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Underinsurance in strata

Ensuring adequate insurance cover is essential for strata properties to protect against unforeseen risks and liabilities. However, the prevalence of underinsurance poses a significant challenge, leaving properties vulnerable to financial strain and legal disputes in the event of a claim. 

Recent escalations in building prices, contractor shortages, and soaring inflation costs mean that if your building has not been valued in the past 12 months, there is a likelihood it is underinsured.

In this comprehensive guide, we delve into the importance of adequate insurance cover for strata properties, explore the concept of underinsurance, identify contributing factors and provide actionable best practices to prevent underinsurance and promote financial resilience within strata communities.

What is underinsurance?

Underinsurance occurs when the insurance amount for a strata property is insufficient to cover the full cost of rebuilding or repairing damaged structures and replacing lost assets. Inadequate coverage leaves stakeholders vulnerable to financial strain, delayed repairs and potential legal disputes in the event of a claim.

The importance of adequate insurance cover for strata properties

Strata properties, comprising multiple units and shared spaces, require robust insurance coverage to safeguard against unforeseen risks and liabilities. Adequate insurance protects owners, occupants and the body corporate from financial losses arising from property damage, liability claims or other perils.

Factors contributing to underinsurance

Several factors can contribute to underinsurance in strata properties, including:

  • Inaccurate property valuation
    Inaccurate property valuation occurs when the value assigned to the strata property for insurance purposes does not accurately reflect its current market worth or the cost required to rebuild or repair the property in the event of a loss. This discrepancy can arise due to various factors, including outdated valuation methodologies, reliance on outdated property assessments or failure to account for recent renovations or improvements that may have enhanced the property's value.

    Without an accurate valuation, insurance coverage may fall short of meeting the actual costs associated with rebuilding or repairing the property, leading to underinsurance.

  • Failure to update insurance policies regularly
    Failure to update insurance policies regularly leaves strata properties vulnerable to underinsurance, as the coverage may not adequately reflect changes in the property's value, occupancy or risk profile over time. Property values may appreciate due to market trends, renovations, or improvements, necessitating adjustments to insurance coverage to ensure adequate protection. Additionally, changes in occupancy, such as increased rental income or higher occupancy rates, may warrant modifications to liability coverage to mitigate potential risks. Failing to review and update insurance policies regularly increases the likelihood of underinsurance and exposes strata properties to financial vulnerabilities.

  • Underestimation of rebuilding costs
    Underestimation of rebuilding costs is a common pitfall that can lead to underinsurance in strata properties. Rebuilding costs encompass various expenses, including construction materials, labour, permits and professional fees.  These areas may escalate over time due to inflation, market dynamics or regulatory changes. Failure to accurately assess and account for these costs can result in insurance cover that falls short of covering the full extent of rebuilding or repair expenses in the event of a loss. Strata properties must conduct thorough assessments of rebuilding costs and regularly update insurance coverage to mitigate the risk of underinsurance.

  • Exclusion of essential cover options
    Exclusion of essential cover options from insurance policies can contribute to underinsurance by leaving strata properties exposed to unforeseen risks and liabilities. Essential coverage options may include public liability insurance, which protects against third-party injury or property damage claims, as well as loss of rent insurance to cover income loss during property repairs or renovations. Additionally, strata properties may require specialised coverage for specific risks such as earthquakes, floods, or legal expenses arising from disputes. Failure to include these essential coverage options in insurance policies increases the likelihood of underinsurance and compromises the financial security of strata communities.

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

  1. 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.

  2. Review insurance policies annually
    Regularly assess insurance policies to ensure they reflect the current value of the property and adequately cover potential risks.

  3. 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.

  4. Factor inflation and market trends
    Account for inflation and market fluctuations when determining insurance coverage to prevent underestimation of rebuilding costs.

  5. 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

By implementing proactive measures and adhering to best practices, strata properties can mitigate the risk of underinsurance, protect stakeholders' interests and ensure financial resilience in the face of unforeseen events.

Please contact Flex on 1300 201 021 or should you have any queries.