VIC: Q&A Owners Corporation Insurance Requirements Victoria

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This article and Q&A is about owners corporation insurance requirements Victoria.

Table of Contents:

• QUESTION: If a landlord is renting out their unit using a non-standard rental agreement, could this arrangement have any consequences for the Owners Corporation, particularly in regards to their building insurance?
• QUESTION: Our strata insurance has increased by 20-30%. Any attempt to negotiate with the insurer had been met with a total lack of empathy or interest. Since 2013, the premium has risen from $13,000 to $35,000.
• QUESTION: If there is an insurance claim, is the claim excess automatically passed back to the owner of the lot which caused the damage?
• QUESTION: Can the Owners Corporation Manager respond to quotes and select the strata insurance renewal on behalf of the OC without sending any information to the committee?
• QUESTION: With renewal of strata insurance, is there a duty of disclosure for all lot owners to advise the insurance company of anything which may have become known and may affect the insurance cover?
• QUESTION: A tenant’s actions resulted in sprinklers being activated and ruining three apartments. The Committee claimed on strata insurance. Is this the correct course of action?
• ARTICLE: Owners Corporation Insurance Requirements Victoria

Question: If a landlord is renting out their unit using a non-standard rental agreement, could this arrangement have any consequences for the Owners Corporation, particularly in regards to their building insurance?

A landlord is renting out their unit using a non-standard rental agreement (which possibly signs away a tenant’s statutory rights) and holds onto the bond money rather than lodging it as per the legislation. Could this arrangement have any consequences for the Owners Corporation, particularly in regards to Owners Corporation’s building insurance?

Answer: We take the view that it would not be reasonable for an insurer to penalise the owners corporation for contracts they are not a party to and, in most cases, not aware of.

Generally, insurance policies will only mention tenancy agreements in certain policy provisions – for example loss of rent may require a signed rental agreement in force before cover can be considered.

But notwithstanding, owners and the owners corporation should be aware of the following provisions:

1. Subrogation clauses which in effect say that you must not do anything that limits the insurers right of recovery (for example “Where You have entered into an undertaking with any other party which prevents or limits Your/Our right to recover from that party all benefit under this agreement is forfeited unless You have Our prior written consent.”)
2. Contractual liability clauses whereby a liability claim arises due solely to a contract or agreement with another party. (for example “We will not pay for any claim arising under the terms of any agreement unless liability would have attached to You in the absence of such agreement”)

Strata Insurance Solutions takes the view that it would not be reasonable for an insurer to penalise the owners corporation for contracts they are not a party to and in most cases not aware of. As conditions above refer to agreements “You” enter into, depending on the specific policy wording and who is defined as “You” in the policy, it may be reasonable to suggest that as the Owners Corporation did not enter in to such agreements, the exclusion/condition does not apply. Additionally, contractual liability exclusions generally provide an allowance for liability assumed under any contract or lease of real or personal property.

As all policy terms and conditions differ, an owners corporation that has concern about specific lease arrangement should seek advice from their insurance adviser.

Prior to entering into any lease agreement, it is recommended lot owners should seek appropriate legal advice.

Tyrone Shandiman
Strata Insurance Solutions
E: [email protected]
T: 07 3899 5129

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 Advisernet Australia AFSL No 240549, ABN 15 003 886 687.

This post appears in the February 2021 edition of The VIC Strata Magazine.

Question: Our strata insurance has increased by 20-30%. Any attempt to negotiate with the insurer had been met with a total lack of empathy or interest. Since 2013, the premium has risen from $13,000 to $35,000.

The annual base premium of our strata insurance has increased by 20-30%, irrespective of whether the building’s value has increase or not. Any attempt to negotiate with the insurer had been met with a total lack of empathy or interest. The premium has risen from $13,000 to $35,000 (since 2013). Would you concede this is an unreasonable, unjustifiable hike?

I might be barking at the moon, but the insurer already charges a hefty premium and if you’re unlucky enough to lodge claims, a $5000 excess is charged on each occasion. Isn’t this double dipping?

Surely there must be some recourse to this kind of unbridled, money grabbing practice by strata insurers. Is there an Ombudsman responsible for this industry?

Answer: I would strongly suggest the owners get their ducks in order and understand the insurers reasons for premium increases.

The information provided was based on general market movements and it must be noted individual factors for the specific building must be considered.

With a $5,000 excess imposed, I would be interested to see the claims history and full reason of why the premiums have increased so much as this is unusual for a building that has a reasonable performing claims history.

It appears in this instance it appears the most likely reason for premium increases and imposed excesses is because there is an adverse claims history. It is not unusual for premium increases and excesses to be applied as has been stated by the questioner and premiums/excesses can decrease when the claims performance improves.

There is a dispute process available firstly through the insurers internal dispute resolution process and then the Australian Financial Complaints Authority (AFCA). I would strongly suggest the owners get their ducks in order and understand the insurers reasons for premium increases firstly. If it is due to an adverse claims history, then the Owners Corporation may have limited prospects of a successful complaint against the insurer and we would advise against a complaint. If you go to AFCA and lose the case, as disputes in AFCA can cost the insurer in excess of $7,000 – the insurer may decide in future years not to insure the complex. This may compound availability and affordability of insurance for the complex.

As always, I am happy to review the specific example provided and provide further advice at no cost to the owners corporation.

Tyrone Shandiman
Strata Insurance Solutions
E: [email protected]
T: 07 3899 5129

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 Advisernet Australia AFSL No 240549, ABN 15 003 886 687.

This post appears in the November 2020 edition of The VIC Strata Magazine.

Question: If there is an insurance claim, is the claim excess automatically passed back to the owner of the lot which caused the damage?

If there is an insurance claim, is the claim excess automatically passed back to the owner of the lot which caused the damage? Is this something which the Owners Corporation can make a standard ruling to have in place by a vote to determine whether or not the excess of any claim is absorbed by the OC or passed on to the lot owner whose property/tenant caused the damage.

Answer: The simple answer to your question is, yes.

The simple answer to your question is, yes. The Owners Corporation can, and in most cases should apply any excess incurred (as a result of a successful insurance claim) to the lot owner or owners which benefit from that claim. But not quite in the way you think it would.

To ensure this is standard practice, the Owners Corporation should implement a standing motion at each Annual General Meeting confirming as such. Members are then afforded the opportunity to determine – if a claim is successful, but is subject to an excess, the excess is applied to the lot which benefits.

The main consensus behind this approach is centred around the ‘benefit principle’ which is largely covered under Section 49 of the Owners Corporation Act 2006:

49. Cost of Repairs, Maintenance or Other Works

1. An owners corporation may recover as a debt the cost of repairs, maintenance or other works undertaken wholly or substantially for the benefit of one or some, but not all, of the lots affected by the owners corporation from the lot owners.
2. The amount payable by the lot owners is to be calculated on the basis that the lot owner of the lot that benefits more pays more.
3. The works referred to in this section may be to the common property or a lot.

There have been several examples of this query in VCAT in recent years. One which springs to mind is Paisley v Owners Corporation PS52240 – OC1697/2012.

The lot owner argued the excess should have been split by lot liability, not paid solely by himself. The member advised the following:

“In my view, the payment of an insurance excess, as opposed to the payment of an insurance premium, attracts the benefit principle. It is money paid out to effect a repair, and as such consideration should be given to the person or persons who benefit.”

“The question then arises, who benefits from a payment made from insurance. In most insurance scenarios, the excess is paid by the person whose property or actions resulted in the damage. That is because that person is receiving the benefit by not having to pay out the full cost of the damage.”

“In the case before me, the Owners Corporation has taken out the insurance, but it is Mr Paisley who is receiving the benefit. Not because Mr Paisley’s unit was damaged and requires repair, but because the source or cause of the damage arose from within Mr Paisley’s lot. In effect, Mr Paisley is receiving the benefit of not having to pay the full cost of the damage.”

Of particular note are the points about the cause of the damage and its origin.

The benefit here is not that which is typically defined under the ‘benefit principle’, but one which states the benefit is provided to the source or cause of the damage, which is where the excess should be borne.

This principle is based around the person, party or source of the damage being the one who has benefited from not having to pay the full cost of the damage.

So, in simple terms, we can apply an excess to the person who benefits from the claim. However, that person is not so much the one who has sustained the damage, but the person who has caused it, as they benefit from the insurer covering the cost of said damage, where they would otherwise have to.

Joel Chamberlain
Horizon Strata Management Group
E: [email protected]
P: 03 9687 7788

This post appears in Strata News #414.

Question: Can the OC Manager respond to quotes and select the strata insurance renewal on behalf of the OC without sending any information to the committee?

When renewal of strata insurance comes around, can the OC Manager legally respond to the quotes and select the insurance renewal on behalf of the OC without sending any information to the committee? They have only placed a comment in the AGM agenda a few months later that renewal was taken out and the cover events and $$.

Answer: Good practice would be for the strata manager to run it by the committee.

Good practice would be for the strata manager to run it by the committee. You need to refer to the terms and conditions of your contract because a lot of strata management contracts do give the strata manager the authority to place and maintain the insurance on behalf of the owners Corporation. If that is the case, they’re meeting the terms of the contract.

It might be a term and condition that you want to negotiate with the strata manager when the contract becomes due for renewal, but it really does depend on what authority the owners Corporation gives a strata manager in their contract.

Tyrone Shandiman
Strata Insurance Solutions
E: [email protected]
T: 07 3899 5129

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 Advisernet Australia AFSL No 240549, ABN 15 003 886 687.

This post appears in the September 2020 edition of The VIC Strata Magazine.

Question: With renewal of strata insurance, is there a duty of disclosure for all lot owners to advise the insurance company of anything which may have become known and may affect the insurance cover?

With renewal of strata insurance in Victoria, is there a duty of disclosure for all lot owners to advise the insurance company of anything which may have become known and may affect the insurance cover?

Should the insurance policy cover be sent to all owners at renewal / change over to a new insurance provider?

Answer: Does the Owners Corporation have knowledge of a matter that should be disclosed to the to the insurer?

So the policyholder is the owners Corporation. The question that needs to be asked firstly is “does the Owners Corporation have knowledge of a matter that should be disclosed to the insurer?” Now that may not be the case if the owner is not disclosing something to that insurer. It would be hard for insurer to say that you haven’t met your disclosure requirements if you didn’t know of the issue in the first place.

The other thing that insurance policies do have if we’re talking about a defect or a property issue is that there are exclusions around non rectification of known defects errors or property issues that haven’t been addressed by the insured and that can include a lot owners.

So if there is a known issue inside the lot and the owner chooses to not rectify that and there’s a claim, then that exclusion could apply. It really does come down to the owners corporations knowledge at the time of claim of disclosure matters.

Tyrone Shandiman
Strata Insurance Solutions
E: [email protected]
T: 07 3899 5129

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 Advisernet Australia AFSL No 240549, ABN 15 003 886 687.

This post appears in Strata News #374.

Question: A tenant’s actions resulted in sprinklers being activated and ruining three apartments. The Committee claimed on strata insurance. Is this the correct course of action?

In a large complex a tenant left the stove on resulting in sprinklers being activated completely ruining the apartment and the two apartments underneath. The Owners Corporation Committee immediately made a claim of $400,000 for damages on the building insurance policy.

Is this correct or should the negligent tenant or owner be forced to pay the excess on the building insurance claim?

As a result of this large claim, the total building insurance premium has increased by $30,000. The Committee proposes that all owners share the cost of the increased premium.

This does not seem reasonable as all lot owners are being required to pay costs as a result of another resident’s negligence. Should the lot owner of the apartment where the negligence took place be required to pay this increase of $30.,000? Their tenant has since vacated.

Answer: For larger claims like this, we would recommend the owners corporation lodge a claim.

Where a tenant has caused damage there are two options available to the owners corporation. They can either lodge a claim on their insurance policy or lodge a letter of demand directly to the responsible tenant.

Where the owners corporation decides to lodge a claim on their strata insurance and the tenant has been negligent in causing the damage, the insurer may at the end of a claim decide to pursue a recovery against the tenant. If the insurer is successful in their recovery against the tenant, the insurer will generally refund the excess.

For small claims we would recommend sending a letter of demand to the tenant in lieu lodging a claim on the insurance and then in the event the owners corporation are not successful in their recovery attempts, they can decide whether they would like to lodge a claim.

For larger claims such as in this question, we would recommend the owners corporation lodge a claim. The reason why is because the immediate need for the property is minimising loss and getting repairs started. If the owners corporation decide to pursue recovery before lodging a claim, they run the risk that the tenant:

• cannot cover the cost of repairing the damage;
• has reasonable grounds to deny the allegation of negligence;
• just does not respond.

In all three scenarios above, precious time would be lost in fixing the damage.

At the end of the claim, the insurer on behalf of the owners corporation will pursue a recovery for the claim if they believe there are reasonable prospects. Insurers will look at recoveries on a commercial basis –insurers will not pursue a recovery where they believe the prospects of a successful claim are low. Our experience with claims for negligence against tenants valued at $400,000, is that the only real prospect the insurer has of recovery is where the tenant has contents insurance and there is no exclusion for liability claims for damage to the tenanted property.

In relation to the second question of apportionment of premium, Section 23 of the Owners Corporations Act 2006 sets out that the levy for insurance must be paid in accordance to lot liability as specified on the plan.

23. Owners corporation may levy fees

• (1) An owners corporation may set annual fees to cover—
  
  • (c) insurance
• (3) The fees set must be based on lot liability.

When you purchase in a strata you share an insurance policy (among other things) and you run this risk that other owners lots may impact the cost of your insurance, just as your lot may impact other owners cost of insurance. It is part one of the considerations for investors prior to purchasing a unit in a strata building.

Tyrone Shandiman
Strata Insurance Solutions
E: [email protected]
T: 07 3899 5129

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 Advisernet Australia AFSL No 240549, ABN 15 003 886 687.

This post appears in Strata News #321.

Owners Corporation Insurance Requirements Victoria

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 then 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.

Valuations

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) [2014] 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) [2013] 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 [2009] 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 then the new condition of the building, plus incidentals.

Tim Graham
Partner
HWL Ebsworth Lawyers
W. www.hwlebsworth.com.au
E. [email protected]

This post appears in Strata News #168.

Have a question about owners corporation insurance requirements in Victoria or something to add to the article? Leave a comment below.

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