Understanding the Risk of Underinsurance for Strata Property Owners

Date published: 21 December 2022, updated 17 September 2024

Underinsurance is a significant issue that strata managers and brokers must be aware of to protect their strata clients. It occurs when a strata building is insured for less than its true replacement value, leaving owners vulnerable to financial losses if damage or loss occurs.

The following article and associated ‘fast facts’ downloadable fact sheet is aimed at assisting you to help apartment owners better understand and safeguard against underinsurance.

Click here to download and share it with your clients to ensure they’re fully protected.

Download Factsheet

What is underinsurance?

Underinsurance happens when the insurance coverage for a property is insufficient to cover the actual cost required to rebuild or repair it to its original state. This gap in coverage can lead to significant financial strain on property owners in the event of a loss.

Most states and territories require a building valuation to be conducted every 5 years, however with the current state of the market, it is advisable to conduct a valuation more often than this.

Several factors contribute to underinsurance for strata properties, including:

Inflation: Rising construction costs and increasing property values are often not updated in the insurance coverage.
Outdated Valuations: Failure to conduct regular assessments means the insured amount may not reflect the current replacement cost.
Policy Updates: Not reviewing insurance policies annually can result in outdated coverage that doesn’t match the property’s current needs.
Additional Cost Considerations: Failing to include additional costs such as professional fees, demolition and the removal of debris.

Flex Insurance ensures that all essential cover items mandated by your state’s legislation are included in our flexible policy. You can view the state requirements here

Tips to Prevent Underinsurance on Strata

Conduct regular property valuations
Ensure accurate valuation of the strata property to determine the replacement cost accurately. We encourage you to check your State regulations in regard to this as there may be a requirement for valuation to be carried out.
Review insurance policies annually
Regularly assess insurance policies to ensure they reflect the current value of the property and adequately cover potential risks.
Consider all risks and coverage options
Evaluate the insurance policy to include essential coverage options such as public liability, loss of rent, legal expenses and building ordinance compliance.
Factor inflation and market trends
Account for inflation and market fluctuations when determining insurance coverage to prevent underestimation of rebuilding costs.
Seek professional advice
Consult insurance brokers or strata management experts to assess insurance needs, identify potential gaps in coverage and secure appropriate insurance solutions. The Flex Insurance expert team are available to discuss any of your queries around underinsurance and our policy offering!

Best practices and recommendations

Establish a risk management plan
Develop a comprehensive risk management plan to identify, assess and mitigate potential risks to the strata property and then ensure you are protected for those potential risks.
Educate owners and committee members
Educate the owners corporation or body corporate about the importance of adequate insurance coverage, their responsibilities in maintaining strata insurance policies and the consequences of underinsurance.
Maintain open communication
Foster open communication among stakeholders to address concerns, share information about insurance matters and collaborate on risk mitigation strategies.
Engage professional strata managers
Engaging experienced strata managers to oversee insurance-related matters, facilitate policy reviews and ensure compliance with legal requirements can be helpful to larger owner corporations or body corporates.
Stay informed about regulatory changes
Stay informed about changes to strata insurance regulations, legislative requirements, and industry standards to adapt insurance strategies accordingly and mitigate compliance risks.

Protect your strata community today

At Flex Insurance, we offer flexible and tailored residential strata insurance, so clients can choose the cover to suit their evolving needs.

Our easy-to-understand factsheet is designed to help spread the knowledge and understanding of underinsurance to strata property owners as well as ways to safeguard against unexpected financial burdens.

Download Factsheet

Please contact Flex Insurance on 1300 201 021 or info@flexinsurance.com.au should you have any queries.