One local council sees common sense

Back in July I received an email from an insurance broker explaining some proposed changes by the Adelaide City Council in respect of the replacement of buildings. I posted the question to my blog at the time but in case you missed it, the email read as follows:

The Adelaide Development Plan has altered zoning throughout the City of Adelaide via the Capital City Development Plan Amendment. Any building that has been damaged and/or destroyed has to be replaced with a building with a minimum height of 21.5 metres (six to seven storeys).

We have a client that has been impacted by this.  At present the client has a 3 storey building.  In the event of a loss, the client would not be allowed to rebuild a 3 storey building.

How do you think we handle this??? – they have $500,000 Extra Cost of Reinstatement – the Underwriter will not increase this sub-limit to accommodate the extra costs involved in re-building (could be $20 million or more) and of course this also has an impact on the BI [business interruption]


Libby [surname and email provided]

Clearly the Council is trying to increase the occupation per square metre in the city which of course generates more rate revenue without really appreciating the ramifications for the property owner where the building has to be replaced through no fault of the building owner. I wrote back setting out the coverage afforded by Extra Cost of Reinstatement:

Hi Libby,

Thanks for your note raising a very interesting question.

The concept behind Additional Increase in Cost of Working was designed to cover upgrades of an existing building to cover things like the fact a building could no longer contain asbestos, could not contain timber floors and or open staircases in a multi-storey building, the building now requires disabled toilets, or a sprinkler system or the like. In each case it allows the insured to have the same sort of building but one which is compliant with the current Building Code of Australia, or other legislation or regulations.

I do not believe that the Additional Increase in Cost of Working cover was ever designed to provide a much larger building with many more storeys and more rentable area, etc. While technically caused by a Local Authority requirement, the situation you paint is really a betterment issue rather an Extra Cost of Reinstatement issue.

With what you have arranged, the Insured could do a couple of things. Either rebuild elsewhere and put back the same sort of building albeit to current code anywhere else in Australia or use existing funds or borrow funds and rebuild in accordance with the newly established minimum height requirements and the additional rent they would
receive over the life of the new building would more than cover the cost of the development.

I am sure your client is scrupulously honest and I am not for one minute suggesting anything else but the moral hazard of allowing an insured to insure a 3 storey building and end up with a 6 or 7 storey building, on the face of it twice the building and twice the value and rental income, is just too great for an insurer to accept.

Another idea is to ask for $500,000 as Additional Extra Cost of Reinstatement if the building is insured under an ISR policy. You client will pay an extra premium but the insurer may accept this relatively standard cover often seen as a core endorsement.

As for the Business Interruption cover, your client will require a sufficient Indemnity Period to allow for the planning, financing, building and re-letting (of the same floor area). The balance of the area would need to be insured under an Advanced Loss of Profits policy.

I hope this is not another case where changes to government legislation pushes the blame onto the insurance industry and away from those who made the change. If the Insured disagrees with the by-law, then he or she needs to take it up with the council either singularly or through the local Chamber of Commerce.  Should this fail, then he or she should exercise their democratic rights and vote against the decision at the next election.

I hope this helps in your and your client’s understanding.

The good news is that armed with


This explanation on Extra Costs of Reinstatement provided by the broker to the Insured along with her own comments went to council and I am delighted that the Adelaide City Council has agreed to include an exemption where the redevelopment is as a result of fire, water or natural disaster. The proposed draft is attached a Draft changes to legislative changes.

This very proactive broker is now working with the Insured to have the perils widened but all in all it is a great result for common sense. Well done everyone concerned including the Adelaide City Council.

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