The Insurance Mistake Townhouse Owners May Not Know They’re Making

If you’re relying on a bank valuation to insure your townhouse development, you’re likely underinsured and, more importantly, exposed. One owners corporation we manage recently discovered they were underinsured by a staggering 32%! Why? Because their insurance cover had never been properly reviewed since the townhouse estate was built. The original sum insured was most likely a rough developer estimate, which hadn’t kept up with escalating construction costs.

This situation isn’t unusual, but it is avoidable. For us, it matters even more because we only manage residential townhouse communities, not apartment buildings. This matters because insurance is often the single biggest cost in the strata budget. If the insurance figure is wrong, everything else is distorted, and owners either overpay or are left financially exposed.

What Your Bank Cares About vs What It Actually Costs To Rebuild

It’s a common misconception that we hear a lot, owners who tell us that they “already had a valuation when we bought the townhouse, can’t we use that?” In fact, a bank valuation and an insurance valuation serve very different purposes.

Banks care about what the townhouse would sell for, and they will include items like land value, aesthetics and the quality of internal finishes. Insurers care about what it would cost to rebuild the townhouse. That includes demolition, debris removal, professional fees, inflation allowances, and more. None of these are accounted for in your bank’s valuation.

What A Proper Insurance Valuation Actually Covers

A qualified consultant (often a quantity surveyor) will inspect your estate and they may review architectural plans. They will apply recent construction rates and factor in demolition, access issues, inflation, and professional services such as council fees to apply for permits or costs for architects. You’ll receive a detailed report that clearly explains how the sum insured was calculated which will be shared with insurers to ensure they have updated replacement values. Some consultants may also provide indexed projections for future years, helping you plan CPI adjustments more accurately and reduce the risk of underinsurance over time.

Here’s a visual breakdown of what an insurance valuation actually covers:

These components are what a proper insurance valuation will account for, many components which will never be included in a bank valuation.

Three Ways Underinsurance Can Hurt You

Failing to obtain an updated insurance valuation leaves your owners corporation exposed to:

• Underinsurance (which may result in major out-of-pocket costs after a claim)
• Delays (insurers may refuse to process claims while valuations are questioned)
• Non-compliance with the legislation (in Victoria owners corporations must obtain an insurance valuation as per the Owners Corporations Act)

We’ve seen insurers increasingly refuse to provide quotes or renewals if sums insured haven’t increased beyond CPI, or they’ll apply average values from their broader portfolio, which may not reflect your actual risk or cost to rebuild the townhouse estate.

How Often Does Victorian Legislation Require A Valuation?

Under the Owners Corporations Act 2006, owners corporations must obtain an insurance valuation at least once every five years. That’s the legal bare minimum, but it’s you may want to review your cover more often, especially if:

• Your property is newly built and was insured using a developer estimate
• Construction costs have shifted significantly (as they have in recent years)
• You’ve undertaken major renovations or extensions

Why The Developer’s Estimate Is Usually Wrong

In many new townhouse developments, the initial insurance value is set by the developer before settlement. These estimates are often based on broad assumptions or outdated cost estimates, not necessarily a professional assessment.

Further, developers are incentivised to keep insurance costs low to make the strata fees more attractive (so the townhouses are easier to sell). Those early figures are rarely revisited unless the owners corporation appoints a proactive manager. That’s how underinsurance quietly creeps in. As mentioned earlier, one of our clients recently discovered they were 32% underinsured, simply because they had been rolling over the same figure from the original developer for years.

How Much Does A Valuation Cost?

An insurance valuation typically costs around $1,400 for owners corporations with 80 or more lots, and the cost decreases for smaller developments. That’s a small cost compared to the hundreds of thousands of dollars it protects you from in the event of a claim.

What If You’re Concerned About Budget Impact?

We understand that some owners corporations may be cash strapped or reluctant to initiate a valuation for fear it will increase premiums dramatically. That’s why our standard approach is to wait until the next renewal to obtain the valuation. This usually gives the owners corporation 8–12 months after their AGM where the new budget is set and they can collect levies and prepare accordingly. By the time the insurance renewal comes around, the budget has typically caught up, and any premium adjustments can be planned in advance. A proactive and experienced manager will also be able to recommend a budget knowing a potential increase in the expenses and thus lessen the impact of a higher insurance premium.

As a reminder: a full insurance valuation only costs around $1,400 for owners corporations with more than 80 lots. This equates to $17.50 per lot, assuming there are 80 lots in the development. Compared to what’s at stake, it’s a very small investment.

A Proactive Approach To Risk

We believe part of our job is to educate, not gatekeep. That’s why we actively advise our clients to obtain insurance valuations. We don’t view it as a checkbox requirement, but one that actually protects owners from avoidable financial harm.

We work closely with insurance valuers and brokers to make the process smooth and transparent. When we see red flags, such as stagnant sums insured or outdated figures, we raise them before they become a problem.

Three Things You Can Do Right Now

• Check when your last insurance valuation was done. If it’s been over five years, or if you’re not sure, it’s time to bring it up with your strata manager.
• Ask your strata manager whether your current sum insured reflects the true cost to rebuild, not just CPI.
• Request a quote for a professional insurance valuation. It’s an investment in peace of mind.

Want help understanding your valuation or arranging a review?
We’re always happy to guide our clients through the process. Proactive, transparent communication is what we stand for, not after-the-fact surprises.