Do your clients know the AUD is changing their plant and equipment insurance values?

Many Australian businesses, of any size, are not considering the impact of the declining Australian Dollar (AUD) on the values of their major plant and equipment, particularly when it comes to assessing another year’s sums insured.

In 2012, 1 USD = 1.03 AUD. Now, in August 2016, 1 USD = 0.75 AUD.

Due to the AUD gradually declining, the cost to replace imported assets has increased dramatically. For example, a printing press we valued in 2012 had a new cost of $7,500,000 compared to today where it's in the vicinity of $10,500,000.

The replacement cost of imported assets, their maintenance and spare parts will increase as well as their value.  Most businesses have imported assets of some variety and therefore shouldn't think themselves exempt of this issue. No machine is fire resistant or indestructible. 

Businesses that haven’t considered their imported assets insurance values could be well under the expected replacement cost and could therefore be in for a real shock.

It’s also dangerous territory for any business that guess their plant values or adopts an annual CPI increase when updating their sums insured each year. What is the point of clients having and paying for insurance coverage if it's not going to compensate them the way you would expect it to? 

Clients worry about disaster hitting their buildings but not what's inside them and consider it appropriate to have their buildings insured, whilst not placing the same importance on their plant and equipment.

All businesses no matter their size require current asset registers and insurance valuations to support any potential claim.  It does not matter how new or old the assets may be at the time of loss, they will all need to be replaced. 

Why 'buy' protection if it's not 'enough' protection. There's no benefit being partially protected. Another reason why it’s important for your clients to have up to date insurance valuations.

Are your client’s buildings situated on underwater pier foundations?

The recent partial collapse of ‘Milano’s on the Lake’, a two storey building into Lake Macquarie, Pelican Marina in NSW brings to light a critical insurance issue that requires a ‘should have’ discussion for Brokers and their Clients who have buildings on underwater pier foundations. 

The partially submerged building that housed several businesses including the popular restaurant and function centre continues to fall in the water. It will soon be demolished even though the structure was

declared structurally safe two months before collapse
— 1233 ABC Newcastle (1)

If any Broker has clients with structures on underwater pier foundations, we suggest they seek clarification from them on the following:

  • Who actually owns the piers?
  • Who is responsible for the insurance coverage?
  • If there is a landlord and tenant; are both parties aware of the current sums insured for the building AND pier support?
  • If they are, then more importantly, are they insured adequately?

Only an independent building insurance valuation will provide the answers above.

Milano’s on the Lake is a prime example of why no-one should think their assets are untouchable.

There was nothing in that report to indicate that there was a danger of imminent collapse but obviously something has occurred since then so we will be investigating that.
— Tim Deverell, Department of Crown Lands Hunter Manager (2)

Clients actively choosing to skip an insurance valuation need to know they can only rest assured knowing their sums insured are correct if they have had a recent insurance valuation conducted. Without one, they could find themselves paying for incorrect insurance coverage and being inadequately reimbursed if disaster strikes.

So, are your client’s buildings, site improvements, contents AND pier support insured, correctly? 

 

(1) Read more Lake Macquarie restaurant Milano's declared structurally safe two months before collapse - 1233 ABC,  9 February 2016

(2) Read more Lake Macquarie restaurant collapse: business owners count the cost - Sydney Morning Herald, 9 February 2016
 

Why you shouldn’t rely on the BPI or CPI without a building insurance valuation

It’s a common misconception that it’s ‘accurate enough’ to forgo a building insurance valuation and rely on the Consumer Price Index (CPI) and or the Building Price Index (BPI) to update sums insured each year.

Firstly, if there is no professional independent valuation, there is no accurate foundation for these updated sums insured to be based on.

Secondly and equally as worrying, the difference between the CPI and BPI over the last five years is so considerable it could be adding an additional 10% to the already incorrect insurance figures.

Between March 2010 and June 2015 the CPI increased by 13.8% and the BPI increased by 23.4%.

For example:

In March 2010, a building was insured for $3,000,000. Each year the building owner relied on the CPI at the time of renewal so the sums insured today would be in the vicinity of $3,414,000.  If the owner relied on the BPI each year the current sums insured today would be in the vicinity of $3,702,000.

That’s a difference of $288,000, approximately 10% difference between either of the updated figures today.

Relying on the CPI and BPI without a recent (3 years) building insurance valuation only exacerbates a very preventable problem and it’s usually caused by people not wanting to pay for a valuation; being over confident nothing bad will happen to them; relying on builders and accountants for insurance figures or thinking they know the true value of their assets.

Some people seem to think simply having insurance cover is enough protection. What is the point of paying for insurance coverage if it's not going to compensate you the way you would expect it too?

Combustible Wall Cladding

The Victorian Building Association (VBA) will conduct an audit of 170 buildings because of the fire at the Lacrosse Apartments in Melbourne in November 2014. 

The fire was started by a cigarette on the 8th floor however it was the combustible wall cladding that further fuelled the fire to reach the 21st floor. Damages were approximately $2 million.

The discovery of this non-compliant cladding is now becoming more frequent particularly in Melbourne. 

Poor building product compliance is a major issue in Australia, with evidence showing that the market penetration of non-conforming products in key construction product sectors may be up to 50 per cent. A recent survey by the Australian Industry Group found that 92 per cent of builders surveyed had been offered faulty materials or products to buy.
— Architecture and Design website (1)

A senate enquiry will also examine the impact these products may have on consumers which are imported from China and not tested to Australian standards. Consumer's insurance costs may also be affected.

This product will not be detected by a valuer during an inspection. Clients and insurance brokers need to be vigilant and to find out if any of this external cladding has been installed in any recent building works.

Combustible building cladding has also been discovered at the Royal Freemasons property in Prahran and on an aged care facility in Melbourne.

...the system is clearly failing and Australia has become a dumping ground for some of the world’s dodgiest and most dangerous building products”.
— Senator Nick Xenophon (2)

(1)  Read more "Non-compliant cladding fuelled Melbourne apartment tower fire, MFB finds" - Geraldine Chua, Architecture and Design, 28 April 2015

(2) Read more "Flammable cladding found at old people's home" - Insurance NEWS, 27 July 2015

Read more "Senate launches flammable cladding inquiry" - Insurance NEWS, 29 June 2015

Mobile Plant and Fleet – Current Market-Agreed Value for Insurance Purposes.

With  the recent downturns in mining, upturns in  construction, especially in New South Wales and Victoria, as well as the impact of the Australian  dollar, it has become more critical to provide updated and market- relevant  Agreed Value valuations on  mobile plant, earth moving equipment, trucks, trailers, plant and equipment for insurance purposes.

In some cases, mobile plant assets may be “undervalued” as the current market demand for construction equipment increases in New South Wales and Victoria, whilst  larger items as used in  mining, may be “overvalued” due to the current demand and supply situation.

In particular New South Wales and Victoria are seeing construction booms, whilst Western Australia and Queensland are experiencing stagnation in the mining industry.

In addition, interest rates and the devaluing Australian dollar add further pressures to current market values, so too are the competitively priced Chinese manufactured items of earth moving, plant and equipment.

Values are also coming under further pressure for trucks that are now ten years or older as finance companies are reluctant to provide finance.

It is vital in these shifting times for your clients not only to update their Agreed Valuations annually but also to review current agreed values to ensure appropriate insurance coverage.

Why you shouldn’t rely on Banks for Building Insurance Valuations

A Bank “Insurance” Valuation Report

When clients require Bank valuations for mortgage, security and or refinancing purposes their Bank will appoint one of their preferred panels of valuation Companies to carry out the valuation.  Included in their Bank valuation report will be one paragraph referring to insurance purposes and an estimate for replacement for the building/s.

 

Their Objective

The primary objective of the Bank valuation is to determine the market value of the land and buildings if they had to be sold by a Bank.  For this purpose, the Bank is only interested in the lettable floor areas. A lower insurance value makes it easier to produce a lower market value, i.e. the relativity of the insurance value to the depreciated value of the improvements is important.  A "narrower gap” between the insurance value and the depreciated value makes it easier to produce a lower or more conservative market value.

 

The Problem

We have witnessed up to a 50% difference in insurance values between an independent specialist insurance valuation and a one-paragraph Bank “insurance” valuation. If a client uses this Bank “insurance” valuation for insurance purposes, they are risking relying on incorrect sums insured for their building/s.

In many if not all Bank “insurance” valuations, the valuer, who generally has little building insurance valuation experience, does not allow for:

  • Purpose-built buildings
  • Purpose-built improvements
  • Site improvements
  • Car parking areas
  • Hardstands

In addition, many Bank “insurance” valuations do not allow for:

  • Escalation costs during the rebuild period
  • Demolition and removal of debris

 

The Solution

We cannot stress enough the importance of Clients and Brokers not relying on Bank valuations for insurance purposes. Only an independent insurance valuation conducted within the last three years can adequately protect your clients should disaster strike. Don’t wait for an insurance claim to find out your clients are insured incorrectly.