1. What is underinsurance?
Underinsurance happens when the insured value of the buildings is lower than the actual replacement value. In a sectional title scheme, this can create major problems after a fire, storm or other large claim.
- The policy may not pay enough to fully repair the damage
- The body corporate may need to raise extra funds
- Owners may be unhappy if special levies are needed
- Trustees may face difficult questions about the insured value
2. Why replacement value matters
The insured value should be based on replacement cost, not simply market value. A building may sell for one amount, but cost a very different amount to rebuild.
- Demolition and clearing costs
- Professional fees
- Building materials and labour
- Compliance upgrades
- Common property structures
- Inflation and building-cost movement
3. Common reasons sectional title schemes become underinsured
Underinsurance usually develops gradually. Trustees may not notice the problem until a claim happens.
- Old valuation not updated
- Annual increases too low
- New structures or improvements not added
- Boundary walls, gates or shared assets forgotten
- Building costs increased faster than the insured value
- The schedule does not reflect the real property layout
4. How the average condition can affect a claim
Some policies may apply an average condition when the property is underinsured. This can reduce the amount paid in a claim, depending on the wording and circumstances.
- The insurer may compare insured value to actual replacement value
- The claim payment may be reduced proportionally
- The body corporate may have to fund the shortfall
- Trustees should check the policy wording and obtain advice
5. What trustees should check before renewal
Trustees should not wait until after a major claim to discuss replacement values. The renewal process is the right time to review the insured value.
- Date of last replacement valuation
- Current building sum insured
- Whether common property is fully included
- Whether improvements or additions were made
- Whether the valuation should be updated
- Whether trustees understand the underinsurance risk
6. Why valuations help
A professional replacement valuation can give trustees a better basis for setting the buildings sum insured and explaining the decision to owners.
- Provides a more structured replacement value
- Helps with AGM discussions
- Reduces guesswork at renewal
- Helps identify missing structures or assets
- Supports better insurance records
7. Underinsurance is not only a premium issue
Increasing the insured value may increase the premium, but underinsurance can cost far more after a serious claim. Trustees should balance premium control with proper risk protection.
- Do not reduce values only to reduce premium
- Check whether the current sum insured can be justified
- Explain the risk clearly to owners
- Keep valuation records and renewal decisions on file
8. Ask for a review if the value is uncertain
Where trustees are unsure whether the scheme is properly insured, a sectional title insurance review can help identify the next steps.
- Review the current schedule
- Compare insured value to available valuation information
- Check common property and shared assets
- Identify valuation gaps
- Prepare better renewal questions