Why you should now recalibrate your building insurance valuation

Why you should do it NOW

Causes of construction cost increases 

a)    The COVID consumer consumption explosion – Federal
Grants to stimulate construction, other grants, less consumer recreational
spending (travel restrictions, limited nights out, lock down – allowing people
to save their money), people at home deciding to renovate, 

b)   Loss of timber supply – 40% of eastern Australia timber
lost in bushfires, California and other areas similar losses, timber mills shut
down due to COVID restrictions, European bark beetle, 

c)    Increased shipping costs – increased 10 fold in 2021,
shipping container shortages, 

d)   Limited steel supply – flow-on effect to steel as a
substitute for timber framing, limited workforce and manufacturing due to lock
down restrictions, 

e)    Limited workforce, where backpackers previously
provided a ready source of labour, then travel restricted by COVID, 

f)    Disasters have used up construction materials, labour,
and resources,

Recommendation – obtain new Building Insurance Valuations,
as earlier valuations were carried out in an environment of an expected
‘steady’ increase in construction costs, not the current unknown volatile
environment.

Effect on insurance

a)    insurers are attempting to claw back their losses from
recent payouts for floods, bushfires and similar catastrophes, 

b)   insurers are cautious on who they choose to insure in
order to reduce their future exposure to risk,

c)    insurers are asking for asbestos reports, safety
reports, maintenance plans to determine the risk of each property,

Consequence – rapid rise in premiums, and insurers being
more selective, with many schemes having difficulty in obtaining quotes for
insurance, and when they can, are significantly higher for properties that are
flood or bushfire affected land, previous high claims history, unable to prove
proactive maintenance, or have insufficient funding.

Higher premiums

a)    in my view it is acceptable and prudent for insurers to
increase the last valuation by an amount of around 2% pa higher than the
expected increase in construction costs, however if left uncalibrated would
have owners overpaying their premium (ie over 10% for five years),

b)   I have carried out hundreds of peer reviews of
insurance valuations and in my experience around 75% have been over-valued.

How can owners prove they are a lower risk 

a)    Maintenance planning and scheduling – a formal Plan
that list Items and the extent of work that has to be carried out on each Item
(including from specialists – lifts, fire, painting), 

b)   Proof that maintenance has been carried out – ie,
records showing the date that roof gutters were cleaned, storm water pits and
pipes jetted out, roof flashing checked, mechanical systems have been properly
serviced and recorded, 

c)    The property is safe from a negligence perspective –
obtaining a Safety Report with proof that the recommended control measures have
been carried out, 

d)   That asbestos is properly managed – obtaining an
Asbestos Register and Asbestos Management Plan with the recommended control
measures carried out.

It is common sense… if you were an insurer, which property would you
insure… the one with a good maintenance regime, no safety issues, limited
disaster exposure, an appropriate asbestos management plan, and a recent
building insurance valuation, or the property without?

Further considerations

Insurers also focus on the maintenance regime of each strata and community
scheme to see if proper maintenance is regularly untaken. Those schemes that
have a poor record of maintenance or are slow to respond, tend to attract a
higher premium.

A proper re-valuation may not necessarily result in a higher recommended sum
insured, particularly if the last valuation was older than 4 years, or the
previous valuer has adopted the ‘cautious’ (over-valued) approach, but to the
detriment of the owners, as harsh as that sounds.

Next steps – get a Building Insurance Valuation from the right
consultant

Avoid consultants that

a)    state ‘combined’ experience (ie does that include the
receptionist in their ‘combined’ years experience), 

b)   do not provide a break up of professional fees,
demolition and removal of debris, gst, escalation during the periods of the
insurance term, reconstruction and certification.

The right consultant will

a)    physically inspect the property for the initial
assessment, (beware of consultants that do not inspect the property), 

b)   have obvious experience in strata and community
compliance legislation, and understands multi layered schemes (varies in each
State), 

c)    have a proper depth of experience in the current
construction costs, 

d)   have Professional Indemnity insurance of at least $10M,

Remember to 

a)    pay an appropriate fee – some consultants cut corners
by not inspecting the property, avoid the false sense of prudency; ie owners
try to save a few hundred dollars on a valuation, but end up paying thousands
more in higher premiums over many years. It is simply a false economy. 

b)   depending on the type of property, have the valuations
carried out periodically (rough rule, residential property up to $5M each 3 to
5 years, for greater than $5M then in the range of annual to three yearly).

Note, BIV Reports Pty Limited commenced as Building Insurance Valuations
Pty Limited.