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Lessons from the Quakes
For Body Corporates, insurance will often be the largest item contained in the Body Corporate budget. Invariably focus will be on the premium, and often little attention is paid to the policy terms and conditions. Boutique has been successful in negotiating a specialist Body Corporate policy through its principal broker, ACM Ahlers, which is not only comprehensive, but also price competitive. The issue of comprehensiveness has been reinforced with those Body Corporates unfortunate to have suffered through the two major quakes Christchurch has experienced.
A number of insurance policies will invariably have listed as add-ons, loss of rents and alternative accommodation cover. This may run from $10,000 per unit up to $25,000 or beyond. Many however will have limitations in terms of the period of cover (generally a maximum of 12 months) whilst others have stand down periods or significant excesses. The significance of having full and comprehensive cover has been brought home to many owners in the Christchurch area, particularly those where the extent of damage has meant that demolition and rebuilding is now the inevitable outcome. For those owners with mortgages, and that is the majority of us, the reality is the mortgage will still need to be paid, whilst the decision to repair or rebuild is made, and in such circumstances no rental income is being achieved. For owner occupiers, the mortgage will also continue whilst an owner, unable to remain in their unit, has to also meet the cost of alternative accommodation.
For those units where a rebuild is required, three significant issues become apparent:
- The size and extent of loss of rents or alternative accommodation cover. In most cases it would be unrealistic to expect a rebuild to occur within 12 months.
- The extent of the replacement cover under the policy. (Thankfully for Boutique’s clients, the one Body Corporate where demolition and rebuilding will be required, the policy provides for cover up to $100Million, irrespective of the value at the time the policy was taken out.
- The underlying strength of the insurance company to meet the immediate claim when in a disaster situation the financial strength of the insurer can become an issue.
Body Corporate’s are unlike stand-alone residential properties, in that generally an option not to rebuild will not exist. The Unit Titles Act (both 1972 and 2010) require full replacement cover, if this is achievable. The proceeds of cover are required to be applied to rebuilding of the units and are not able to be applied to clearing the individual owners’ mortgages.
Whilst it has, to some extent, grown out of fashion, the Unit Titles Act does enable an individual owner to take additional insurance cover to clear their mortgage in a disaster situation. This cover supplements the Body Corporate cover and avoids the owners being concerned about the extent of loss of rents or alternative accommodation cover. Any owner who wishes to explore such cover, which is not particularly expensive, should contact your Secretary.
Whilst all Body Corporates should have comprehensive replacement cover in place, it is important the strength of the insurer be considered along with the issue of how comprehensive the policy terms and conditions are. The cursory assessment of the insurance proposals that occurs with many Body Corporates reflects less than a prudent approach to what is one of the critical decisions for every Body Corporate - a reality the Christchurch disaster has strongly brought home to owners in the ten Body Corporates in Christchurch managed by Boutique.