StrataVal

In Victoria, legislation require the corporation to take out owners corporation insurance to cover:

• Your residential property – such as the cost of any damage or repairs to your buildings and common areas, structural floors and ceilings, balconies and balustrades, external walls, steps and staircases.

• Your liability to others – when an injury or property damage occurs to someone visiting the building, public liability insurance covers the liability for expenses your owners corporation is ordered to pay due to negligence.

• Fidelity guarantee – mandatory in Victoria, this covers your strata corporation for financial losses from dishonesty, theft or fraud by a third party.
  

Owners corporations can also take out optional cover to include such things as machinery breakdown, committee indemnity, and injury suffered by workers or volunteers.

The owners corporation is responsible for taking out replacement cost insurance.

In practical terms, this means it’s usually the management committee that purchases from the insurance company, or via a broker or owners corporation manager on behalf of the corporation, however members of the corporation (i.e. the unit/lot owners) have the right to inspect the policy, check that it is adequate, and that it represents value for money.

Quite simply, Owners Corporation Building Insurance protects the Owners Corporation for damage sustained to the building as a result of an Accidental or Malicious act. Common examples are:

• Fire/Arson

• Vandalism

• Glass Breakage

• Storm/Tempest

• Vehicular Impact

• Burst Pipes

• Lightning Strikes

• Burglary & Theft

• Earthquakes
  

A common misapprehension is that Owners Corporation Building Insurance protects the Owners Corporation for the routine maintenance items or building defects such as the repair of leaking shower trays, settlement/movement cracks in walls & ceilings or concrete cancer, unfortunately this is not the case. The easiest comparison to think of is motor vehicle insurance. You can insure your vehicle against having an accident, however you cannot insure your vehicle for wearing out. This same principle applies to OC Building Insurance.

Every Owners Corporation has a mandatory duty to insure ‘the building’ against accidental or malicious.

Lot space within a strata scheme is commonly defined as;

“the cubic air-space contained within the inner surface of the boundary walls, under surface of the ceiling and upper surface of the floor” Under this definition the lot owner is responsible for the repair, replacement and maintenance of all building components housed within the lot, such as:

• Internal walls

• Shower screens

• Internal doors

• Built-in wardrobes

• Toilets, baths & basins

• Kitchen sinks, cabinets and bench tops

• Appliances such as wall and bench ovens, cook tops, range hoods, hot water heaters and bathroom & laundry exhaust fans
  

For example, a leaking tap washer in the kitchen or leak through a shower screen is the lot owners’ responsibility to maintain.

Simply speaking these items are the lot owners’ responsibility for the purposes of repair, replacement and maintenance, however they are protected by the Owners Building Insurance if damaged via an insurable event.

Owners Corporation insurance covers areas of the property that are owned jointly by the lot owners, such as the building, driveways and carparks, and also common areas around and within the building. The policy can also include gardens, usually with separate limits, and also machinery listed on the policy.

When it comes to Owners Corporation Insurance, the claim amount paid for any loss / damage to the building will not exceed the total Building Sum Insured noted on the policy schedule.

If a Owners Corporation property is underinsured, it means the Building Sum Insured on the insurance schedule is less than the total amount it would cost to reinstate and replace the building in the event a total loss.

In order to determine the correct Building Sum Insured, and avoid breaching the Act, a Professional Property Valuation should always be sought.

Scenario A: A partial loss occurs and the building is underinsured.

The Strata Insurance claim payment to reinstate the unit will never exceed the total Building Sum Insured noted on the policy schedule.

If the building is underinsured by $1M, and a single unit burns down, but the cost to rebuild is less than the total Building Sum Insured, the unit can be reinstated.

Alternatively, if the cost to rebuild is more than the Building Sum Insured noted on the Strata Insurance, it’s likely the insurer will simply pay out the total Building Sum Insured amount to the OC or OC Manager, to be distributed to affected lot owners.

The lot owners will then need to make a decision on how to proceed forward with replacement of the unit.

Note: The latter is highly unlikely unless the building is grossly underinsured.

Scenario B: A total loss occurs and the building is underinsured.

If a total loss occurs and the Building Sum Insured is insufficient, all lot owners would be out-of-pocket.

In this scenario, we anticipate that the insurer would pay out the Building Sum Insured noted on the policy schedule to the OC or OC Manager, who would then allocate the claim settlement to each owner based on their ‘lot liability’.

It would then be up to the owners to decide how to proceed, and whether they can even afford to reinstate the property.

In such circumstances, it is likely that owners may commence legal action to recoup their financial losses, alleging a breach in professional duty by the OC, Committee Members and / or Strata Manager.

The OC, OC Committees, and OC Managers have a legal obligation to ensure adequate Insurance is in place.

Strata Insurance requirements stipulate the following:

All Owners Corporations’ have a legal responsibility to take out Strata Insurance that is sufficient to reinstate and replace all buildings on the common property.

Unless the sum insured is at least equivalent to the cost required to replace, repair or rebuild the property to a similar pre-loss condition, plus incidentals, the OC will be in breach of its obligations.

To avoid breaching legal obligations, it is prudent for the Owners Corporation to obtain a Professional Building Valuation, ensuring adequate Strata Insurance sums insured are noted on the insurance schedule.

Owners Corporation insurance covers the cost of repairing or replacing the building's infrastructure, such as the walls and windows, stairwells and fire exits, common lobbies and facilities, lighting, security systems and even areas which aren't accessible to all residents such as individual balconies and managers' offices.

If no professional valuation is sought, and a loss occurs that is greater than the Building Sum Insured noted on the insurance schedule, numerous parties could be held liable for a breach of professional duty.

Lot owners who suffer financial loss as a result of inadequate insurance could take legal action against:

• The Owners Corporation

• Corporation entity

• Committee Members

• The OC Manager (if applicable)
  

Recommendation

Obtaining a Professional Valuation comes at a fraction of the cost when compared to the financial losses and litigation that could ensue after an underinsured loss at a OC property.

No, the contents and fittings contained within your lot ARE NOT protected by the Strata Building Insurance and are specifically excluded from the policy, items such as:

• Carpets and underlay

• Light fittings

• Any furnishing or personal contents

• Floating floorboards

• Wallpaper

• Curtains and blinds

• Paint work on walls and ceilings

• Wall tiles located on internal walls.

• Electrical appliances that are not hardwired into the building, eg. clothes dryers, dishwashers or microwaves, TV’s etc.
  

Owner-occupiers may extend the cover on their contents insurance to include the items not covered by the strata building Insurance. Most major mainstream insurers are aware of the delineation between strata building insurance and contents insurance for a OC property and are happy to extend home contents insurance to include the items listed above.

Non-resident or investor owners may take out ‘Landlords Insurance’ for a sufficient sum to cover the fittings of their lot. However, all owners should undertake their own inquires with their insurer or insurance broker to ensure their contents are adequately protected by their contents policy.