NSW: Q&A How Often Do We Need to Have an Insurance Valuation?

This article is about the requirement to have an insurance valuation done regularly.

Table of Contents:

• QUESTION: Does an independent building insurance valuation supersede the valuation the insurance company has placed on the building? Under the legislation, must the owners corporation inform the insurance company of the new valuation?
• QUESTION: How often are owners corporations required to update their building insurance valuation? Without approval, our strata manager engaged their brand company to arrange a valuation and charged it to the OC. Is this ethical?
• QUESTION: Because of recent inflation fluctuations, should committees arrange insurance valuations more regularly instead of waiting the typical five years? How have market fluctuations affected the insured amount? Could we see more than usual cases of over- or underinsurance?
• QUESTION: Now the requirement to get an insurance valuation has been removed from the legislation, how often do we need to have a valuation done on the building?

Question: Does an independent building insurance valuation supersede the valuation the insurance company has placed on the building? Under the legislation, must the owners corporation inform the insurance company of the new valuation?

Answer: Although no specific legislative requirement in NSW obliges the owners corporation to inform the insurer of a new valuation, it is highly advisable.

An independent insurance rebuild valuation conducted by a quantity surveyor is generally considered the most appropriate way of assessing the building’s full replacement value. It’s important to note that insurers typically do not undertake these insurance rebuild valuations; this responsibility lies with the owners corporation.

Although no specific legislative requirement in NSW obliges the owners corporation to inform the insurer of a new valuation, it is highly advisable. This ensures the insurance cover accurately reflects the building’s full replacement value, in compliance with legislative requirements to insure the property for its full replacement cost.

Should you obtain a valuation that recommends a specific insurance amount, it is prudent to insure the building for at least the amount stated in this professional opinion to maintain adequate coverage and avoid underinsurance.

Tyrone Shandiman
Strata Insurance Solutions
E: tshandiman@iaa.net.au
P: 1300 554 165

This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Shandit Pty Ltd T/as Strata Insurance Solutions strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances. Shandit Pty Ltd T/As Strata Insurance Solutions is a Corporate Authorised Representative (No. 404246) of Insurance Advisenent Australia AFSL No 240549, ABN 15 003 886 687.

This post appears in theDecember 2024 edition of The NSW Strata Magazine.

Question: How often are owners corporations required to update their building insurance valuation? Without approval, our strata manager engaged their brand company to arrange a valuation and charged it to the OC. Is this ethical?

What are the statutory and other requirements for an owners corporation to obtain updated building insurance valuations for insurance purposes?

Owners at our AGM unanimously voted to retain the existing building insurance coverage for the remaining four months of the policy. A week later, our strata manager engaged their brand company to prepare an updated valuation report without any advance notice or owner’s consent. The manager has now recommended the strata committee increase our coverage immediately.

The strata manager has not disclosed their financial interest in the brand company, and has passed on the charge for preparation of the valuation report to the owners corporation despite the service not being requested. Is this ethical?

Answer: Your situation raises several concerns, particularly regarding conflict of interest.

In New South Wales, the legislative requirement to obtain insurance rebuild valuations every five years was abolished in 2015. Currently, there are no statutory mandates to procure an insurance rebuild valuation. However, the legislation does require that buildings are insured for their full replacement value, which can place a higher compliance responsibility on the owners corporation.

When dealing with insurance valuations, it is essential to follow appropriate processes to avoid any perceptions of conflicts of interest, whether actual or perceived. The example in the question highlights this issue: despite owners at an AGM unanimously voting to retain the existing level of building insurance coverage, the strata manager engaged their own associated company to prepare an updated valuation report without advance notice or owners’ consent. This resulted in a recommendation to increase cover, raising concerns about transparency and fairness.

Your situation raises several concerns, particularly regarding conflict of interest. Here are my recommendations:

• Request Evidence: Ask the strata manager to provide evidence that the owners corporation agreed to the updated valuation. This is crucial, especially given the potential conflict of interest.
• Show Cause: If the strata manager cannot provide this information, it is reasonable to request that they show cause as to why the owners corporation should bear the cost of the valuation report, especially when it was conducted by an associated company without prior consent.
• Conflict of Interest: If the strata manager receives a commission on insurance, they could potentially benefit from an increased building sum insured through higher commissions. This should be transparently disclosed.
• Independent Valuation: Given these circumstances, it is advisable to use an independent valuer who has no ties to the strata manager. This helps ensure that valuations are impartial and in the best interest of the owners corporation. It may be advisable to seek an independent valuation.

In conclusion, while there are no longer statutory requirements in NSW for regular insurance rebuild valuations, ensuring your building is insured for its full replacement value remains a critical responsibility. By being aware of potential conflicts of interest and insisting on transparency and independent valuations, owners corporations can navigate these challenges effectively and maintain fair and adequate insurance coverage.

Tyrone Shandiman
Strata Insurance Solutions
E: tshandiman@iaa.net.au
P: 1300 554 165

This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Shandit Pty Ltd T/as Strata Insurance Solutions strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances. Shandit Pty Ltd T/As Strata Insurance Solutions is a Corporate Authorised Representative (No. 404246) of Insurance Advisenent Australia AFSL No 240549, ABN 15 003 886 687.

This post appears in the July 2024 edition of The NSW Strata Magazine.

Question: Because of recent inflation fluctuations, should committees arrange insurance valuations more regularly instead of waiting the typical five years? How have market fluctuations affected the insured amount? Could we see more than usual cases of over- or underinsurance?

Answer: Yes they should be arranging more regularly than the 5 years due to the recent construction market fluctuations.

We’re recommending annual updates at the moment due to construction market fluctuations which have been significant since the pandemic. It’s really important to have a valuation done more regularly and at the moment, five years is way too long. It’s an added expense, but it’s better than being underinsured by a significant percentage.

Inflation within the construction market directly affects the building sum insured / insurance valuation for a strata property. Media has drawn attention to 20% annual increases which have been relevant in some areas, this however is not applicable to all areas. On the other side of the coin some properties have been inflating their building sum insured / insurance valuation amount by the 20% per annum seen in the media which may not be relevant to their area, or property, resulting in significant over-insurance as well.

We can bring your sum insured back in line with what’s actually happening in the market for your property, not just based on the insurer’s automatic indexation. Prior to the pandemic the insurer’s automatic indexation was typically too high, but generally since the pandemic it has been too low and it cannot be relied upon. Also, what is the basis of the number that the insurer is automatically indexing? Is it correct, current and relevant to your property?

An independent valuation for your property rather than being based on what has been read or seen in the media is key, especially at the moment in a rapidly moving market.

Zac Gleeson
GQS
E: zac@gqs.com.au
P: 0419 755 896

This post appears in the May 2024 edition of The NSW Strata Magazine.

Question: Now the requirement to get an insurance valuation has been removed from the legislation, how often do we need to have a valuation done on the building?

Answer: Although no longer in the legislation, we recommend you consider valuations every 5 years.

In 2015, the NSW government removed the requirement for buildings to obtain an insurance re-build valuation every 5 years from the legislation. It follows that there is no specific legislative requirement to obtain a valuation at certain periods.

Not-with-standing, Section 160 & 161 of the Strata Schemes Management Act 2015 does in effect require a building to insure for a sum insured that “if the building is destroyed, the building is to be rebuilt or replaced so that the condition of every part of the rebuilt or replacement building is not worse or less extensive than that part when new”.

While there is no specific requirement for frequent insurance re-build valuations – the Act does impose a requirement for the building to be insured for full re-build value and fines and penalties apply for non-compliance of the Act.

The best way to ensure compliance is to seek regular insurance re-build valuations and while there is now no requirement in NSW to get valuations every 5 years (as was the case under the previous legislation), Strata Insurance Solutions still recommends committees consider valuations every 5 years.

The policy covers the owners corporation’s interest and does not actually cover the lot owner (owners need their own landlord’s insurance). There are no exclusions in the policy that specifically deals with this scenario. From the insurer’s perspective, the building is being used for residential purposes.

What are your thoughts on the timing of insurance valuations? If you have a question or something to add to the article, leave a comment below.

Tyrone Shandiman
Strata Insurance Solutions
T: 07 3899 5129
E: tshandiman@iaa.net.au

This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Shandit Pty Ltd T/as Strata Insurance Solutions strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances. Shandit Pty Ltd T/As Strata Insurance Solutions is a Corporate Authorised Representative (No. 404246) of Insurance Advisernet Australia AFSL No 240549, ABN 15 003 886 687.

This post appears in Strata News #308.

Read next:

• NSW: Owners Corporations, Common Property Repairs and Insurance – A Tricky Relationship
• NSW: Q&A Strata Manager Insurance Commissions
• Check Your Building Sum Insured

Visit Strata Insurance OR NSW Strata Legislation pages.

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