NSW: Q&A Can We Avoid Strata Manager Insurance Commissions?

NSW Committee Members are wondering whether they can avoid paying strata manager insurance commissions upon renewal of their policies. Mario Esera of HWL Ebsworth, Leanne Habib of Premium Strata and Tyrone Shandiman of Strata Insurance Solutions have provided the following responses.

Question: Can a strata manager charge higher strata management fees if a committee decides to place the insurance independently of the strata manager? What is the connection between strata management fees and strata manager insurance commissions?

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Can a strata manager charge higher strata management fees if a committee decides to place the insurance independently of the strata manager?

After finding a more competitive offer with another provider and advising the strata manager of our intention to place the insurance with this insurer, the strata manager advised “irrelevant of whether you use one of the insurance companies we obtained quotes from or not the commission payable to our office will still apply according to our strata management contract.”

The Competition & Consumer Act 2010 deals with the topic of third line forcing which states “Third line forcing occurs when a business will only supply goods or services, or give a particular price or discount on the condition that the purchaser buys goods or services from a particular third party. If the buyer refuses to comply with this condition, the business will refuse to supply them with goods or services.”

The Act also goes on to discuss other types of exclusive dealing.

Does the contract which requires us to either place insurance with the strata managers insurers, resulting in them receiving strata manager insurance commissions, or pay higher costs to the strata manager breach the Competition & Consumer Act 2010?

The strata manager insurance commissions clause in question:

1.3.1 Insurance Fee and Commissions

The Owners Corporation acknowledges that it has been fully informed by receipt of this appointment of the Manager’s arrangements with the authorising licensees listed in Clause 1.2 (or with various insurers if the Manager, or the Manager’s employee, holds an Australian Financial Services Licence) and that it has agreed that:-

1.3.1.1 the manager may receive or retain as a commission a percentage of the base premium payable by the Owners Corporation on the placing of insurance or the insuring of risk by the Owners Corporation;

Percentage of base premium payable 20% and/or fees disclosed in the applicable Financial Services Guide

1.3.1.2 if the insurance commission is less than 15% of the base premium paid by the Owners Corporation the Owners Corporation will pay to the Manager a fee being the difference between the commission received and the 15% of the base premium.

1.3.1.3 such commission shall be in addition to the fee for service set out in Clause 2.1.

Answer: The wording of the clause would suggest that there is no offence under the Act.

The wording of the clause would suggest that there is no offence under the Act.

The clause is also fairly well drafted, such that it could not be said to be misleading or deceptive.

It also seems unlikely that the clause contravenes the third line forcing provisions in the Competition and Consumer Act 2010 (Cth).

On the face, it appears that offering the discount on management fees is ‘exclusive dealing’ for the purposes of s 47(6)(c) of the Act.

However, the third line forcing prohibition will fail on two grounds as follows:

1. It does not appear that the purpose of the clause is offering a benefit on a condition that the Committee acquires services from a preferred provider (and not a competitor). Rather, it seems to merely provide an incentive to take out insurance with the preferred provider in order to reduce management costs and thus fees; and
2. The clause does not have the effect of substantially lessening the competition in the relevant market.

This post appears in Strata News #223.

Mario Esera
Special Counsel
HWL Ebsworth
P: +61 7 3169 4750
E: [email protected]

Question: Our building insurance is due mid 2019. Is the Owners Corporation able to renew this themselves or must it go through the Strata Management Company? We would prefer not to pay our Strata Manager insurance commissions.

I am the Secretary/Treasurer for a small, inexperienced Owners Corporation in NSW.

We are one year into a three-year Strata Management contract and have discovered that our Strata Management is very expensive, gives poor service and is charging us unnecessary fees (though they are in the agreement). An example is they have been charging us a monthly defect management fee although we are a new building when in reality, our only defects where ones that required a small amount of carpet re-laid and a door seal replaced.

We have an AGM coming up. Our building insurance is due mid 2019. Is the Owners Corporation able to renew this themselves or must it go through the Strata Management Company? If possible, we would prefer not to pay our Strata Manager insurance commission.

At the moment, the Strata Management Company are receiving a commission on the insurance, which we agreed to. I have asked around other buildings and have been advised that, in some cases, their Strata Management gives the insurance commission back to the Body Corporate.

I brought this up with our Strata Manager who advised that the commission has to be paid to a “licenced person”. Is this correct? If possible we would like to put this commission back to our Capital Works Fund.

Answer: You need to check what your contract states with regard to strata manager insurance commissions.

Tyrone Shandiman: The decision makers, with regard to the insurance, is the Body Corporate committee and the committee are entitled to place the insurance with whomever they choose.

By practice, most strata managers will take a commission for the insurance policy they place and do not give it back to the body corporate as it is a revenue stream for them.

When the policy renews the committee may consider seeking alternative quotes with other providers who do not pay a commission to the strata manager and they may find this provides a saving for the owners corporation.

You need to check what your contract states with regard to strata manager insurance commissions. Although rare, we have seen some contracts state the strata manager is still entitled to a commission if the insurance is not placed with them.

Leanne Habib: If your strata manager uses the standard Strata Community Australia Strata Management Agreement, the commission’s position is outlined in clause 3.3 set out below:

3.3 In addition to the fees and charges in clause 3.1 and 3.2, the agent is entitled to remuneration for its services in the form of rebates, discounts and commissions disclosed in schedule C1 and schedule C2 as follows:

(a) If the first option in item 6 is selected, the agent may retain rebates, discounts and commissions paid to it by the providers of goods and services to the owners corporation described in the disclosure schedule C1 or schedule C2 or as otherwise notified in writing to the owners corporation from time to time and agreed in writing by the owners corporation.

(b) If the second option in item 6 is selected, the agent must pay to the owners corporation any rebates, discounts and commissions paid to it by providers of goods and services to the owners corporation within 30 days of receipt except for any rebates, discounts and commissions described in the disclosure schedule C2 which may be retained by the agent.

(c) If the third option in item 6 is selected, the agent must pay to the owners corporation any rebates, discounts and commissions paid to it by providers of goods and services to the owners corporation within 30 days of receipt.

(d) If the owners corporation:

(i) delegates the agent to arrange insurance cover;

(ii) selects the first or second option in item 6; and

(iii) later takes steps to arrange its own insurance or directs, instructs or passes a resolution that has the effect that the agent does not receive a commission or rebate for the placement of insurance, then the agreed services fee shall be increased by an amount equivalent to the commission the agent would have received had the agent arranged the insurance cover.

3.4 The agent must account to the owners corporation for money received by the agent on behalf of the owners corporation in the manner and with the frequency set out in item 8.

3.5 At any time, by written agreement between the parties, items may be added to or deleted from the additional services rates and/or charges.

So, whether or not the owners corporation or strata manager is entitled to receive insurance commissions depends on which option is selected in Item 6 on the front page of the contract.
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This post appears in Strata News #218.

Read next:

• Insurance Commissions Within the Strata Industry
• NSW: Q&A What does public liability insurance include?

These articles are not intended to be personal advice and you should not rely on it as a substitute for any form of advice.

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