|
Recent storms throughout South East Queensland have again shown property owners and investors just how important it is to have their property insured accurately. Media reports are suggesting current insurance claims are over $250 million for that particular weather event alone.
Under-insured Australians
According to research completed by the Insurance Council of Australia (ICA) around 7.5% of Australian home buildings are insured for less than 70% of their replacement value; 20% of home buildings are insured for 70-90% of replacement value. This means that in the event of a natural disaster, the property owner will be left out of pocket if they have to rebuild, costing thousands of dollars.
Your Building May Already Be Under-insured
Building codes are continually changing and evolving and you can almost be guaranteed that many existing buildings cannot be rebuilt completely to their current state. This is due to ever changing rules within the Building Code of Australia (BCA) and various other legislative changes. Two recent examples significantly affecting the construction costs of buildings include:
-
The introduction of BASIX (NSW developments only) - governing the energy and water efficiency of firstly residential homes (released progressively between 2004 and 2006), then in a 2007 amendment, all residential dwellings in NSW; and
-
The recent amendments to Section J of the BCA - imposing strict new regulations relating to the energy efficiency of all commercial buildings, adding significantly to the cost of their construction.
Anyone attempting to rebuild any dwelling following an insurance claim will be forced to comply with current building codes, and without expert advice from a quantity surveyor, they could find themselves under-insured by a considerable margin and unable to replace their building.
Specialist cost advice is highly beneficial due to the potential complexity of the process between total loss and reinstatement of the original building.
The Importance of Accurately Insured Property
A Replacement Cost Estimate is an assessment of the actual cost to reinstate a building in today’s economic climate. When determining the replacement cost of a building many issues need to be considered, including but not limited to:
-
Demolition and removal of debris and asbestos and the associated consultant fees;
-
The cost of constructing the building considering planning constraints and building codes;
-
Consultants fees and all preliminaries; and
-
Cost escalations for time period relating to:
-
Assessment of damage and claim finalisation;
-
Lead time and planning;
-
Design and documentation;
-
Calling of tenders and tender evaluation;
-
Construction and fit out period; and
-
Time lapse between policy renewal dates.
There are three possible outcomes from inaccurately estimated replacement costs:
-
Understated insurance value - total property loss: the property owner runs the risk of significant losses in the event of a major disaster such as a fire or earthquake.
-
Overstated insurance value - total property loss: significant additional premiums will result.
-
Understated insurance value - partial property loss: the insurer may only pay that percentage of underinsurance leaving the property owner to meet the shortfall.
BMT & ASSOC has access to construction cost estimating techniques necessary to determine the cost of construction and related costs required for insurance purpose.
What Does this Mean to Developers?
It is easy for developers fall into the trap of insuring their finished asset for the cost of building it. The build cost however does not cover items previously mentioned like demolition, consultant’s fees and cost escalations which can result in a serious shortfall in the insured value of a property.
What Does this Mean to Financiers?
Of course financiers are equally exposed to this risk on completion, as well as any going concerns in their portfolio, and it is for this reason that establishing a realistic replacement value should for part of any due diligence process.
Should you have any queries regarding replacement cost estimates or any other BMT & ASSOC service, please do not hesitate to contact Tom, Brad or Brendan at the office.
|
