We all need building insurance, whether that be for residential, investment, commercial or government buildings, but how much insurance should we be allowing for?
As a general rule, most domestic residential homeowners will want to keep their premiums as economical as possible, so will only insure for the replacement cost of their home, which can be very costly in the long run.
Depending on the type of building that is to be insured, the following allowances need to be taken into account when applying for building insurance:
- ctual present day value replacement cost of the building(s)
- demolition costs of existing damaged building(s)
- rent of alternative premises until replacement building is complete
- design fees for new building
- authority fees for new building
- loss of income if building was being used to generate income
- escalation costs. There could be a three to four-year time delay from when the original insurance claim was placed to the new building being ready to be occupied.
I have found from preparing ‘building replacement costs’ for insurances purposes for numerous body corporates in Queensland over the years that the additional cost for all the above additional items, over and above the ‘building replacement cost’ are in the order of 50 per cent of the building cost.
For example, if the cost of replacing the building(s) after they have been destroyed is $1.5 million then, as a rule of thumb the owner(s) should be insuring the building(s) for $2.25 million.
Then on top of this we need to also consider the circumstance of the building being destroyed. Was it a one-off event or natural disaster or something less rare?
Unfortunately natural disasters are a common occurrence in Australia with natural disasters occurring on a regular basis over the last 50 years. The list includes Cyclone Tracey (Darwin, 1974), the Ash Wednesday bushfires (Victoria and South Australia, 1983), the Newcastle earthquake (New South Wales, 1989), Cyclone Larry (Cairns, Far North Queensland, 2006), the Black Saturday bushfires (Victoria, 2009), and Cyclone Yasi (Mission Beach/Cardwell, Far North Queensland, 2011).
The cost of reconstruction can increase by as much as 50 to 100 per cent in the local area of the disaster. This was particularly evident after the Newcastle earthquake. In the late 1980s, Australia was going through a recession with the construction industry particularly depressed, except for the Newcastle region of NSW.
As a young quantity surveyor, I relocated to Newcastle at this time to help assess earthquake damaged buildings, mostly for insurance claims. Most owners thought they had adequate insurance. However, the realization soon hit home. Due to the amount of damage to Newcastle buildings, reconstruction costs increased between 50 and 100 per cent, leaving most owners out of pocket.
In addition to a ‘spike’ in the local economy following a natural disaster, federal and state governments can also amend building regulations to make buildings safer.
However, this has the effect of increasing costs. Following the Black Saturday bushfires, many homeowners found they had inadequate cover to rebuild their homes due to new Victorian planning provisions that were introduced for any new dwellings that were to be constructed within bushfire prone areas after Black Saturday.
So where does this leave the building owner when considering what level of cover for building insurance?
It’s all about risk assessment and value for money.
It is up to each individual building owner to assess the risk of their building(s) being damaged or destroyed. This should be a relatively simple process for the domestic residential owner. However, corporate entities, statutory bodies and institutions with large portfolios of properties will need to assess the best value for scenario.
For example, if we take a leading Australian university or government department that has more than 100 individual buildings, the risk assessment versus value for money spectrum could be:
- insure all buildings for building replacement costs, plus all additional items previously identified, plus allow for a spike in reconstruction costs due to a natural disaster
- insure all buildings for building replacement costs plus all additional items
- insure all buildings for building replacement costs only
- take out a ‘risk policy only’
- do not insure
The last point may not be so ridiculous, as the total yearly insurance premium cost on a multitude of buildings may actually exceed the cost of replacing a single building that is destroyed.
Look at your portfolio and determine your risks and what the best value for money scenario is for you.