When the sum insured does not accurately reflect the true replacement value of a building, property owners may face a significant financial shortfall if damage occurs. This can place considerable financial pressure on owners at a time when they are already dealing with the disruption and stress of a claim.
In many cases, underinsurance is not intentional. However, it arises when building values are not regularly reviewed or updated to reflect current construction costs and market conditions.
Why Underinsurance Happens
Several key factors contribute to the growing risk of underinsurance within strata properties.
Inflation and Rising Construction Costs
One of the most significant contributors is inflation within the construction industry. The cost of building materials, labour, and professional services has increased substantially in recent years. If the building sum insured is not regularly adjusted, it may quickly fall behind the actual cost required to rebuild the property.
Increased demand for housing, rising property values, and escalating rental prices have also contributed to upward pressure on replacement costs. As a result, many buildings valued several years ago may now be significantly undervalued.
Outdated Building Valuations
Another common cause of underinsurance is relying on outdated building valuations. Over time, the true cost of rebuilding a property can change significantly. Without a current professional valuation, the sum insured may no longer reflect the actual reinstatement value of the building.
Regular valuations are essential to ensure insurance coverage remains accurate and appropriate.
Due Diligence and Policy Renewals
In some situations, insurance policies may be renewed each year using the previous sum insured without a detailed reassessment of the property's replacement value. This practice, often referred to as "rolling over" the insured amount, can gradually increase the risk of underinsurance.
While insurance brokers have a responsibility to act in the best interests of their clients, the final decision regarding the sum insured ultimately rests with the property owner or owners corporation. In some cases, owners may choose not to follow advice to increase the insured value in order to manage rising premium costs. Although this may provide short-term savings, it can leave the owners exposed to significant financial risk if a major claim occurs.
Legal Responsibilities for Strata Properties
Strata legislation across Australia generally requires property owners or owners corporations to ensure their buildings are insured for their full replacement or reinstatement value.
In most states and territories, professional building valuations are typically required at least every five years. However, given the rapid increase in construction costs in recent years, it is increasingly recommended that valuations be conducted more frequently.
How Owners Can Reduce the Risk of Underinsurance
Taking a proactive approach is the most effective way to ensure a strata property remains adequately insured.
At Cohabit, we work closely with strata owners to help minimise the risk of underinsurance and ensure appropriate protection for their assets. We recommend the following steps:
- • Conduct regular professional building valuations — Building valuations should be carried out regularly, particularly during periods of significant increases in construction costs.
- • Review the sum insured annually — The building sum insured should be reviewed each year to ensure it reflects current rebuilding costs.
- • Apply indexation to the building sum insured — To help maintain adequate coverage, Cohabit can apply automatic indexation to the building sum insured at renewal (subject to owner instruction). This adjusts the insured value each year in line with the Consumer Price Index (CPI), helping it keep pace with inflation and rising construction costs.
- • Seek clarification or a second opinion when needed — If there are concerns about the accuracy of a building valuation, owners should not hesitate to seek further advice.
- • Work closely with your insurance broker — Maintaining open communication with your Cohabit insurance broker helps ensure that the insurance program remains suitable for the property and reflects any changes in value or risk.
