The Unit Owners's Stairway to Insurers' Heaven
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The Unit Owners’ Stairway to Insurers’ Heaven

Strata insurance in Queensland is compulsory, and mostly about insuring the full replacement value for the entire building.

Many unit owners in Queensland are now painfully aware they paid far too much for strata insurance in the years following the 2008/09 GFC.

Post-2009, construction costs virtually stagnated:  in some years, they actually went backwards. (See ABS Index 6427.411 Building Construction – QLD’ Index[i])

However, insurers continued suggesting annual uplifts of at least 5%; one insurer was even suggesting 8%.

The gap between actual replacement cost and insured replacement cost (i.e. the Building Sum Insured, or BSI) just kept growing.  Many complexes were on a steep, and very expensive stairway to insurers’ heaven. (See David Leary’s article here)

One saving grace in Queensland is the requirement “the body corporate must, at least every 5 years, obtain an independent valuation stating the full replacement value of the building or buildings.”[ii] Getting the fresh valuation every 5 years provides a safety check.  (David Leary recommends even more frequent valuations, to avoid premium gouging through unrealistic annual uplifts.)

For most complexes, the following graph illustrates an all too familiar story:
Let us assume a complex is valued at $25M in 2009…the owners accept the annual 5% uplifts suggested by their insurer…by 2014, BSI would have risen to $31.9M… but a fresh Valuation in 2014 brings the BSI back to around $25M.

In total, the owners over-insured their complex by about $13M, and paid excess premiums of around $10,000.  Not good, but manageable: and the 2014 valuations sets them on the correct path for the next 5 years, hopefully more aware of the risk of incorrect annual uplifts.
But what if the 2014 valuation is wrong?
What if the valuer is very accommodating and simply matches the already inflated BSI of $31.9M: the owners could keep on climbing the stairway for another 5 years.  It would be even worse if the owners had accepted 8% annual uplifts in the early years: the compounding effect would be enormous.  (The risk of ‘accommodating valuations’ is raised in David Leary’s article re Insurance Premium Gouging: re Avoid Biasing the Valuation)
By 2016, they will have over-insured their complex by nearly $60M in total, and paid excess premiums of around $53,000.

This has happened to some of our Building Members; thankfully only a few so far, and apparently limited to one particular Body Corporate Manager and one ‘valuation’ firm.
One of the first things we do for new BMs is offer an Insurance Diagnostic Audit.  Over time, we have developed a number of Red Flags to help identify potential risks e.g.:
  1. Is the latest valuation significantly higher overall than the previous valuation, done 5 years ago?
  2. Is the latest valuation significantly higher per unit than the industry benchmark?
  3. Is the latest valuation significantly higher per m2 per unit than the industry benchmark?
  4. Does the latest valuation virtually match the latest BSI?
  5. Was the latest valuation commissioned shortly after the BCM placed the already inflated 2014 insurance?
  6. Was the latest valuation commissioned by the BCM rather than the BCC?
  7. Is there a possible relationship between the BCM and the valuation firm?
  8. Does the latest valuation identify the name and professional qualifications of the ‘valuer’?
  9. Does the latest valuation refer to, but not identify, construction cost indexes justifying significant increases from previous years, over and above CPI increases?

If YES: 
If YES: 

If YES: 
If YES: 

If YES: 

If YES: 
If YES: 
If NO: 

If YES: 
None of these Red Flags would be sufficient in themselves to suggest misconduct or impropriety.

However, there were sufficient Red Flags to persuade the Body Corporate Committees (BCC) referred to above to seek an alternate valuation from an independent, qualified valuer who insists on not being advised what the current BSI is.

In all cases, the fresh valuation came in only slightly higher than the 2009 valuation, and significantly lower than the aberrant valuation commissioned by the BCM.

In all cases, the first response of the BCC was to seek an immediate revision of the BSI for their current insurance, and obtain a refund calculated on the correct BSI for the remainder of the insurance period.

And their second response would be……?  We will keep you posted on the outcomes.
NB:  If any unit owner Red Flags any of their own Insurance Valuations, and has concerns about the probity of their current Building Sum Insured, please contact us…we are always here for any Building Members interested in maximising financial benefits for their community.

[i]  Open this link, then:
  1. click on DOWNLOADS (see Menu Bar, 2nd from left); then
  2. click on the green XLS button on Table 17: Output of the Construction Industries:  then
  3. click on the blue series ID on Line 15: Construction QLD
    This Index reports movement in QLD’s construction costs, quarter by quarter, dating from 1998.  
[ii] s. 179 Accommodation Module.   s. 181 Standard Module.
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