OWNERS CORPORATION INSURANCE

The legislation requires the owners corporation to effect certain insurances. These are critical when it comes to protecting the interests of lot owners. A purchaser should thoroughly consider the insurances that have been put in place by the owners corporation. The following paragraphs will highlight the importance of the various types of insurances and things that need to be taken into account by a purchaser. During the purchase process a purchaser will have limited rights to require changes to the owners corporation insurances, but as an owner they will be able to directly propose changes to insurance arrangements.

Details of Building Insurance
The building insurance provisions are sometimes complex and these guidelines have necessarily been restricted to single use buildings containing home units. Where a mixed use development is involved with a mixture of uses (e.g. commercial and residential) or a mixture of housing types (e.g. townhouses and apartments) then a purchaser should consult their solicitor or conveyancer for a detailed briefing on the application of the insurance provisions to the specific building or community.

In the conventional home unit building, building insurance is effected on a “replacement or reinstatement” basis. The is effectively a “new for old” insurance arrangement. Although this insurance is referred to as “building” insurance, it is actually insurance over the common property parts of the building. Common property is all those parts of the building that are not included within the lots, although there are some parts of the building and its installations that are within a lot but are still part of the common property or are treated as part of the common property for building insurance purposes. In practice, insurance policies cover the entire structure of the building and uncertainties arise as to things such as internal fittings and decorative features. What is not covered in the owners corporation’s building policy is usually covered in the owner’s contents policy provided the two policies are compatible. The best way to ensure compatibility of these two policies is to take out both types of insurance with the same insurer.

The legislation provides a guide as to how the sum insured should be calculated, although that guide is very simplistic. In summary, the sum insured should cover the cost of replacing the building or repairing any damage so that the building is in the same condition it was in when new. This cover must include all incidental costs, including removal of debris and the fees of architects and other professional advisers. The calculation should also make allowance for inflation given that the damage or destruction may occur in the final days of the policy period and the approvals for reinstatement or rebuilding may take many months to obtain. There are also a number of additional covers offered by insurers that are well worth consideration - these will be highlighted later in this commentary.

You should also be aware that a large proportion of buildings in New South Wales are under insured and if serious damage or destruction occurs the insurer may elect to proportionally reduce the amount paid to settle the claim. The insurer may be legally entitled to do this and the result will be a need for all the lot owners to make up the difference to allow the building to be repaired or replaced. This can be a huge financial burden on lot owners. To minimize the risk of this occurring, the legislation requires the owners corporation to obtain an insurance valuation at least every 5 years for the purpose of calculating the sum insured. In practice, those valuations should be obtained at least every 2 or 3 years rather than the prescribed period of 5 years. During the course of the inspection the inspector will endeavour to sight the last insurance valuation carried out and include key details of that valuation in the report.

Building insurance does not cover maintenance of the building or any repair that is in the nature of maintenance. There must be damage by one of the “events” covered by the policy (e.g. fire, storm, tempest, earthquake, etc.) before a claim can be made.

The owner’s share of the premium for insurances is paid by means of the normal levy process.

Details of Asset Insurance (if separate from above)
An owners corporation can own assets, such as furniture, lawnmower and paintings. It is under a duty to insure any assets that it owns and this is generally referred to as Asset Insurance or Contents Insurance. Sometimes Asset Insurance or Contents Insurance are “bundled” with the building insurance policy. Like building insurance, this cover is usually on a “new for old” basis. To determine the adequacy of the insurance cover one would need to have a list of the assets owned by the owners corporation and then determine the replacement costs of those assets. Also, the risks to be included in the insurance cover would to a large degree be determined by the nature of the assets.

Details of Public Liability Insurance
Public liability insurance protects the owners corporation against liability to anyone who uses the Common Property, including owners and occupiers of lots. Although an owner is not strictly a member of the “public” the Courts have upheld the rights of owners to sue owners corporations for compensation. This insurance therefore goes beyond insuring members of the public. Liability usually takes the form of loss or damage to property or damages for death, illness or personal injury, such as injury arising from falls or from defective parts of the Common Property.

The legislation requires a minimum cover of $10 million for each event. In practice, owners corporations should seriously consider whether this minimum requirement is adequate for the particular scheme. This is because of the nature of the potential liability of lot owners. Because lot owners are liable to contribute to the unfunded liabilities of the owners corporation by having to pay levies imposed on them, the owners corporation is effectively an unlimited liability company. It is therefore critical that owners corporations are always covered for public liability insurance and that the amount of cover is adequate. While they are not common, there have been instances of lot owners having to pay substantial sums of money to meet the unfunded liabilities of an owners corporation arising out of inadequate public liability insurance cover.

If the owners corporation’s public liability insurance is below the minimum $10 million requirement, or if it is not current, the purchaser’s solicitor or conveyancer should ensure that this problem is addressed before the purchase is settled. Addressing the problem may require an indemnity (with or without supporting security) from the selling owner. Failing that, the purchaser could become personally liable for a proportion of any damages that the owners corporation becomes liable for during any period of lapsed or inadequate insurance. In a serious case the purchaser’s solicitor or conveyancer may need to consider whether there are grounds to cancel or rescind the purchase contract.

Any break in the currency of public liability insurance, even if it occurs before the purchaser acquires their lot, has the potential to pass a proportion of the owners corporation’s liability on to the purchaser. Therefore any such break should be treated very seriously by a purchaser and their solicitor or conveyancer.

Details of Worker’s Compensation Insurance
Anyone who employs people must carry worker’s compensation insurance. The test of “employment” is a difficult one and some people who are not strictly employees are treated as employees for the purposes of being entitled to worker’s compensation. Also, if a contractor engaged by the owners corporation fails to cover their employees with workers compensation insurance the owners corporation may incur a liability to the employee. Therefore, all bodies corporate should seriously consider the need for a worker’s compensation insurance policy. Failure to have this insurance in place when a valid liability arises is not only an offence, but the owners corporation itself will need to bear the claim out of its own funds. In turn this effectively results in the liability being passed on to the lot owners.

Details of Voluntary Workers Insurance
Voluntary Workers Insurance covers those owners or occupiers who carry out work for the owners corporation in a voluntary capacity. It is an optional insurance cover and will usually only be taken out if it is common for owners or occupiers to undertake voluntary work.

Details of other Insurances
An owners corporation has the power to decide to take out insurance covers other than those that are compulsory under the legislation. This is where those insurances are disclosed in the report. Common examples of these other insurances are:
• Loss of Rent (which covers against claims by investment owners for loss of rent during any period the unit is uninhabitable).
• Building contents.
• Office Bearers Liability (which covers committee members against liability for their actions as governors of the owners corporation).
• Fidelity Guarantee (which covers the owners corporation against theft of its money).
• Catastrophe (which covers against the increased cost of building in the aftermath of a major catastrophe, such as an earthquake or major cyclone, when labour and materials are at a premium).
• Machinery Breakdown (which covers the costs of repairs to machinery that breaks down for reasons other than lack of maintenance).

Details of any insurance broker used
This section identifies any insurance broker used by the owners corporation in relation to its insurance placements. Insurance brokers are commonly engaged by the strata managing agent or the owners corporation to set up the entire portfolio of insurances. The broker usually receives a commission for placing the insurance, although this commission is paid by the insurer. It is most unlikely that the insurance would be any cheaper if the owners corporation placed it directly with the insurer. Using a broker has the advantage of ensuring that the owners corporation is properly advised in relation to its insurance affairs.

Details of the last valuation obtained
This is a very important section which is often answered “Unable to ascertain, no valuation was sighted”. Building valuations are the only way to determine accurately the total replacement value of the building. Indexing the cost of the building by a % amount year by year is extremely risky. There are a number of companies who can provide very accurate building valuations. These valuations are also required to be effected by the owners corporation at least every 5 years as a matter of law.

If no insurance valuation was sighted by the inspector the purchaser should follow up the question of adequacy of building insurance with their solicitor or conveyancer, or the owners corporation as soon as possible after settlement of the purchase. An adequate level of insurance cover on the building is very import for the purchaser.