Q&A: What is a Building Insurance Valuation?

We sat down with Moish Ekman, a Certified Practicing Valuer from Ensure Group Property Valuers, to understand what a building insurance valuation is, why strata communities require them and how often they should consider getting a new valuation.

Q: To begin, please explain what a building insurance valuation is and what it contains?

A: An insurance valuation is a report completed generally by a certified practicing valuer or a quantity surveyor which sets out the total limit of liability which could arise from a claim in the event of a total disaster.

The report needs to assume the worst-case scenario. What would it cost to demolish, redesign and rebuild a building if a disaster occurred on the last day of the policy period, allowing for cost escalations from now until the building is under construction?

The report may include basic underwriting information and construction materials, photos, zoning, building areas and most critically, the insurance valuation figures, as well as a signature and qualification of the valuer.

Q: Why do strata communities require building insurance valuations and how often should they consider getting a new valuation?

A: The Owners Corporation Act 2006 stipulates that all OC’s are required to be fully insured for building replacement. The question then arises: “How much cover is that exactly?” This is where valuation reports become critical. A valuation will ensure that the OC has discharged their responsibility relating to obtaining adequate building insurance.

With respect to the frequency of valuations, currently the Act says that prescribed OC’s i.e. those with 100+ lots or more than $200,000 in annual fees must have a valuation done at least once every five years.

The amendments to this legislation which are scheduled to come in to effect next year will change this so that any OC with 3 or more lots will also require regular valuations at least once every five years. (Waiting on Sharon at SCA to confirm)

Our recommendation is that five years is a little long and, ideally, every three years a fresh valuation should be obtained to keep in line with construction cost rises. Many lot owners and OC managers already run on a three-year valuation cycle.

Q: When considering engaging a property valuer, what factors should owners’ corporations and strata managers consider?

A: The managers should consider the qualifications of the valuer and their experience in undertaking valuations for insurance purposes. Also, as many OC buildings will have values in excess of $40 million, valuers undertaking these larger building valuations are required to have $10 million professional indemnity insurance under the APIV Professional Standards Scheme. OC managers should check this is being upheld when appointing a valuer.

Q: What does a building insurance valuation process entail and how long does this take?

A: The process requires written instructions to be sent to the valuer, ideally with access information/codes and a plan of subdivision to correctly identify the buildings. The valuer will arrange a time to inspect the building and take notes and measurements. Once the calculations are complete, a report is compiled and sent back to the OC manager. One can expect the process to take 5-15 business days.

Q: What is the effect if one lot has renovated their apartment and the rest are all in original 1970’s condition, for example?

A: This is a common scenario actually. It is important to understand that insurance valuations are assessing the cost to build a brand-new replacement. Therefore, the fact that some units are not renovated, and some are is not so relevant. The problem arises when a lot owner goes over and above a typical modern renovation. In this case, it is important to remember that insurance payouts depend on the lot entitlements, not the cost of each lot’s renovations. Therefore, if a Lot owner is renovating with quality far above modern standards, they would be required to take out extra insurance for their lot to cover those higher end finishes.