Victorian building valuations and underinsurance 

Victorian building valuations and underinsurance.

 

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1. Building valuations and underinsurance - who carries the risk? 

 

More so now than ever, strata properties are increasingly becoming at risk of underinsurance. With inflation and increasing costs of repairs because of labour and material shortages, ensuring you have adequate insurance in place is more important than ever. 

 

In Victoria, it is the legal responsibility of the owners corporation to insure the building against destruction or damage to enable the building to be rebuilt, repaired or reinstated. The value to be insured must be adequate to reinstate the property to a condition substantially the same, but not better or more extensive than its condition when new – and to assist for this purpose the owners corporation must obtain an independent valuation no less than every five years (Owners Corporations Act, 2006).  

 

Any shortfalls are the responsibility of the owners corporation. Can you really afford the risk? 

 

Our friends at Strata Community Insurance are eager to share their experience with us. In recent times they have seen cases where buildings and strata communities have experienced significant damage, but the building is not fully destroyed, and the sum insured was insufficient to complete the reinstatement. So, when it comes to making a claim for repair, the owners find themselves in the unfortunate position of being underinsured.

 

Ultimately, that means collectively the individual owners would be exposed for the shortfall and need to pay the balance themselves. Which could be tens of thousands of dollars, or worse, in the millions. 

 

 

2. The importance of building valuations.

 

Getting an accurate building valuation through an experienced valuer familiar with the requirements of the strata legislation is becoming ever more critical. This is a vital tool in mitigating underinsurance. 

 

The role of a valuer is to assess the value of a property, including its buildings and common property, to meet the obligations required under the law, to ensure the property is adequately valued and the owners corporation is protected against potential financial losses.

 

The valuer will typically conduct a physical inspection of the property and consider various factors, such as the age and condition of the building, the quality and type of construction materials used, the location of the property, and any unique features that may affect its value.

 

Based on this assessment, the valuer will provide a valuation report that outlines the recommended sum insured for the property. 

 

The recommended sum insured is the estimated cost to rebuild the property in the event of a total loss, including demolition, site clearance, construction costs and other factors such as temporary housing. There are always exceptions in valuations and these should be discussed with the valuer and considered by the owners corporation to ensure you meet your obligations as per the relevant legislation.

 

It is important to note that the replacement and reinstatement value is not the same as the market value of the property, which reflects the price that the property would sell for on the open market.

 

 

3. Appoint a professional valuer.

 

Fortunately for owners, there are professional valuers available to assist in estimating the minimum value required to meet your obligations. Like all service providers, you should do your research and obtain quotes.

 

Check the skills of the valuer. Are they only skilled at small buildings of, say, $3m, or capable of handling large buildings? Request an example of their work based on a similar building to yours. Also, always check their level of professional indemnity cover. 

 

Owners should understand when determining the reinstatement value of their building, it is vital that escalation costs be correctly calculated from the date of the building valuation to the eventual end of the rebuilding/reinstatement period the valuer has considered appropriate for that building. 

 

As we saw during recent catastrophe events, when supply demands increase, the cost can go up considerably. This needs to be taken into account to protect yourself. 

 

Remember, the cheapest quote is not always best. This is your home or investment we are talking about. Having the right level of protection makes good sense.

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Reference:

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(Owners Corporations Act, 2006), A tier five owners corporation is exempt from the requirement under s65(1) of the Owners Corporations Act 2006 (Vic).