This article about owners corporation insurance requirements Victoria has been supplied by Tim Graham, HWL Ebsworth Lawyers.
Insurance is important to protect owners corporations’ property and, to a limited extent, lot owners’ personal assets. The Owners Corporations Act 2006 sets out the minimum insurance requirements:
- Reinstatement and replacement insurance of buildings on common property; and
- Public liability insurance for the common property.
Two lot subdivisions are exempt, which is a shortfall in my opinion as insurable events are no less likely to occur on two lot subdivisions.
Reinstatement and replacement insurance
Subject to the two lot exception all owners corporations’ must take out reinstatement and replacement insurance for all buildings on the common property.
A building includes:
- A structure and part of a building or structure;
- Walls, out-buildings, service installations and other things attached to the main structure;
- Any pipes or cables used to provide services to a party other than the owners corporation or its members (shared services); and
- A boat or a pontoon permanently moored or fixed to land.
Reinstatement and replacement insurance must cover the cost necessary to replace, repair or rebuild the property to a condition substantially the same, but not better or more extensive than its condition when new. That extends to reinstatement and replacement insurance for the owners corporation’s portion of any shared services, which include pipes or cables used to provide services including water, electricity, gas and telecommunications to the building that are shared with a person other than the owners corporation or any of its members.
The owners corporation must also be indemnified for the payment of incidental expenses necessarily and reasonably incurred:
- In the removal of debris; and
- The remuneration of architects and other persons whose services are necessary, being incidental to the replacement, repair or rebuilding of the damaged property.
Unless the sum insured is at least equivalent to the cost necessary to replace, repair or rebuild the property to a condition substantially the same than the new condition of the building, plus incidentals, the owners corporation will be in breach of its obligations.
The costs necessary to obtain planning permits and building permits, as well as meeting any heritage requirements, should be countenanced, as well as construction costs which usually increase with the effluxion of time.
It is difficult to see how an owners corporation can discharge that obligation without obtaining regular valuations. Unhelpfully, The Owners Corporations Act 2006 mandates that only prescribed owners corporations’ (annual fees in excess of $200,000 in a financial year or more than 100 lots) must obtain valuations, and then the minimum requirement that a valuation is obtained every five (5) years is too infrequent.
It goes without saying that valuations should be obtained from suitably experienced and reputable valuers, and that whilst unlike other Australian states valuers do not have to be formally registered to practise in Victoria, it is strongly recommended that owners corporations’ source only those valuers who are registered with the Australian Property Institute.
Owners corporations’ duties
Owners corporations’ must exercise due care and diligence in the performance of their functions. The same duty applies to committees and sub-committees.
Under the Strata Communities Association (Vic) (SCA) standard form Contract of Appointment owners corporations’ must:
- 9.2.5 Read the Product Disclosure Statement provided by the Manager before making a decision to purchase the insurance and decide as to the appropriate insurer, the amount of cover and the appropriate policy in good time to enable insurance renewal each year;
- 9.2.6 Obtain a valuation of the cost of reinstatement and replacement of the building/s which the Owners Corporation is obliged to insure not less frequently than every three years.
Whilst SCA is to be commended by requiring more frequent valuations than the statutory minimum 3 years is still too infrequent unless the sum insured is at least equivalent to the cost necessary to replace, repair or rebuild the property to a condition substantially the same than the new condition of the building, plus incidentals.
owners corporation Managers’ duties
Owners corporation Managers’ duties under the law are many and varied:
- Under s.122(1)(b) of The Owners Corporations Act 2006 an Owners Corporation Manager must exercise due care and diligence in the performance of the manager’s functions;
- Under clause 2.1 of the SCA standard form Contract of Appointment an Owners Corporation Manage must:
- Arrange a valuation of the cost of reinstatement and replacement of the building/s when requested by the Owners Corporation;
- Provide guidance to the Owners Corporation to enable the Owners Corporation to carry out and perform its duties and functions, as set out in this clause;
- At law an Owners Corporation Manager must exercise reasonable care to avoid causing injury or loss to another person; and
- Assuming the Australian Consumer Law applies to the provision of Owners Corporation Management services (see for example Owners Corporation RP 7789 v J&D Corporate Consulting Services Pty Ltd (Owners Corporations)  VCAT 499 the ACL implies a guarantee into the Contract of Appointment that a manager will render its services to the OC consumer with due care and skill.
In M.R.O. Nominees Pty Ltd v Network Pacific Real Estate Pty Ltd (Owners Corporations)  VCAT 1492 VCAT ordered that:
- An owners corporation’s obligation to insure extends to an obligation to insure fixtures that form part of a lot owner’s building if the lot is located within a multi-level development; and
- Network Pacific Real Estate Pty Ltd, which was the Owners Corporation Manager breached its duty to the lot owner under section 122(1)(b) of The Owners Corporations Act 2006 to exercise due care and diligence in the performance of its functions because it failed to obtain adequate insurance that covered the breakdown of the lot owner’s compressor.
On the other hand, in Wong v Body Corporate 1 Plan no 433814P & Ors  VCC 0100 the County Court determined that it was a matter for the owners corporation to determine whether the repair and maintenance is required and at what cost and, once a decision had been made by the owners corporation, it would then prevail upon the manager to undertake its contractual obligation to execute that decision.
Bearing in mind an Owners Corporation Manager’s contractual duty to provide guidance to the owners corporation to enable the owners corporation to carry out and perform its duties and functions, Owners Corporation Manager’s may be at risk unless they recommend – preferably in writing – that owners corporations’ obtain valuations as frequently as necessary to ensure that the sum insured is at least equivalent to the cost necessary to replace, repair or rebuild the property to a condition substantially the same than the new condition of the building, plus incidentals.
This post appears in Strata News #168.
- VIC: Owners Corporation Reinstatement and Replacement Insurance – What Should it Cover?
- Does my strata insurance cover me for everything?