Building Insurance Valuations

The Roles and Responsibilities of Strata Owners and Their Agents

The legislative requirements for building insurance valuation vary between each state.

Where most states simply refer to obtaining a valuation, some state the purpose being for replacement of the improvements (SA, ACT).

In NSW, the legislation refers to both reinstatement and replacement, which is wrong. You can’t value a property for reinstatement unless you make an assumption of the level of damage to the improvements.

The key legislative requirement is to disclose unknown risks to an insurer or potential insurer under the Commonwealth Insurance Contracts Act 1984 (see s21 below). This is the greatest risk that the owners have, and they must advise to the insurance company about it.

These days, insurers need to know about the tenancy mix, particularly in industrial properties where the occupant may store volatile or combustible materials. These weigh in the insurance assessment for the cost of the premium.

One of the best ways to properly and legally minimise your premium is to:

1. Obtain a safety report which highlights any public liability risks that the property may contain and provides insight into the maintenance of the property, such as worn, dangerous, unlit, areas, and hazards, such as trip, slip, fall, protrusion and electrical and whether it has been addressed. An insurer needs to know exactly what risks they are inuring against. If your scheme has little or no public liability risks, then you can easily expect a lower premium when compared to a similar scheme where there has been no disclosure of any safety risk at all. It’s common sense that the insurer will charge more if there are unknown factors in your scheme.

2. Cladding asbestos or other hazardous materials reports. An asbestos report should include both an asbestos register for items that are assumed to be asbestos, and for items that have been tested and have been proven to be asbestos. Advising the insurer that the scheme does not have external combustible cladding would also help reduce premiums. Again, an insurer will increase a premium to allow for unknown risk.

3. Compliance with National and State-based fire safety requirements, primarily ensuring all fire safety measures are regularly tested and working to ensure protection for people and property. Failures and negligence can be found in the Bankstown Coroner’s Report recommendations.

4. Regular valuations to ensure that the premium is calibrated to the proper replacement costs of the building. An insurer will typically add a buffer of around 2 percent greater than the normal escalation of construction costs. Appropriate consideration and allowance include heritage for the type of material used, higher ceiling and high construction costs, modern regime and clear span commercial office space. As a rule of thumb, properties under $5M each 5 years, $5M to $10M each 3-5 years, greater than $10M each 1-2 years.

5. Minimise the level of claims being made. If the claims are minor items, then the owners should consider whether claiming for many minor items would offset the reputation that scheme would have as being a perennial claimer. Prudent owners would use an effective capital works fund plans (reserve fund, maintenance fund, sinking fund) to provide for these minor repairs.

6. For industrial and some retail schemes, an insurance risk report will consider the actual use of the lots in the scheme and highlight those uses that have a higher than normal level of combustible or volatile materials. This is part of your responsibility of disclosure, as the failure to not properly disclose a risk to the insurer may leave you with no insurance.

INSURANCE CONTRACTS ACT 1984 – SECT 21

The insured’s duty of disclosure

(1)  Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: 

(a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or 

(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to: 

(i) the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and 

(ii)  the class of persons who would ordinarily be expected to apply for insurance cover of that kind. 

(2) The duty of disclosure does not require the disclosure of a matter:

(a)  that diminishes the risk;

(b) that is of common knowledge;

(c) that the insurer knows or in the ordinary course of the insurer’s business as an insurer ought to know; or 

(d)  as to which compliance with the duty of disclosure is waived by the insurer.

(3) Where a person: 

(a) failed to answer; or 

(b)  gave an obviously incomplete or irrelevant answer to; a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.

(4) All building insurance valuations must be carried out by BIV Reports Pty Limited 1300 10 72 80 😉