UOAQ Newsflash #16 - The 5-Year Rule
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Dear Subscriber,

We have seen far too many cases recently where owners have unwittingly paid grossly excessive insurance premiums, sometimes adding up to more than $100,000 over just 4 years or so.

There are many reasons why this has been happening, but one reason is of much concern to us…failure to obtain a fresh valuation at least every 5 years.  It seems many owners are not being made aware of this so-called 5-Year Rule.

It is true that the date of the last valuation must be disclosed in the AGM papers, but so what?  Surely, what is more important is knowing when the next valuation is due by? 

This problem can be easily solved by owners requiring full disclosure, by their Body Corporate Managers, of the 5-Year Rule in the AGM papers… and most importantly, specific  disclosure of the Due-by-Date for their next valuation.

I strongly recommend all complexes adopt this practice.


Wayne Stevens
President
Unit Owners Association of Queensland Inc.

WHO KNEW?  Some Lessons from the Strata Insurance Game

2.3: INSURANCE VALUATIONS HAVE A 'USE-BY-DATE'
So why not tell the owners what it is?
 

The ‘5-Year Rule’ & what it means.


Generally, a new insurance valuation stating the full replacement value of your building must be obtained at least every 5 years… hence the so called 5-Year Rule.[i]
 
Under this rule, insurance valuations have a mandated life cycle spanning  Start date…. Shelf-life…. Use-by-date…. by which time, you are obliged to obtain a fresh valuation, if you haven’t already obtained one earlier.  Then the life cycle of this fresh valuation starts all over again…and so on.

Regular renewal of your insurance valuations is all about protecting your finances: protection, that is, from the risk of either under-insurance or over-insurance developing in the intervening period between valuations.  We have written about it in our June 2015 magazine.
 

Q: How do you know when a fresh valuation is due?
A: With some difficulty!


The BCCM legislation requires disclosure of the last insurance valuation, as follows:
  1. The date when that last insurance valuation was done,
  2. The full replacement value of the building, as stated in that last valuation.
This disclosure must be included in your annual general meeting (AGM) papers.[ii]

Unfortunately, the legislation does not require disclosure of the 5-Year Rule itself, i.e. the obligation to obtain a fresh valuation at least 5 years from the date when that last valuation was done

Nor does it require calculation and disclosure of the due-by-date for the next valuation.  You have to somehow work it out yourself.

This leaves owners in a position where, unless they know about the 5-Year Rule from other sources, they could easily be forgiven for reading the disclosed date of their last valuation and then thinking ‘That’s really nice…but so what?’
 

There is a curious illogic in this statutory deficiency. 


Why tease owners with only the first part of the formula, when it would be quite easy to require disclosure of the next, and most important, two parts:

 ‘…and we must obtain a fresh valuation within 5 years from that date’

‘…and therefore, the due-by-date for that fresh valuation is such and such a date.

Preferably, all three parts could be combined into one single, simple statement co-located with the annual Statutory ‘Review of Insurance’ Motion.

This could easily be the industry standard.
 

What is the industry standard? 


Seemingly, there is no industry standard.

Notwithstanding the absence of statutory compulsion, it would be nice if it were common practice for our Body Corporate Managers (BCM) to voluntarily fill this disclosure gap by detailing the 5-Year Rule and specifying the use-by-date.

Unfortunately, it is rare for us to see a clear statement in the AGM papers that the fresh valuation must be obtained by a specific due-by-date.

The statutory deficiency, combined with this absence of any industry standard of full disclosure, seems to be one of the main reasons for the number of complexes we encounter where the 5-Year Rule has not been complied with.  For example:
  1. Valuations not done at all,
  2. Valuations deliberately postponed till much later after the due-by-date, or
  3. Valuations which are just simply overlooked for a year or two.

Where to from here?


We have raised our concerns about this statutory deficiency with the BCCM Commissioner’s Office, asking for it to be referred to the Attorney General for inclusion in the current Law Reform process.

In the meantime, our advice to all owners is this:

Provide a more informative disclosure to all owners in your own AGM papers about the insurance valuation requirements.  There is no statutory impediment to your doing so.

For example, the disclosure in your own 2016 AGM papers could then read:
 
  Last Valuation:                                 28 June 2012
Replacement Value:                       $32,000,000
AND
Next Valuation Required By:         28 June 2017
(NB: Fresh valuations are required at least every 5 years.)
 
 

Who knows…this could be the start of a new industry standard.

 
[i] BCCM (Accommodation Module) Regulation s.179    [also Standard Module s.181]
[ii] Accommodation Module s.175(3)(a)-(b)      [also Standard Module.177(3)(a)-(b)]
 
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