Underinsurance risks

Underinsurance is one of the greatest financial risks facing an Owners Corporation. If a building is insured for less than its true replacement value, owners may face significant financial shortfalls following a major insured event.

It is important to understand that the replacement value of a building is not the same as its market value. Insurance should generally consider the full cost of demolition, debris removal, professional fees, compliance with current building standards, project management and complete rebuilding of the common property.

Common causes of underinsurance include:

• Outdated building valuations.
• Rising construction costs.
• Inflation.
• Building improvements not reflected in the insured value.
• Changes to building codes and compliance requirements.
• Assuming the purchase price reflects replacement cost.

An adequately insured building provides financial certainty and helps protect every owner’s investment should the unexpected occur.

At Strata Real Estate Services, we encourage committees to regularly review building valuations, discuss replacement values with their insurance broker and ensure their insurance arrangements remain appropriate as construction costs and legislative requirements evolve.

Committee members and owners should review the Strata Management Agency Agreement to understand any remuneration, commissions, fees or other benefits the strata manager may receive in connection with arranging, renewing or administering the Owners Corporation’s insurance policies.

The information above is provided as general information only and should not be considered financial, insurance or legal advice. Owners Corporations and individual owners should obtain independent professional advice appropriate to their circumstances.