Andrew is on the committee for the Body Corporate in the apartment building he lives in.  They recently received a quote for insurance for the following year, which had tripled from the previous year’s cost.  They wondered if they could take anything less than full replacement insurance.

The law says that a Body Corporate has a duty to insure all buildings “at their full insurable value”.  Generally this is read as full replacement insurance.  However, the law also says that indemnity cover (e.g. to a lump sum) is permitted if full replacement cover is “not available in the market”.

An argument has been raised that “not available in the market” could apply to a situation where it is available but is not commercially viable to take such insurance because of the price attached to it.  This interpretation may not be accepted, so the current position is that it is a breach of the Unit Titles Act to take out anything other than full replacement insurance.

Bodies Corporate need to think seriously before making any decision to insure for less than full replacement and also need to consider the following:

1. Mortgagees (i.e. banks)– if any owners have a mortgage over their units, it will likely be a breach of their mortgage terms to allow the building to be insured for anything other than full replacement.
2. Purchasers – if owners are looking to sell their apartments, a lack of full insurance will put off buyers and may mean that they cannot obtain finance to purchase.

It is very important to take professional advice if your Body Corporate is considering insuring its building for less than full replacement value.