…If the improvements are more than this the SM needs to increase the insurance value of the lot (owner pays)…
That is how we used to operate but (in the ACT) the requirement to insure the property by the Unit Titles Act is not qualified in any way so the OC has to insure everything. It is not possible to get an insurance policy that gives absolutely 100% coverage-they all have an excess for example. Consequently the OC has to make up any shortfall between the absolute requirement and the actual policies that are available in the market. So, we used to make unit owners pay the excess on claims if it was their unit that was damaged. Now the legal advice is that we were not acting lawfully and the OC has to pay that. Consequently we have a new line in our budget for making up the difference in any insurance claim.
I suspect that if alterations that increased the value were not notified to the insurer, they could claim we were under-insured. Still, in the case of minor things like a gazebo or paving, they generally don’t change anything. Even when I did a very major extension to my unit, a (say) 50% increase in the value of one unit out of 105 was deemed to be a negligible change in value of the overall property and consequently we were not required to resurvey and reevaluate unit entitlements.