Question: Can our body corporate committee negotiate our own strata insurance coverage and use the body corporate manager’s strata insurance commission to reduce our annual contributions?
We have five units in our strata scheme so our annual fees to our body corporate manager are very high. As secretary of our group, I endeavour to keep costs down by getting our own quotes for intended work and doing all necessary research before instructing the body corporate to act on our behalf.
Our annual insurance and the commission increases every year. The strata insurance commission we pay our body corporate manager is now almost $5000. This is paid directly to the body corporate manager by the insurance broker.
Can our body corporate committee negotiate our own strata insurance coverage and use the body corporate manager’s commission to reduce our annual strata insurance contributions?
Answer: Do you get a better deal if the body corporate arranges the insurance directly so there is no commission or fee paid to the body corporate manager and its broker for doing the work?
Body Corporates are entitled to arrange their own insurance if they want, and if you can get a better deal for your scheme then you probably have an obligation to do this. The initial process is relatively simple – advise your body corporate managers that you will arrange your own insurance by holding a VOC to confirm that the committee will be undertaking this function, and then either contact insurers or an independent broker to arrange.
However, this question opens up a much bigger topic of conversation for body corporates which is, do you necessarily get a better deal by going it alone – that is having the body corporate arrange the insurance directly so there is no commission or fee paid to the body corporate manager and its broker for doing the work?
It’s easy just to say that commissions are a rip-off, but the practical reality is, like all systems, this method of arranging insurance has pros and cons and you need to be informed to evaluate these in the interests of your body corporate.
I’ve listed some of the considerations in the appraisal process below, but first, as someone who runs a body corporate company, I have to be transparent saying that our company receives commissions when we arrange insurance for a site. This is declared to owners as part of our contract and also at the time of renewal. We also have schemes that manage their own affairs. Both systems are functional and, I think, reasonably fair to owners in terms of transparency and as a trade for receipt of payment for work conducted. Some people may disagree and that’s OK – I encourage your comments below. As a company, we are also conscious that the commission system is coming under increasing pressure, particularly as premiums are rising steeply. It seems likely that, at the least, body corporate management agencies will have to offer alternative models to the established system in the next few years.
From an owner’s perspective, it has to be considered that arranging insurance and dealing with claims takes a lot of time, organisation and some skill. It may not always feel like it, but most managers I’ve worked with put a lot of energy into trying to keep premiums low for their customers. The amounts paid to managers and brokers are compensation for the time and effort they put in.
In that context, what considerations are there if you want to go it alone?
Firstly, you need to look at who is doing the work. If it is not the body corporate manager, it probably means the Committee is responsible, not just for arranging the renewal, but for managing claims throughout the year. That includes dealing with owners, contractors and all the associated issues. The managing agent will probably just forward the Committee any phone calls and emails they receive. Is the Committee happy to do this? Do the individuals have the time? Do they have the expertise and the knowledge? If the answer is yes, then you can probably make a saving by going it alone, but this is mostly because the time of the Committee has been valued at zero whereas body corporate managers and brokers value their time more highly. And, as an individual committee member, you might want to consider what the net benefit to you is for doing the work on behalf of others. Consider it this way — if you have a 10 lot scheme and the Committee saves $1000 by arranging its own insurance, that sounds good. But as an individual you have saved just one tenth of that amount — $100 — and if you have done ten hours of work to achieve that saving your rate of pay is, effectively, $10.00 per hour. Are you happy with that? It’s worth thinking about.
If the Committee don’t want to do it all by themselves, they could get an independent broker to assist, but then you have to pay a fee to this broker. Are their rates better than the fees charged by the body corporate manager and their broker? I’ve seen some cases where they are better and others where they are worse. Shop around and see what you can find. To help determine the total you are currently paying, you might need to look at your contract with your manager to see what the total of the commission is and what is included with it. Do the managers only arrange the insurance renewal for that fee, or do they help file claims and manage owners and contractors as well? Will the broker do this for you and would they charge a fee for it? To get a feel for this, ask your managing agent about the commission system, what payments they get and what you get in return. If they are transparent and comfortable having that conversation with you, that’s probably a good thing. If not, then it might be a warning sign.
Next, you might need to consider any additional service fees that could be applied by your body corporate if you go it alone but still need help with insurance matters through the year – even if the body corporate manager tries to stay out of insurance affairs, it is not always that easy. Consider this year where there have been a number of severe weather events. If you have flooding at your building, would you be happy if you called up the manager on the day of a disaster and they said that, as it sounds like an insurance event, they don’t handle that for your scheme so contact your broker but that they wish you good luck in arranging the repairs. Well, most managers wouldn’t do that, but they will bill you for the time it takes to help resolve the issues. The costs of this can rise quickly in some circumstances. Hopefully your scheme can avoid major issues but it is hard to extricate body corporate managers completely from the process so you need to be aware of the possible costs and evaluate the risk and reward accordingly.
Lastly, you also need to consider whether there is a penalty clause in your agreement with the managing agent if you don’t arrange insurance through them. Some agreements have this clause, some don’t. Even if your agreement has the clause, would the managing agents apply it? Typically the clause allows the body corporate managers to apply a fee equivalent to the lost revenue they were anticipating from receiving the commission, so the amount can be high. Management agencies tend to be reluctant to apply this section of the contract because if they do, the likelihood is that the customer will look to end the relationship at the next opportunity. On the other hand, if they think your scheme will leave regardless or if they lose money on your scheme because they are not getting the commission, they might choose to apply it. Check your contract and ask your managers so you know where things stand.
William Marquand
Tower Body Corporate
E: willmarquand@towerbodycorporate.com.au
P: 07 5609 4924
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