If you own a unit, apartment or townhouse in a strata scheme, there is a question worth asking before your next renewal notice arrives: does the building’s insurance reflect what it would cost to rebuild today?
For many Australians living in residential strata properties, the answer is likely no. A combination of surging construction costs, labour shortages and supply chain pressures over recent years has left a significant number of strata buildings insured for far less than their true replacement value. The gap between what a policy covers and what a rebuild would actually cost is known as underinsurance, and it is one of the most serious risks facing owners corporations and individual lot owners right now.
Why the Numbers No Longer Add Up
The cost of building in Australia has risen sharply since 2020. According to the Australian Bureau of Statistics, prices received by building construction businesses increased by 31.1% from September 2020 to June 2024. Labour shortages, higher material costs and ongoing supply disruptions all contributed to this sustained increase.
For strata buildings, this matters enormously. An insurance policy taken out or last reviewed three or four years ago was likely calculated on a cost base that no longer reflects reality. If a major loss event occurred today and the building needed to be fully rebuilt, the shortfall between the insured sum and the actual cost could run into hundreds of thousands of dollars.
Industry specialists have noted that if a building has not been valued in the past 12 months, there is a real likelihood it is underinsured, and that the current environment of contractor shortages and soaring inflationary costs across the construction sector has made this message more critical than ever.
Who Bears the Risk?
This is where many lot owners are caught off guard. When a strata building is underinsured and a major claim is made, the shortfall does not simply disappear. It becomes the financial responsibility of the owners corporation and ultimately the individual owners themselves.
Industry guidance makes clear that the liability for any shortfall in insurance cover in the event of a total loss rests with the individual owners. For retirees or those on fixed incomes who have chosen strata living precisely because it offers a more manageable lifestyle, an unexpected capital call of this kind could be devastating.
In most states and territories across Australia, bodies corporate are legally required to insure the building for its full replacement and reinstatement value. This includes not just the cost of rebuilding the structure itself but also the removal of debris, professional fees for architects and engineers and allowances for cost escalation over the period of construction. A policy sum that looks adequate on paper can still fall well short when all of these components are factored in.
When Was Your Building Last Valued?
A professional insurance valuation is the most reliable way to ensure a strata building is covered for what it would actually cost to rebuild. These valuations should be carried out by a qualified valuer with specific experience in strata properties and should be updated regularly given how much construction costs have moved.
If a building has not had a professional valuation in the last three years, it is likely underinsured. In the event of a total loss, any shortfall becomes the individual owner’s liability. Mbcm
In Victoria, legislation already requires owners’ corporations to obtain an insurance valuation at least once every five years. Other states and territories have their own requirements but even where the legislative minimum is being met, that may not be enough in the current environment. A valuation that is five years old predates some of the most significant cost increases Australia’s construction sector has ever seen.
Beyond formal valuations, owners’ corporations can also look at indexing their building sum insured at each renewal to help it keep pace with rising costs between valuations.
Many insurers recommend indexing the building sum insured by around five per cent at each renewal as a practical buffer between formal valuations. However, given that Australian building construction prices rose by more than 31% between 2020 and 2024, annual indexation alone may not have been enough to keep many policies current during that period. It helps but it is not a substitute for a thorough professional valuation.
What Strata Committees Should Be Doing Now
For those who sit on a strata committee or owners corporation, now is a practical time to take stock. Ask when the building was last professionally valued for insurance purposes and compare that figure against current construction cost benchmarks for your area.
Consider engaging a specialist insurance adviser who understands the strata sector and can help identify whether the current sum insured is realistic.
It is also worth reviewing the full scope of what your policy covers. A solid strata building policy should account for the complete cost of reinstatement including demolition and debris removal, consultant fees and the time it takes to actually complete a rebuild.
Policies vary considerably in how these items are treated so the fine print matters.
For lot owners who are not on the committee, it is entirely reasonable to raise this issue at the next annual general meeting. Requesting a copy of the most recent valuation and asking whether a review is planned are straightforward steps that could save considerable financial pain down the track.
The Bottom Line
Strata living is an increasingly popular choice for mature Australians seeking a low- maintenance lifestyle without sacrificing comfort or community. But the convenience of shared building management should not come with blind faith that the insurance is adequate.
Construction costs in Australia have risen dramatically and the insurance coverage arranged in better economic conditions may no longer reflect the real cost of replacing what you own. A building that is underinsured is not a protected asset. Getting the right residential strata insurance and reviewing it regularly with a specialist is one of the most straightforward steps an owners corporation can take to protect everyone in the scheme.
