Strata Insurance Valuations: How Often?

INSURANCE INDUSTRY NEWS

It is one of the most common questions we are asked, and the honest answer is that the legislation does not state a specified frequency.

But read the chain through and the answer sits a lot closer to “every renewal” than most owners corporations would like.

Section 160 puts the obligation on the owners corporation

Section 160 of the Strata Schemes Management Act 2015 places the obligation squarely on the owners corporation: insure the building, and insure it against destruction or damage by fire, lightning, explosion or any other occurrence specified in the policy.
It says nothing about frequency.

Section 161(1)(a) supplies the standard

Section 161(1)(a) requires that the building is to be insured for at least the amount determined in accordance with the regulations.

So the Act sets the duty and points elsewhere for the number.

Clause 39 does the real work

Which takes you to clause 39 of the Strata Schemes Management Regulation 2016, headed Manner of calculation of insurance limit under damage policy. The minimum sum insured is the sum of:

• (a) the estimated cost, as at the date of commencement of the damage policy, of carrying out the reinstatement work and making the payments section 161 requires; plus
• (b) the estimated amount by which that expenditure may increase over the following 24 months,

including all applicable taxes, fees and charges.

Six words in that clause do all the work: “as at the date of commencement.”

Not as at the date of the last valuation. Not as at whenever the scheme last got around to it. The figure must be an estimate of replacement cost at the moment the policy incepts. You cannot form that estimate without assessing replacement value, and in practice that means a current valuation.

The 24-month allowance is a buffer, not a substitute

The escalation allowance in (b) reinforces the point rather than softening it.

The Regulation already builds in a forward buffer, pegged to the policy’s commencement, because rebuilding takes time and costs move while it happens. A sum insured carried forward from a valuation done five or six years ago is not using that buffer. It consumed it years ago.

What we see in practice

We see this regularly on schemes we take over: valuations five and six years old, rolled forward each renewal with a token uplift, or none at all, against a construction market that has moved far faster than any indexation applied to it.

The gap is rarely visible until there is a claim, and by then the sum insured is the only number that matters.

So what is the recommended frequency?

We get asked this a lot, and our answer is that an annual valuation aligns with clause 39, because most strata insurance policies are written for a 12-month period. Each renewal is a new commencement date, and clause 39 asks for an estimate as at that date.

What about 6-month policies? That comes down to the risk appetite of the owners corporation. But read the Regulation in its literal sense and some adjustment, to make sure the building is insured for the correct amount at the new commencement date, is worthwhile.

What this means for owners corporations and strata managers

• Treat the sum insured as a figure that has to be formed fresh at each policy commencement, not a figure that is carried forward.
• Check the date of the valuation sitting behind the current sum insured. If it is more than a year old, the escalation allowance in clause 39(b) has already been spent.
• Indexation applied by a broker or insurer is not an estimate of reinstatement cost. It is an adjustment to a figure that may no longer be the right starting point.
• On schemes newly taken over, make the age of the valuation one of the first things checked.

If you would like the valuation position on a scheme reviewed, or a current valuation ahead of renewal, talk to us.

Note: This article is general information about the NSW legislative framework and is not legal advice. Owners corporations should obtain their own advice on their particular scheme.