Insurance

June 17, 2024 Published by British Columbia Chapter - By Lora Manor

Is Your Newly Developed Strata Insured For It’s Replacement Cost?

From CCI BC Strata Connection Magazine, Volume 02, Spring/Summer 2024

A commonly misunderstood issue at the turnover meeting for a new strata is whether an insurance appraisal is required. It is often assumed that a developer s construction cost is an accurate reflection of the Replacement Cost of the strata and an insurance appraisal is not necessary. Insuring a strata for the developer s cost often results in under or overinsurance. Identified below are a few reasons why the developer s construction costs may differ from the insurable value of the strata: 

1) The developer’s construction cost may not include all the costs that are incurred to build the strata or may be based on reduced costs due to efficiencies achieved by the developer. 

The construction costs provided by the developer may not include soft costs  such as architect fees, development fees and general contractor fees. All these items are costs that would be typically incurred if the strata had to be rebuilt after a total loss. A developer who is building multiple complexes would also most likely achieve efficiencies with regards to material and labour costs. For example, a developer who is building ten condominium buildings will have to purchase significantly more steel girders from their supplier than a developer who is constructing only one building. As a result, the supplier is more likely to offer a favourable purchase price to the developer of multiple buildings. Insuring the strata for the reduced construction cost may create a deficiency in funds if the under-insured strata have to be rebuilt in a total loss situation. In the above-described scenarios, the unit-owners could potentially be held responsible for the difference. 

2) The developer’s construction cost may be limited to the proposed cost at the beginning of the tendering process.

It is often the case that the construction cost for a condominium building is determined and fixed during the tendering process for contractors. If this cost is utilized for placement of insurance, it may result in an extremely inaccurate Replacement Cost since the time lag between the tendering process and completion of construction of the strata can sometimes take as much as three to four years. Over that time period, the material and labour costs could change significantly.

Economic changes such as inflation and interest rates could potentially affect the cost of construction greatly. In addition, changes related to material costs include shortages and surpluses of material that can affect prices through the law of supply and demand. Shortages result in higher prices while surpluses lower the prices lower for material. The available labour pool will affect construction costs for the strata in much the same way as materials. A large supply of skilled labour results in lower costs while a small supply would increase labour costs. It should also be noted that changes in material costs are not always a gradual process. It is not uncommon to see drastic changes in material costs over a short period of time. 

3) The developer’s construction cost may include costs for non-insurable items. 

The developer may incur various costs during construction that should not be considered for property insurance purposes, such as:

• One-time site clearing and preparation costs
• Additional labour costs for overtime or bonuses
• Interest accrued in financing arrangements during construction 

These costs would not be applicable in a normal reconstruction scenario, since site preparation is a one time cost, normal labour markets are assumed and financing costs are not considered. In the instances when the developers cost is adopted and it includes these additional non-insurable items, the insured value will be overstated. This may result in higher insurance premium payments.

In conclusion, construction costs provided by developers can considerably differ from the Replacement Cost of the strata. The recommended way to determine the Replacement Cost is to engage a professional Appraisal Firm to determine the insurable value of the common assets owned by the Strata Corporation. This will not only ensure accuracy but will also transfer liability for the calculation of the Replacement Cost to the Appraisal Firm. 

Lora Manor, Business Development Associate, Suncorp Valuations

At Suncorp, we have over 40 years of experience in assessing value – market value and insurance replacement value for property of all types: diamond mines to water and wastewater systems; condominium complexes to retail ma ls; or pulp & paper mi ls to the house down the road, and a l things in between.