This article about insurance commissions in Strata has been supplied by Jonathan Smith, Beyond Strata.
In this article, we look into some of the general questions owners may have surrounding insurance commissions within the owners corporation industry in Victoria. In particular, we discuss what managers should be doing to establish and maintain open and transparent disclosure with owners.
My strata manager is receiving commissions from various parties connected to my owners corporation which challenges my perception of whether the manager is acting in the owners best interests.
This statement is a sentiment shared amongst many members of owners corporations throughout Victoria and across Australia.
As per section 71(2)(c) of the Owners Corporation (OC) Act 2006 (the Act), the provision of details of the insurance held by the Owners Corporation must be dealt with at the Annual General Meeting (AGM). As the AGM doesn’t always coincide with the renewal of insurance, it is common practice for managers in addition to dealing with the insurance with members at an AGM, to present insurance renewal quotations to the owners or committee at an alternate scheduled meeting, or via electronic communication, prior to the renewal of the policy. This is to ensure that the Owners Corporation’s insurance premium is competitive in the market for both policy inclusions and value.
What if a member of the OC presents an external insurance quotation to the owners, separate to the quotations gathered by the manager’s insurance provider or broker?
A possible scenario is that your manager may only present or table quotations from an insurance provider or broker in which they are an Authorised Representative (AR) for. Explained simply, the AR status, permits the manager to provide general and factual advice, with respect to insurance policies from the insurance broker or provider they are representing. In this circumstance, your manager may be limited, to an extent, from being able to source quotes from insurer’s external, to the manager’s insurance provider or broker, due to not being an AR for those insurers.
But what if the insurance quotation, external to the strata manager’s provider or broker, has better policy inclusions and value for the Owners Corporation?
In this instance, the owners should not be constrained with which insurer they choose based on whether the manager is an AR for them or not. Your manager should inform the owners that if they were to proceed with an insurance renewal through an insurance provider external to the manager’s provider or broker, in which they are not an AR for, the manager will be restricted to only providing factual information to the Owners Corporation with respect to that insurance policy.
If the owners are in agreement to this arrangement, then there is no cause for the Owners Corporation not to be able to proceed with an insurer of their choice, particularly if the insurance provider is offering better policy inclusions and value.
Will my strata manager still receive a commission if the owners proceed with an external insurance provider?
With respect to insurance commissions, a significant number of managers in the industry obtain a commission to manage the insurance aspect of the Owners Corporation including, but not limited to:
- Gathering property information to complete and submit quotation request forms, which can include retrieving the properties:
- Claims history;
- Construction and building details;
- Fire protection information;
- Security protection information; and
- If commercial strata; estimated rental turnover, tenant business information and so on.
- Circulating or tabling quotations to owners for decision including liaising between owners and broker or insurer
- Assisting owners, committee or chairperson with respect to lodging an insurance claim including, but not limited to:
- Acting as a conduit between broker or provider and owner if private property related; or if a common property related, between committee or chairperson and broker or provider;
- Guiding the owner, committee or chairperson through the completion of the claim documentation process based on the brokers or insurers instructions;
- Assisting the owner, committee or chairperson in appointing contractors based on the brokers or insurers approval;
- Coordinating meetings and access to site for contractors and/or assessors;
- Tracking the progress and following up claims to ensure that they progress as swiftly as possible;
- Ensuring the claim loop is closed and finalised after satisfactory completion of rectification works including the settlement of claims and distribution of funds to the relevant parties; and
- Keeping records of all relevant documentation
- Obtaining a valuation for the property for insurance purposes based on owners instructions; and
- Liaising with the broker or insurer with amendments to the policy as a result of the valuation, subject to approval from members.
In terms of disclosure, insurance commissions received by managers are disclosed in the standard management contract, provided to its managers from the peak industry body for Owners Corporation Management in Victoria – Strata Community Association (SCA).
In addition to the standard contract disclosure, managers should make it prominently known at the proposal stage of engagement with any prospective owners corporation. Once appointed they should communicate on an ongoing basis any receipt of insurance commission at each Annual General Meeting. Further to this, and in order to demonstrate an even higher level of transparency with their clients, the manager could also disclose their commission at the point at which they circulate the insurance renewal quotations to the owners. The manager, at that stage, can disclose the dollar amount they will be receiving in commissions, based on the owner’s selection of insurer.
By following all the above steps, it ensures that at each point of engagement with the owners and committee in relation to insurance, the manager is giving them all the relevant information, providing them ample opportunity to query any aspect of the commission and further to this allows the manager to alleviate any concerns or reservations owners may have.
Generally, if the Owners Corporation proceeds with an insurer listed on the panel of the broker or with a provider in which the manager is an AR for, the manager will receive a commission as a percentage of the base premium. According to information from a reputable insurance broker in the industry, under this arrangement, the commission paid by the insurer is at no additional cost to the Owners Corporation. It’s important to keep in mind that this may not be the case with all insurance brokers.
With that said, if members were to proceed with an external insurance quotation separate to the quotations gathered by the manager, in which the manager was not an AR, then the manager, in most cases, would not receive an insurance commission from the insurance company. In this situation, as the manager would be losing revenue, he or she would generally have the ability to directly charge the Owners Corporation for this commission amount, so long as it is written into the management contract. The standard contract from the SCA does include such a clause, for the manager to avail themselves of.
Just like any other business, for Owner Corporation management companies, insurance commission is a revenue stream that they rely upon for the ongoing viability and sustainability of their businesses. In that, in the absence of this revenue stream, inevitably the management fees would need to increase, in order to compensate for this reduction in revenue to the business.
Insurance commissions are a part of the Owners Corporation industry, at the least for the foreseeable future. If managers proactively practice greater levels of transparency above and beyond minimum acceptable disclosure requirements expected from owners, as well as remaining open and honest to owners through proper explanation and education so that they are better informed, there is no reason, why the topic of insurance commissions needs to be so hidden in the Owners Corporation industry.
This post appears in Strata News #205.
“While we make every effort to ensure this material is accurate and up to date, such material does in no way constitute the provision of professional advice. We do not guarantee, and accepts no legal liability whatsoever arising from or connected to, the accuracy, reliability, currency or completeness of this material. Readers should seek appropriate independent professional advice prior to relying on, or entering into any commitment based on material published here, which material is purely published for general reference purposes alone.”
“Secret” Strata Insurance Commissions?
In our latest Strata Newsletter (2 March, 2016) we included an article about insurance commissions published by the Townsville Bulletin – Insurance advocate calls on State to ban manager’s commission.
From the article: SECRET third-party commissions of as much as 20 per cent being paid by insurers to body corporate managers are costing unit owners thousands of dollars extra in premiums and should be banned, North Queensland insurance advocate Margaret Shaw says.
Knowing it would be a controversial topic across the strata world, we chose to include the article in our newsletter in order to inform our members of its existence and open discussion on the matter.
There has been a buzz in the industry around this topic for quite a while:
Not long after publishing our newsletter, I received the following response from Greg Honeyman, Strata Specialist, MBCM Ballarat:
“Secret” Insurance Commissions? I don’t think so!
This article requires some serious refutation, and the advocate Margaret Shaw really should get her facts together.
In Victoria, for professional Owners Corporation Managers who are members of the peak industry body (SCA Vic), any insurance commissions are absolutely transparent. In fact, at every AGM (and whenever body corporate insurance is discussed), we provide a disclosure statement to all owners. To make an across-the-board accusation of secret commissions is for Ms Shaw to tread on extremely dangerous legal territory.
It is accepted by all right-thinking owners that the payment of insurance commissions to professional managers does not cost unit owners more. Quite the opposite in fact. The current practice keeps costs down. Professional managers undergo training in strata insurance products and are viewed by the insurance industry as a key part of the insurance process, particularly in ensuring that competitive quotations are carried out properly and that owners receive the best possible insurance coverage for their needs at the best possible prices.
Without these professional managers, the insurance companies would have to employ large numbers of sales staff to carry on the job of quoting and providing the correct form of insurance to the many thousands of strata properties in the country. This is what would end up costing the owners more. Not only that, but I have serious doubts about whether owners would then end up with the correct insurance.
Strata insurance is incredibly specialised. The best people to interface with owners corporations are the professional managers who know the properties and know the owners. The system that is currently in place is the best possible system, and any commissions are hard earned.
Generalist, sensationalist and inaccurate comments by people like Margaret Shaw will result in the worst possible outcome for owners of units in strata communities, both in terms of the quality of insurance and cost. And to expect owners to arrange their own insurance is a recipe for problems, increased cost and potential disaster. The best possible strata insurance is a single blanket cover through one insurer.
I would agree with Ms Shaw however where it comes to strata managers who are unprofessional, unregistered or not members of the industry peak body. Our profession has no place for cottage industry amateurs or shoddy performers.
As an industry leader, the MBCM group is passionate about ensuring professionalism and transparency in everything we do. We have 48 members in our franchise group and all are members of the SCA (Vic). My sympathies go out to Ms Shaw and her colleagues if they have been the unfortunate recipient of poor management practices.
The industry has seen far too many Owners Corporations which have attempted their own insurance and ended up with a disaster on their hands:
- Under insurance (and in some cases gross over-insurance).
- Conjoined units insured by separate insurance companies (fertile ground for dispute in the event of a claim).
- No common property insurance (exposing owners to personal liability).
- Expired insurance (I am dealing with one of these as we speak, where they simply forgot to renew – 15 months ago).
- Non-existent insurance (it won’t happen to me).
Professional managers ensure that Owners Corporations are protected and insured properly and in a timely manner.
For the record, I have attached the MBCM strata management disclosure.
DISCLOSURE OF INSURANCE AGENCY FEES AND COMMISSIONS
The purpose of this memorandum is to facilitate uniform disclosure of insurance agency fees and commissions received by Owners Corporation Managers who are members of Strata Community Association Victoria and who comply with the conditions set out below.
Strata Community Association endorses the current practice of Managers deriving insurance commissions on insurance premiums paid on behalf of Owners Corporations as this contributes to a lower level of management fees and has no effect on the cost of insurance to the Owners Corporation. The conditions applicable to endorsement by the Institute are as follows:
- Such fees and commissions are properly disclosed to clients.
- Such fees and commissions do not increase the cost of insurance to Owners Corporations.
- Such fees and commissions do not exceed 20% of total premium payable by Owners Corporations.
- In all cases the best interest of the client is the paramount criterion when presenting quotations from particular insurance companies or placing insurance with any insurance company or broker.
The level of insurance agency fees or commissions by Owners Corporation Managers varies and it rarely reaches the limit set in condition 3 above. This upper limit of such income has been specified in this memorandum to simplify the process of disclosure.
The distribution of this document by the Manager to the Owners Corporation clients will serve as an announcement that such income is being received and that there is compliance with the restrictions as set out above.
We encourage discussion about this topic and hope you decide to contribute.
- NSW: Q&A Strata Manager Won’t Admit to Insurance Commissions
- How Strata Managers Effectively Control Strata Schemes
Still after more information about insurance commissions, even more general articles about strata insurance or information about strata living in your state or territory? Visit our Strata Insurance OR Strata Information Pages by State.