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Building Code Requirements vs. Property Insurance Requirements

Over the last few years the insurance market has been hardening. Premiums have increased, available coverages have decreased, and insurers have become less willing to compete for business.

As the market has hardened, there has been a disconnect between building code requirements and property insurance requirements. At KBI, we’ve seen more and more cases where:

  • An insurer denies cover for a building even though it complies with the National Construction Code (NCC.)
  • An insurer charges extra to cover a building because of risks associated with a building material that is NCC compliant.

An insurance broker can’t provide construction advice, but they can help provide information you need to make informed decisions and avoid surprises. This includes information about the insurance implications of different building materials.

Why are building code requirements and property insurance requirements different?

Insurance requirements and building codes are not written by the same people, or for the same purpose. Differences reflect:

Different Goals

A property insurance policy covers financial risks associated with owning a building. If a building material is safe to use but costly to repair, this may concern an insurance company more than it concerns the Australian Building Codes Board (ABCB.)

Different Risk Appetites

Risks deemed acceptable by the ABCB are not always acceptable to insurers.

Different Response Times

Information about the safety of building materials is always changing. A government body like the ABCB cannot always adapt as fast as a private insurance company.

Why is the gap between building code requirements and property insurance requirements increasing?

More and more code-compliant buildings are having trouble finding insurance. There are two reasons for this:

Reason #1: The insurance market has hardened, and property insurance requirements have become stricter

In 2020 insurance companies faced claims related to the Australian bush fires, COVID-19, and severe weather events. This has led to extremely poor loss ratios across the industry, which means the insurers are paying more in claims than they are collecting in premiums.

This, coupled with the already hardening insurance market, has created a difficult environment for building owners. A hard market is defined by reduced capacity and higher prices. In a hard market, insurers are less willing to compete against each other for business.

Building owners are feeling the squeeze, especially if their building has previous claims or other risk factors. Those seeking insurance can expect:

  • Risk-averse insurers
  • Stricter rules for issuing new policies
  • Fewer options
  • Higher premiums
  • Higher excesses

Reason #2: Insurers heavily restrict cover for buildings with combustible cladding like ACP.

In 2017, the Grenfell Tower fire killed 72 people. The building had Aluminium Composite Cladding (ACP) with a combustible polyethylene core. At the public inquiry, experts linked the spread of the fire to the building’s cladding.

Insurers and Australian state governments reacted differently to this news. NSW enacted a ban on ACP products that are more than 30% polyethylene. Insurers were much harsher:

  • Buildings with ACP cladding became difficult to insure and the cost of covering buildings with ACP skyrocketed.
  • Building codes can allow some ACP products with small amounts of polyethylene, but many insurers take a stricter approach by refusing to insure buildings with ACP containing any amount of polyethylene, classifying it as “flammable”
  • Insurers have begun restricting coverage and increasing prices for other highly-combustible code-compliant building materials too. This includes Expanded Polystyrene Cladding (EPS) and Timber cladding.

How can an insurance broker help?

The gap between building code requirements and property insurance requirements has grown.

If you plan to build, renovate, or refurbish a premises: an insurance broker can tell you how different building materials affect insurance cover. This may not change your mind, but it will mean you understand the implications of your decision and are prepared at renewal time.

If you already own a building: your broker can keep you up to date with industry changes. If guidelines change and your building becomes difficult to insure, they can help you find a suitable insurer and negotiate a fair price.

Why choose KBI?

With KBI as your broker you can expect:

  • To be kept in the loop about market changes.
  • To get expert help sourcing cover for difficult to insure buildings.
  • To get the information you need to make informed decisions around your building and renovation projects.

Feel free to reach out to our commercial property team for more information.

Tyson Jeffrey

Tyson Jeffrey is an Account Manager at KBI with a focus on Commercial Property and Strata insurance.

Have any questions?

Talk to one of our Commercial Property Experts today!

*The Content is for informational purposes only, you should not construe any such information or other material as  financial, or other advice. This information is general and does not take into account your objectives, financial situation or needs. When considering the purchase of an insurance policy, you should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.

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