For many bodies corporate, insurance is one of the biggest ongoing costs. While the body corporate is responsible for arranging insurance, each lot owner contributes to the premium through levies. Understanding how these contributions are calculated is essential for both committees and owners.
The legal framework
Under the Body Corporate and Community Management Act 1997 and associated regulation modules, a body corporate is required to insure buildings and other required assets within the scheme. It must also hold public liability insurance to cover injury or damage to others on property.
The cost of that insurance (known as the premium) is shared among all lot owners. Each owner contributes to this cost through levies paid into the administrative fund.
Importantly, the law sets out specific rules for how each owner’s share of the insurance premium must be calculated. These calculation rules differ from those used to divide most other body corporate expenses.
How building insurance premiums are calculated
The total insurance premium is determined by the insurer based on risk factors such as:
- replacement value of the building (based on professional valuations)
- location and exposure to risks (e.g. storms, flooding)
- building materials, age, and condition
- claims history of the scheme
- the amount of excess the body corporate agrees to.
To ensure the insurance covers the full cost of rebuilding, the body corporate must obtain an independent professional valuation at least once every five years.
Proportional sharing of premiums
Each lot owner pays a proportionate share of the insurance premium. How that share is calculated depends on the type of survey plan registered for the scheme.
1. Building format plan (e.g. apartments, townhouses with shared structures)
For schemes registered under a building format plan (or volumetric format plan), each owner’s share of the building insurance premium is based on their lot entitlement listed in the interest schedule.
Lot entitlements are set when the scheme is created and recorded in the community management statement. They reflect, among other things, the relative value of each lot.
Example:
If a lot has an interest entitlement of 2 out of a total of 20, the owner pays 10% of the building insurance premium.
2. Standard format plan (e.g. town house complex, duplexes)
For schemes registered under a standard format plan, where the lots share a common wall, the calculation is different. Each owner’s contribution is based on the cost of reinstating the buildings on their own lot.
Example:
If one lot has a higher rebuild cost (due to size or construction), that owner will pay a higher share of the premium.
For lots in a standard format plan where there are no shared walls owners can take out their own building insurance. The body corporate can set up a voluntary insurance scheme to cover these types of lots. However, it is the lot owner’s decision if they participate in the scheme.
Adjustments for differences between lots
The legislation recognises that strict application of these methods may not always give a fair outcome. As a result, insurance contributions may be adjusted to reflect a lot’s specific circumstances.
Adjustments may be made where a lot owner informs the body corporate that they:
- have higher-quality fixtures or finishes in their lot that increase the insured value
- have made improvements to common property that benefits their lot more than others
- partake in activities within their lot that may increase the insurance risk (e.g. commercial or hazardous use).
Example:
If a lot owner upgrades their unit with premium fixtures that increase the replacement value, they need to inform the body corporate of the changes and their share of the insurance premium may be increased accordingly.
How insurance costs are levied
The body corporate includes the cost of insurance in its administrative fund budget each year, which is approved at the annual general meeting.
Once approved, each owner receives a contribution notice showing their share of the levies, including the insurance premium.
Sometimes the insurance levy is shown separately to the administrative fund levy and sometimes they are combined. If you want to find out the premium this information can usually be found in the body corporate records on the annual general meeting documents.
Although most body corporate costs are based on contribution schedule lot entitlements, insurance is a key exception and follows the rules outlined above, which is often why they are listed separately on the notice.
What about insurance excess?
An insurance excess is the amount that must be paid when making a claim under an insurance policy before the insurer contributes.
Example:
If a claim totals $20,000 and the excess is $5,000, the insurer will pay $15,000, and the excess of $5,000 must then be covered either by the body corporate or, in some cases, an individual owner.
Although the excess is not part of the premium itself, it is still important for lot owners to understand, as it can affect their potential out-of-pocket costs. The level of the excess chosen by the body corporate can also influence the overall insurance premium. Who pays the excess depends on the circumstances of the claim:
-
if damage affects only one lot, that owner will usually pay
if multiple lots or common property are affected, the body corporate will usually pay
responsibility may shift depending on fault or maintenance issues.
Why understanding insurance contributions matters
Insurance contributions can vary significantly between lots, even within the same scheme. Key factors influencing what each owner pays include:
- the type of survey plan
- the lot’s entitlement or rebuild value
- improvements or upgrades
- risk factors associated with the lot.
For committees, applying the correct method is a legislative requirement. For owners, understanding how contributions are calculated can help explain why levies differ and when adjustments may be appropriate.
Insurance in a community titles scheme is not always divided equally, it is allocated according to legislated principles designed to reflect value, risk and fairness.
By understanding how premiums and excesses are calculated, both committees and owners can make informed decisions and reduce the likelihood of disputes about contributions.
This post appears in Strata News #793.
Commissioner for Body Corporate and Community Management
P: Information Service Freecall 1800 060 119
This article has been republished with permission from the author and first appeared on the Commissioner for Body Corporate and Community Management website.
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