This article about flood insurance has been provided by Tyrone Shandiman, Strata Insurance Solutions.
The need for flood cover in multi-storey strata buildings can be a source of dispute within strata communities.
Generally, the definition of flood in an insurance policy is the covering of normally dry land with water released or that has escaped from the normal confines of any watercourse, river, lake, creek, reservoir, canal or dam.
Australia is currently in a La Nina weather pattern and this brings a higher risk of flooding.
Ground floor apartments have a much higher exposure to flood damage and therefore have a greater need for flood cover than apartments in upper levels.
Take the example of a three-storey building whereby only the ground floor has an exposure to flood and the second and third floors do not.
An insurance motion at a general meeting for flood cover with a higher premium may have lower prospects of success over a motion without flood cover for a lower premium, because a majority of owners (i.e. the second and third floors) don’t believe they need flood cover.
This can leave the ground floor exposed to a major uninsured loss.
Lot owners are responsible for damage inside their lot and notwithstanding, the body corporate is responsible for damage of a structural nature and utility services that do not service one lot.
Based on Queensland legislation, lot owners in strata buildings with common walls do not have the option to insure property defined as “building” under the BCCM Act outside of an insurance policy arranged by the body corporate. This is because of the basic principal that insurers will not insure part of a building.
A common question we get asked is – What can ground floor owners that want flood cover do to protect their investment?
A dispute in relation to whether a body corporate should have flood cover has been before the Body Corporate Commissioner – Winnipeg Grange  and may provide some guidance.
In this case two owners in a duplex could not reach an agreement on whether to insure for flood cover. The issues considered by the commissioner was whether not taking out flood insurance was:
- Contrary to the legislative requirements; or
We will explore both of these items in more detail.
Applicable strata regulation states that damage, for coverage under strata insurance should include “…earthquake, explosion, fire, lightning, storm, tempest and water damage…”
While flood cover is not specifically mentioned in the definition of damage, in Winnipeg Grange , the commissioner stated that they “were satisfied “water damage” covers damage from water in different ways and includes flooding.
Applicable strata legislation also has a provision that “the body corporate may put in place … additional insurance … it is required to put in place under the regulation module …” which allows the body corporate some flexibility in obtaining more than the minimum level of insurance necessary for its particular requirements.
For the reasons above the commissioners view was “The legislation requires the body corporate to have sufficient insurance to rectify any damage to the relevant areas to the condition that they were in when new. On the material presented by the parties I do not consider that there is sufficient insurance in place to achieve these results in the circumstances of a future flood event.”
Strata Insurance Solutions takes a contrary view to the commissioner’s position of requiring that all water damage events are covered, without the opportunity to exclude specific events. This is because there are other water events that no insurer covers such as actions by the sea & damage from faulty workmanship. It would in essence mean not a single strata policy in Australia could comply with legislation.
But putting our own views aside on this one point, the commissioner has looked at a number of other considerations in totality and given the commissioner has made orders in this regard, these arguments are available to lot owners seeking to run arguments in favour of including flood cover on their policy.
The BCCM Act requires the body corporate to “act reasonably in anything it does … including making, or not making, a decision …”
This in essence means an owner may run an argument that it is not reasonable for the body corporate to not obtain flood insurance.
What is “reasonable” is always subjective, but Strata Insurance Solutions believes there are considerations that may support an argument that not having flood insurance is not a reasonable act, including:
- Evidence of the buildings flood exposure such as flood mapping provided by council, hydrological advice or proximity to a body of water such as a watercourse, river, lake, creek, reservoir, canal or dam
- Insuring without flood may devalue the units if buyers cannot secure a loan because the financier has a requirement for flood cover. Lower values on ground floor units would have a flow on effect to the upper level units.
- If you were the owner of the entire building and knew there was a flood exposure, it would be a reasonable act to insure for flood cover;
- Premium & excess may also be a factor that supports or weakens the argument of whether flood insurance is reasonable depending on the costs associated with flood cover.
The following options may be available to owners that have a desire to have flood insurance in their policy:
- Raise your concerns with the body corporate – this might include discussing concerns with the committee and owners and submitting motions for flood insurance at general meetings. Irrespective of whether upper floors have a flood exposure, there is a commercial argument that not having flood insurance may devalue units and furthermore, the body corporate is responsible for damage of a structural nature and for utility services not servicing one lot. There may also be issues with access to building and/or common facilities (lifts, basements, garage doors etc) and this may have some effect on owners of upper floor units and can be a cause for loss of rent or accommodation expense;
- Get more ground floor units owners elected on the committee – if a majority of committee members are ground floor owners with a desire to insure flood cover, being on the committee allows for a higher level of influence over the insurance policy that is taken out. This may become more relevant as the new regulations recently released takes effect, which allows the committee to affect an insurance proposal above relevant spending limits;
- Lodge a dispute in the commissioner’s office – An owner can lodge a dispute in with the commissioner and in the case of Winnipeg Grange , the owner was successful in obtaining orders in favour of flood insurance;
A question was posed to Strata Insurance Solutions about whether the ground floor apartments can offer to pay a higher portion of premium to ensure there is coverage. We would recommend seeking legal advice as to whether this contravenes regulation, for example, section 182 of Body Corporate and Community Management (Standard Module) Regulation 2008.
We always suggest aggrieved lot owners first try to resolve any issue with the body corporate amicably and without it being a “dispute”. Sometimes, the outcome of a disagreement within a body corporate does not always depend on what the dispute it about, but how the lot owner goes about resolving the issue.
If all else fails, and you believe the risk associated with not having flood insurance is unacceptable to you – although not desirable, there is always the option of selling your apartment and removing this exposure all together.
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 #416.
If you have a question about flood insurance or something to add to the article, leave a comment below.
- NAT: Flood Insurance Cover in Residential Strata properties. Are you Covered?
- NAT: Is Your Strata Property Prepared For Bushfire Season?
- QLD: Alternative Insurance
Looking for strata information concerning your state? For state-specific strata information, take a look here.