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Risk of Underinsurance: not enough cover

Monday, 04th August 2014

The requirement of a body corporate or owners corporation to arrange strata insurance has seen an increase in legislative focus in recent years, but despite this, an estimated 70% of properties are still underinsured say the Insurance Council of Australia. With so many grey areas, CHU answers the most common questions relating to strata underinsurance.

 

1. Do you believe many Australian unit holders/body corporate/strata holders are underinsured on their properties?

Underinsurance has long been a problem in the Australian property market, and the strata sector is no exception. The strata sector is very heavily regulated by appropriate state-based legislation, which outlines the insurance requirements of an Owners Corporation (OC), and the personal risk to each and every member of an OC of failure to have adequate insurance in place. This includes property and liability, as well the exposure inherent in being a committee member of an OC.

The obligations of OC committee members are substantial and they can be held personally liable for their actions and decisions made on behalf of lot owners. In addition, lot owners have an unlimited liability to cover any potential shortfall in insurance funds in the event that a loss is not adequately covered by the sums insured in an insurance policy.

Whilst not directly focussed on strata, there have been a number of significant studies into underinsurance in Australia, including:

In 2005 the Australian Securities and Investments Commission (ASIC) penned a report following the tragic 2003 bushfires in Canberra. In this report ASIC advised, that “...the level of under insurance in Australia is high. Recent surveys suggest that between 27% and 81% of consumers were underinsured by 10% or more against current rebuilding costs.”

More recently, and as part of the Barriers to Effective Climate Change Adaptation submission to the Productivity Commission in 2012, Insurance Australia Group (IAG) advised:

Non-insurance and under-insurance continue to be a problem;

The rates of non-insurance are similar to those found in a survey 10 years ago

It is not unreasonable to assume that the same level of underinsurance exists in strata, even though the legislation stipulates that cover should be put in place at market replacement costs.

2. Please list the top questions that a unit investor should ask an insurer when enquiring about a building and contents insurance policy on their rental property?

For a rental property the investor should be purchasing Landlords Cover. This policy provides a range of covers. The most important issues an investor needs to cover off are:

Any physical aspects of the building the investor owns but is not covered under the OC policy e.g. floating floors

Certain items, which are part of the rental agreement, are covered for damage e.g. washing machines, dish washer

What amount of 3rd party liability cover is included?

Is there cover for rental default and malicious damage by a tenant?

3. Is the replacement valuation up to the strata/body corporate to sort out or does the insurance provider do this? If no, how does a property owner work out the property's replacement value? Is this consistent across the nation and what is the approximate cost to do this?

An insurer does undertake some underwriting surveys on certain strata risks, but this is more to do with risk assessments that are used in determining insurable amounts. The OC is responsible for ensuring it meets strict legal obligations to purchase sufficient insurance for full reinstatement and replacement, and as mentioned previously, the services of a respected and experienced valuer should be used to perform this on an appropriate frequency basis.

Strata policies do not have an average clause in them. This clause means if a property is only insured for 50% of what it should be then only 50% on any claim will be paid.

Looking forward, strata insurers may begin to reintroduce average clauses into their wording if OC’s continually underinsure. The reason being, the insurer is simply not getting adequate risk premium to cover what it is underwriting.

4. Is contents insurance important, even if the tenant has taken out cover? What does this generally cover? Do you think there a common misperception that contents insurance only covers non-fixed items?

A tenant or lot owner needs to take out insurance to cover property that it is not the responsibility of the OC to insure. This will include all personal items e.g. TV, fridge, freezers, clothes, dishwasher, carpets, curtains, blinds, etc. The contents cover also needs to provide 3rd party liability cover as well.

There is a lack of understanding of the need to buy contents insurance for an owner occupier, or a landlords cover for an investor, or contents cover for a tenant, as people mistakenly think the OC cover insures everything.

For more information visit www.bcssm.com.au

 

By Alan Ferre

CHU's State Manager to Victoria and Tasmania

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