For a number of innocent reasons, using a builder-provided construction cost as the basis for your initial replacement insurance policy may be less reliable than you expect. In new strata schemes there is an additional risk – the developer may have a vested interest in manipulating the value to achieve a private, non-insurance related objective.
Cost cutting undervaluations
You may not be amazed that some developers reportedly devalue their scheme’s reconstruction cost in order to artificially lower the insurance premium and, by extension, the levies during the selling period.
This is potentially a serious risk in disaster prone areas such as North Queensland where insurance premiums have sky rocketed over the past few years.
Ego boosting overvaluations
Many people don’t appreciate the extent of non-building expenditure: such as the land purchase, feasibility studies, development finance, contract and marketing costs associated with a major development. Deduct the cost of all the building fittings that will be insured under contents insurance as well, and there may be a substantial gap between a development’s reconstruction cost and what lot owners expect it to be, based on their purchase price.
Some developers worry this will create an impression of inflated sale prices. Their solution – just increase the insured value. After all, it’s not them who will be paying most of the premium!
We have encountered schemes where lot owners were convinced that lowering the original developer-set reconstruction value was an admission that the market value of their lots had decreased. Such was the power of this misconception that even the prospect of a substantial saving in premium had limited influence.
The safeguard
As with most developer set budget items, we recommend that lot owners obtain their own, independent valuation before they renew the initial insurance policy.
The exception to this rule is in Queensland. Here it is mandatory for the original owner to obtain an independent valuation from a quantity surveyor or valuer and to insure the building for the full amount stated in that valuation [sec. 191 BCCMA 1997].