Not all quotations are equal.

The comparison between a Hyundai car and a Mercedes car is apparent to a reasonable person’s knowledge of the quality differentials between the two brands. Unfortunately, unlike the automotive industry, the difference in quality between insurance cover and insurance companies is not as well documented or simple to measure.

There is a general consumer acceptance that a quotation for insurance somehow provides an automatic level playing field irrespective of the insurance company or what the policy cover is or, most importantly, what the company’s reputation is and its attitude to the settlement of claims. Many people fall into the trap of going ahead with a quote because it offers a cheap price. Regrettably, this attitude reduces the point of comparison to the level of premium only and therefore provides a limited analysis of the insurer, the policy and the real or potential costs of selecting a policy that is not suited to the needs of the body corporate or lot owners.

Assessment of insurance plan & quotation – what you need to know:

There are several real and potential exposures that need to be considered when assessing an insurance plan and quotation. These considerations include:

1. The financial strength of the insurance company

Insurance companies that reduce rates are simply buying the business for short-term gain. This invariably leads to major problems, especially when there is the need to support their products in the medium- to long-term.

You should look out for common indicators of unprofessional practices that include:

• A high ratio of claim denials;

• Slow claim payments; and

• Slow administrative service.

In other words, you need to be extremely wary of companies that charge suspiciously low premiums.

2. Policy cover

To safeguard the assets and, therefore, the lifestyle of the individual owners of the body corporate, it is critical that the policy cover is as comprehensive as possible and that it meets the requirements of the Body Corporate and Community Management Act 1997.

The requirements on the body corporate to meet their statutory obligation are absolute – the body corporate is not permitted to negotiate a lesser cover. Note, that individual owners have an unlimited financial liability in regard to the operation of the body corporate.

3. Under-insurance

Although the premium component of insurance is important, it pales into insignificance when it is compared to a major event loss on a building that is inadvertently or deliberately underinsured. Unfortunately, there is very little focus on the sum insured. If a total loss occurs, the owners will all share in the shortfall. However sums insured are blissfully ignored other than by periodic industry average valuations that often do not stack up when a major loss occurs.

The Body Corporate and Community Management Act imposes a statutory obligation on a body corporate to insure their building for the full replacement value. Failure to do so, can lead to possible convictions and fines and the risk exposure can lead to substantial financial loss for the owners.

There are several factors which contribute to under insurance, including:

1. Valuers do not receive the correct instructions from the body corporate. The instructions must be based on the individual circumstances of your building and all potential problems must be identified.

2. The allowances which are made for inflation to cover those losses that could occur at the end of the insurance year are generally inadequate. The normal allowance that is acceptable for inflation is 18 months, however a more responsible and prudent period to take would be 36 months.

3. The sums insured must be reviewed annually, as circumstances can change dramatically that will affect the end result, (construction rates are prone to sudden increases such as those currently occurring in Western Australia).

4. Catastrophe cover

The Body Corporate and Community Management Act requires insurance to cover the destruction of a building however it does not specify the cause of destruction of the building – whether by fire or earthquake and the resultant replacement costs will vary considerably depending on the cause.

History has proven that a sum insured that is calculated on the destruction of the building by fire will not be sufficient to cover the replacement of the building caused by an earthquake – primarily due to the widespread scale of damage caused by an event like an earthquake relative to a “single building event” like a fire.

It is contrary to the Body Corporate and Community Management Act to insure for anything less than the full replacement cost of the building destroyed by the worst possible scenario, such as an earthquake.

Statistical evidence of post-catastrophe cost inflation shows that you need a minimum level of cover equivalent to 30% of the building sum insured. A conscious appraisal and recommended coverage limits needs to be applied.

Aside from the concern that while many bodies corporate do not have catastrophe cover, there are also many who choose to insure for a blanket cover of 15% as promoted by certain insurers within the strata market. Industry wide research maintains this amount is inadequate and the restricted cover will ensure the sum insured will not represent full replacement cover.

Most importantly, if the building or catastrophe sum insured is insufficient to cover the full replacement of the building, the difference must be made up from the funds of the body corporate. The personal assets of the individual owners may be exposed to claims for rebuilding.

5. The ability to pay claims quickly.

Delayed claims settlement can create additional unnecessary costs and inconvenience for both the body corporate and the body corporate, anager.

The chasing up of outstanding claims is costly, time consuming, and onerous. Unfortunately, this is a typical occurrence. Situations have arisen where contractors have enforced their rights against the body corporate and demanded payment for work undertaken. In these situations, the body corporate may be liable to pay a contractor because the insurance company has delayed payment(s) of an agreed insurance claim.

When considering potential insurers it is advisable to take into account a sound record of fast claim payments.

6. The level of premium:

Another contributing factor in the decision making process is the level of premium. Arguably, this is the least significant factor. While the premium needs to be competitive, perceived potential savings can be insignificant and misleading when viewed in the light of the above points.

By Kay Trimble - CHU Underwriting Agencies P/L