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Cost of Damage

Monday, 04th February 2013

With disasters continuing to causing havoc in Australian cities the importance of insurance has become a hot topic for A reoccurring issue for strata residents is insurance. Scott Overy of CHU Underwriting Agencies looks at the cost of damage rectification to common property.

Victoria in 2012 was free from major natural catastrophes impacting high concentrations of strata properties. This was a welcome relief from the previous three years where, as the below table shows, the opposite occurred:
 2009 Bushfires Damage Caused - $1.1 billion
 2010 Hail Storm
 Damage Caused - $1.1 billion
 2011 Severe Storm
 Damage Caused - $488 million
 2011 Severe Storm
 Damage Caused - $729 million

Insured damages from natural catastrophes impacting Victoria[1] Whilst there is much debate on whether these events are getting more severe and increasing in frequency, what we do know is that these events cause great financial hardship for individuals and communities. The cost of everyday claims - which include such things as general water damage, malicious damage and broken windows - have risen significantly over the last couple of years, but the impact has been masked by the sheer volume of catastrophe-related damage. As a general rule insurance costs should at the very minimum increase each year in line with claims inflation, which has run at between 1.5 & 2.0 times the rate of CPI over the last three decades[2].  In the last twelve months claims inflation has increased significantly more than this for everyday claims. There have been a number of macroeconomic drivers pushing the cost of claims upward - they include:

  • The sheet number and severity of catastrophe claims
  • A building boom in Victoria
  • The mining boom in other states 
  • Some Owners Corporations (OCs) have chosen not to undertake regular maintenance work or have defects rectified, which has led to the increased damage to the property.

There has been a significant contraction in the first three drivers, which should result in the lowering of costs charged by builders. This is a proactive conversation that needs to occur with all builders you engage to undertake OC work. To stop damage occurring in the first place, or minimise it when it does happen, the OC has to take responsibility for maintenance and defect rectification, have in place sound risk management processes and ensure that regular maintenance is performed. For example:

  • Attention to items such as the regular cleaning of gutters and maintenance to the roof can substantially reduce the chance of water ingress during a storm.
  • Old pipes that are degrading should be replaced to reduce the amount of burst pipe claims, and trees lopped to minimise falling branches.
  • Common area pathways and driveways should be monitored regularly for any trip and fall hazards in order to reduce the potential for liability claims.

Proactive steps such as these will lower claims frequencies and costs. Electing to take a higher excess may assist in reducing insurance premiums, but it will not take the expense away.  The insurer will pay less due to the higher excess, and the difference is picked up by the OC and/or the lot owner - who have to pay all amounts below the excess. Damage has to be fixed to ensure legal requirements under the Owners Corporations Act 2006 (VIC) are adhered to.

Author:  Scott Overy – CHU Underwriting Agencies

[2] Cordell Building Indices – Cordell Housing Price Index - CHIP

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