Owners Corporation Insurance Legal Obligations Explained

Katie Dam

LawyerAitken PartnersView Profile

To help protect strata communities against financial loss and legal liability, owners corporation insurance is essential. However, simply having an insurance policy does not guarantee a strata property is adequately protected.

Owners Corporation Insurance: Legal Obligations

Insufficient insurance cover, inaccurate valuations or non-compliance with legal obligations can expose owners corporations and lot owners to unexpected costs and disputes. So if you are an owner, a committee member, or a strata manager, it’s important that you understand your legal responsibilities so that your insurance remains fit for purpose.

What are the mandatory insurance obligations for an owners corporation?

Is owners corporation insurance mandatory? Yes, obligations vary depending on where the building is located. In every Australian state and territory, strata legislation imposes insurance obligations on owners corporations and equivalent strata entities, although requirements vary between jurisdictions.

While the strata insurance requirements vary, owners corporations in general are required to ensure they obtain insurance that covers any assets they’re responsible for managing, including common property and shared structures. Required cover commonly includes building insurance, reinstatement and replacement cover, and public liability insurance.

Additionally, owners corporations must:

• comply with applicable state or territory legislation

• insure all eligible common property and shared assets

• ensure the insured amount reflects the current replacement value of buildings
• regularly review policy to account for changes in the property's value, condition, use or risk profile

Exemptions

In some jurisdictions there may be limited exemptions or alternative insurance arrangements for certain types of strata schemes, such as some two-lot subdivisions. Co-owners of these properties still face risks if they experience uninsured losses or if someone is injured on common property, however. So, regardless of mandatory requirements, owners corporations need adequate cover.

Insurance coverage gaps

Coverage gaps are a common issue when it comes to owners corporation insurance, and can be disappointing when they occur. Gaps often arise where a policy doesn’t respond to a relevant loss, the level of cover is insufficient, or there’s uncertainty about who is responsible for covering certain property.

Owners corporations should mitigate against these common coverage gaps:

• Policy exclusions
  Insurance policies don’t insure against every loss. Wear and tear, poor maintenance, poor workmanship or gradual deterioration may be excluded by a policy, so it’s crucial owners corporation review policy wording carefully and clearly understand what is and isn’t covered.
  

• Underinsurance
  If the insured amount doesn’t reflect the current cost of rebuilding or repairing the property, owners may face unexpected costs following a major loss. Regular insurance valuations reduce this risk.
  

• Policy breaches or non-disclosure
  Insurers may reduce or decline insurance claims if they haven’t been duly notified of significant changes to a property or changes in its use. Any change must be reported to the insurer in accordance with policy requirements.
  

• Unclear responsibilities between the owners corporation and lot owners
  Generally, the owners corporation insures common property and building structures, and individual owners insure their own contents and certain items within their lot. Disputes can arise where it’s unclear which party is responsible for damage, repairs, or insurance claims.

Responsibility: Who is liable if insurance is inadequate?

Owners corporation

As the legal entity responsible for managing the common property and meeting statutory insurance obligations, the owners corporation is ultimately responsible for ensuring the insurance arrangements it puts in place are appropriate and comply with legal requirements.

Lot owners

If underinsurance occurs, all lot owners are responsible for covering the financial shortfall. Generally, in this situation, the owners corporation would impose a special levy on each property owner to raise the funds. This may even apply to new property owners who have bought into the strata scheme after the underlying insurance decision was made.

Committee members

Committee members generally have duties to act with care and diligence when making decisions about the owners corporation's insurance arrangements. While they’re not automatically personally liable if a building is underinsured, they may face scrutiny if they are found to have:

• disregarded professional advice

• neglected to obtain updated insurance valuations

• failed to regularly check whether insurance remained adequate for the property

• made decisions without appropriate consideration of the owners corporation's legal obligations.

Where these issues contribute to uninsured losses or disputes, it may be alleged that committee members failed in their duties.

Strata managers

On behalf of the owners corporation, strata managers commonly obtain insurance quotes and administer policy renewals. Their conduct may be scrutisied if they’re alleged to have:

• overlooked important information

• failed to follow instructions

• failed to carry out their contractual obligations.

Similarly, professional advisers and insurance brokers may face scrutiny where their actions have contributed to inadequate insurance arrangements.

Common owners corporation insurance mistakes and how to avoid them

Even where an owners corporation has insurance in place, avoidable mistakes can leave lot owners exposed to financial loss, disputes and legal liability. Taking a proactive approach to reviewing insurance arrangements can help reduce these risks. Beware of the following common errors when it comes to insurance.

Relying on an out-of-date policy

A common mistake owners corporations make is to not regularly assess their insurance policy to ensure it offers sufficient cover for rebuilding and repair. Labour and construction costs fluctuate over time, so coverage that may previously have been adequate may no longer suffice.

Best practice:

• When the insurance policy comes up for renewal, review it to ensure it still provides adequate cover. Don’t just renew it without checking.

• Where required under applicable state or territory legislation, ensure a professional building insurance valuation is conducted at least every five years. Even where not legally required, regular professional valuations are considered best practice

Assuming everything is covered

Many owners corporations overlook the coverage gaps we detailed earlier in this article. Assuming a policy offers coverage it doesn’t offer leaves owners exposed to financial and legal risks.

Best practice:

• Closely examine policy wording to understand exclusions, excesses and coverage limits.

• Ensure individual lot owners understand what they are responsible for insuring.

• If required items aren’t covered, consider obtaining additional insurance to ensure adequate coverage.

Failing to be clear on responsibilities

Where common property and individual lots overlap, it’s common for there to be disputes around who is responsible for arranging insurance or responding to damage.

Best practice:

• Ensure there is a clear understanding of the responsibilities of the strata managers, individual lot owners, the owners corporation as an entity, and the committee members.

• Lot owners should take out their own insurance policies to cover gaps that aren’t covered by the owners corporation insurance.

Not notifying the insurer of changes

Owners corporations should notify their insurer of material changes as required under the policy terms. Non-disclosure may result in reduced or denied claims.

Best practice:

• Quickly inform the insurer of changes in occupancy, the building’s use, significant renovations and extensions.

• To support future claims, maintain accurate records of maintenance, repairs, inspections, committee decisions and insurance valuations.

Ignoring Public Liability Risks

Changes to how a property is used can affect public liability exposure.

Best practice:

• Review public liability insurance at each renewal and whenever the property's risk profile changes. What impacts public liability risk?

• Increased visitor access

• Short-term letting

• Commercial use of common property

• Installation of new facilities

• Major building works.

Waiting Until a Problem Arises

It’s common for owners corporations to wait too long to seek legal support. They often only reach out for owners corporation legal advice after a dispute has developed or an insurance claim has been denied. By not acting early, the risk of uninsured losses, disagreements between owners or costly litigation increases.

Best practice:

Seek legal advice:

• When there are concerns about:

• adequacy of coverage

• compliance with legal regulations

• compliance with insurance policy requirements

• insurance responsibilities.

Legal support may also be required after issues arise, such as where:

• breaches of statutory duties are suspected

• negligence is alleged

• there are disputes over responsibility for uninsured losses

• there are disagreements between owners, insurers or service providers

• there’s uncertainty about whether the owners corporation's insurance arrangements follow applicable legislation.

How Aitken Partners can help with owners corporation insurance legal obligations

Whether you’re buying into a strata corporation, are a strata manager, or you’re seeking help on behalf of an owners corporation, Aitken Partners can help you clarify obligations, identify potential risks and reduce the likelihood of escalating disputes. As insurance obligations differ between states and territories, obtaining advice about your specific owners corporation’s legal responsibilities can help ensure compliance.

Book a consult for owners corporation legal advice today.