A reminder about the effect of the Carbon Tax on reinstatement and replacement values

According to a recent report by the Green Building Council of Australia, buildings account for 23% of greenhouse emissions.

Under the legislation the top 500 polluters will pay $23 per tonne for the carbon dioxide that they produce. Think how many of our major manufacturers manufacture building materials. BHP, Boral, CSR, Pioneer, Laminex Industries, Pilkington ACI to name a few.

But the tax is not just on the manufacturers. The Clean Energy Act 2011 (Cth) is a tax on:

 

  1. stationary energy (including natural gas suppliers),
  2. industrial processing,
  3. resources, and
  4. the waste sector.

If you consider that the vast majority of building materials start life as a resource, iron ore, bauxite, silicone sand, clay, limestone, etc and then think just how much energy is required to smelt, refine, bake etc the raw material to convert it into the building materials we use you can see that the cost of reconstruction is going to increase.

This means that more than ever, the sum insured on every building in Australia, commercial and domestic, needs to be reviewed to ensure that it is adequate to rebuild it should it be damaged by an insured peril.

Remember that commercial insurance policies are subject to a test for under insurance.

If a building is insured for say $1 million but its current replacement cost at the start date of the period of insurance (some policies are tested at the date of the damage) is $2 million then it is not the case that the owner of a liability has no exposure for under insurance unless the claim exceeds the sum insured of $1 million.

Under the vast majority of insurance policies on commercial buildings, stock and other property, the insurer will allow a 15% or 20% tolerance for being under insured. If you are under insured by more than this tolerance then the Insured is deemed to be his or her own insurer for a portion of each and every loss where the value of the claim is greater than 5% or 10%.

As an example, let us assume the building has had the roof damaged by hail and it needs to be replaced and the cost of this including some repairs to the interior necessary due to water entry amount to $250,000.  With an insurance policy with 80% co-insurance (20% tolerance for under insurance) the claim would be settled as follows.

The Insurer would pay:

Sum Insured on the building times the repair cost of building divided by 80% of the true replacement value of the building.

= $1,000,000 x $250,000 ÷ 80% x $2,000,000

=  $156,250 less any policy deductible/excess)

The owner of the building would have to fund the shortfall of $93,750 ($250,000 less $156,250) plus any policy deductible/excess.

Rather than risk the potential loss of nearly $100,000 from a claim of $250,000 it is my strong advice to review the sum insured and to ensure that it is adequate to avoid the penalty of under insurance, bearing in mind the extra costs of building caused by the introduction of the Carbon Tax.

One final point, as the tax is also applicable to the waste sector, it is necessary to review the limits or sub-limits in the insurance policy for Removal of Debris.

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