The recent severe weather conditions in Australia have highlighted the importance of adequate insurance coverage. The devastating impacts of tropical cyclones, flooding, and other extreme weather events underscore the necessity for comprehensive coverage that aligns with the current value and potential risks associated with rebuilding damaged or destroyed properties.
Illustrating the importance is a case study of a high-end complex of 50 apartments that suffered significant damage due to a tropical cyclone. The damage was so extensive that many apartments were reduced to a shell, highlighting an urgent need for reconstruction.
At the time of the disaster, the property was insured for $48.7M, reflecting its original construction cost. This replacement cost was proposed by the developer and accepted by both the Body Corporate Committee and the Insurance Broker without an independent assessment being commissioned.
However, a comprehensive assessment revealed that appropriate insurance coverage should have amounted to $59.2M, accounting for construction, escalation, demolition, removal of debris, re-design and documentation costs. In essence, only 82.2% of the property’s true value was insured.
Following standard protocols outlined in most insurance policies – including an ‘averaging clause’ – when disaster struck in the form of a tropical cyclone; it became evident that there was a significant shortfall in coverage. The reconstruction bill amounted to $22.5M but due to underinsurance; only 82.2% or $18.5M was covered by insurance.
This left apartment owners with a daunting task - raising an additional $4M to restore their property to its former state.
It is also worth noting that this case study regarding underinsurance can apply to all types of properties in Australia. Moreover, it is dangerous to adopt escalations each year as these may not have kept up with actual building cost increases. It is anticipated that the rebuilding required in these storm-affected areas will put further pressure on construction costs. Further, this pressure and demand for reconstruction is expected to flow into the broader construction industry which is already under cost pressures.
This case study highlights critical lessons about ensuring adequate insurance, especially amidst increasing severe weather conditions and volatile construction costs. Find out more about how the Acumentis team can assist with an Insurance Valuation, outlining an accurate replacement cost for your property.