This article discusses whether strata can use an insurance payout for other capital works in NSW and the risks of reallocating those funds.
Question: Can an owners corporation reallocate an insurance payout to the capital works fund if there are no repairs to carry out?
Our NSW strata scheme received a large insurance payout after the 2019 bushfires, but it did not follow the usual claim process. An owner lodged the claim, the insurer denied it, and the owner then went to the ombudsman and succeeded.
The owners corporation has held this money in its account for about five years. We do not have paperwork that specifies what the money must be spent on. Our strata manager claims NSW strata rules require the money to be used for repairs, even though no repairs seem necessary.
Can owners approve, at an AGM, moving this insurance payout into the capital works fund and using it for other capital works spending?
Answer: The most conservative and legally sound approach is to apply the funds in line with the settlement documentation unless and until a tribunal determines otherwise.
This is a legally unusual situation and not one that arises frequently in NSW strata practice.
As a general principle, insurance proceeds are paid to indemnify the owners corporation for a defined insured loss. Where funds are paid pursuant to a settlement or determination (including an AFCA determination), the safest and most legally defensible course is to apply those funds consistently with the scope of works or loss description upon which the settlement was based.
In other words, to strictly comply with legislative and fiduciary obligations, the owners corporation should apply the funds in accordance with the basis on which they were awarded.
While an owners corporation can pass resolutions at a general meeting regarding fund allocations, a resolution cannot override legal obligations attaching to insurance monies. If the funds were paid for reinstatement of insured damage, reallocating them for another purpose may expose the scheme to challenge.
If the owners corporation wishes to depart from the original purpose of the payment, the more appropriate pathway would be to seek formal determination or clarification through NSW Fair Trading (i.e. NCAT). That would provide certainty and protection for the committee.
In practical terms, if the funds were applied differently and no owner or interested party challenged the decision, enforcement may never arise. However, the risk remains that an owner could dispute the decision in future, particularly given committee members’ statutory duties.
Accordingly, the most conservative and legally sound approach is to apply the funds in line with the settlement documentation unless and until a tribunal determines otherwise.
Tyrone Shandiman Strata Insurance Solutions E: tshandiman@iaa.net.au P: 1300 554 165
This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Shandit Pty Ltd T/as Strata Insurance Solutions strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances. Shandit Pty Ltd T/As Strata Insurance Solutions is a Corporate Authorised Representative (No. 404246) of Insurance Advisenent Australia AFSL No 240549, ABN 15 003 886 687.
This post appears in the April 2026 edition of The NSW Strata Magazine.
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