Strata Insurance

Author Suzanne Ford BCB Insurance Brokers

If you’re a Lot Owner who attends your Annual General Meeting (AGM) you’ll know the agenda always includes an item for Strata Insurance. In most instances, Strata Insurance is simply renewed without much discussion. 

And it’s really no surprise most of us don’t give our insurance arrangements much thought – it’s just something we must have. 

But a claim or dispute usually prompts questions.

So, let’s look at the basics of Strata Insurance, and we’ll answer some of the most common questions we receive from owners and committees. 

It’s no coincidence the strata committee manages the Strata Insurance renewal. The Owner’s Corporation (OC) has a legislated responsibility under the Strata Schemes Management Act 2016 (SSMA) to obtain Insurance on behalf of the Strata scheme.

The OC must obtain cover for:

Avoid the risk of underinsurance

The OC’s responsibilities extend beyond simply obtaining insurance. It must ensure there is an adequate building sum insured – one which reflects the full replacement value. 

Simply put, in the event of a total loss, the amount should be enough to rebuild or reinstate the property back to substantially the same condition it was in prior to the loss. This must include additional costs such as Removal of Debris and Professional Fees too. 

To help ensure the sum insured doesn't fall too far below current rebuild prices, Insurers automatically increase the sum insured at a rate of 5% annually to allow for inflation. 

“Guestimating” the value

Under previous legislation, the OC had to obtain a professional building valuation every five years. This current valuation and an annually adjusted sum insured minimised the risk of underinsurance. 

But a change to the legislation in 2016 means the OC is no longer required to obtain a valuation. However, it must still obtain full insurance for the Strata scheme and the sum insured must still reflect the full replacement or reinstatement value. If the building is underinsured, the OC itself could be legally liable. 

The OC also needs to decide whether to include any additional types of cover, usually for an additional premium. Some of these are outlined below.

Catastrophe insurance

If your Building has been damaged by a Catastrophe (an event as defined by the Insurance Council of Australia - ICA), then the costs of repairs and rebuilding could escalate dramatically due to the spike in demand for these services. Catastrophe cover provides additional funds to allow for these increased costs. 

Events such as the Sydney Storm (1999) and more recently the Christchurch Earthquake (2011) highlight the difficulties of repairing and rebuilding when large scale losses occur. It may be difficult to source raw materials and tradespeople, with increased waiting periods and demands for service. 

Flood cover

Flood cover is typically excluded under Strata Insurance, although some Insurers have recently introduced it in certain geographical areas. 

It’s important to be aware that “Flood” is a defined term in Insurance.

Flood is defined as “Water escaping from its natural environment such as a river or creek; or from a dam”.  Flood does not include inundation from the Sea or water overflowing from gutters/rooves. 

A lack of Flood cover could catch out the OC, particularly if you’re not aware of the flood risk at your location. Some buildings in high risk areas may also find it difficult to obtain Flood cover. 

Office Bearers cover

The Office Bearers (committee members) are volunteers, who make decisions on behalf of the Strata scheme. In many cases, committee members may be inexperienced in corporate or financial matters.

Obtaining Office Bearers cover provides some protection for Officers if they are held liable personally liable for adverse outcomes based on their decisions and/or actions. Although it’s not legally required, this cover is highly recommended to give some protection and comfort to the committee as they fulfill their duties.  

What factors affect our premium? 

Many factors impact the premium charged by an Insurer, including: 

Premiums for commercial strata schemes are also impacted by the occupancies and activities undertaken at the premises. Certain high-risk occupancies such as warehousing, manufacturing and panel beating attract a higher premium due to the increased risks associated with these activities. 

While you can’t change your loss history or your location, you can address your premium and ensure you receive the best possible terms. 

How we can get the best premium? 

1.Highlight the positives about your building 

Tell your broker and/or Insurer about any recent repairs, improvements or safety features installed, particularly any new fire prevention methods, eg installing automatic sprinklers. 

2. Check the accuracy of your loss history

Your claims history should reflect the most up to date information available. For example, it may show a claim for Impact Damage (a car drove into your fence), but if the cost of this loss was subsequently recovered from a third party, then this should be noted on your records. 

3. Ensure occupancy information is up to date

Commercial Strata schemes must provide a list of current occupants prior to policy renewal. If a higher risk occupant is scheduled to vacate your premises, let your Insurer know.  This may lead to a premium reduction. 

If our building is well maintained and has an excellent loss history, why has our premium increased? 

The short answer is sometimes it’s not you, it’s the market.

The Insurance market is cyclical, fluctuating between ‘hard’ and ‘soft’ market conditions. During a soft market, premiums reduce, but during a hard market they increase. After many years of premium reductions, we are now in a hardening market and most OCs will notice their premiums increasing. 

Why do market conditions have such an impact on premiums? 

Insurance is a global industry. 

The Insurance sector is profitable when losses worldwide are low. This attracts capital from investors, resulting in increased capacity for existing Insurers and encourages new participants to enter the market. Increased competition and underwriting capacity cause premiums to fall as Insurers compete on pricing to gain or increase their market share. 

But this can’t last. The combination of falling premiums and increased losses isn’t sustainable. 

Eventually capital is withdrawn from the industry forcing some Insurers to abandon unprofitable or high-risk sectors of the market, while others adjust their underwriting practice. As underwriting capacity shrinks, premiums rise, and the cycle continues...

Is the Lot Owners’ personal property covered? 

It’s common for owners to think their personal property is covered under a Strata Policy – this isn’t necessarily the case, and you should check your policy carefully. 

What is covered under a Strata Insurance Policy? 

A Strata Policy provides cover for an owner’s Fixtures and Fittings. 

This includes fitted kitchens and benchtops, baths, vanities, toilets and built in wardrobes. Recently, paint and wallpaper have also become standard inclusions. Some policies also cover floating floors, but always check your Policy terms and conditions for clarification.

The Strata Policy doesn’t provide cover for personal possessions such as carpets, curtains, furniture and other personal effects. 

Owners may also be liable for property damage/personal injury to third parties within their Lot. A Strata Policy doesn’t provide this liability cover for owners. Instead, you should obtain your own Contents Insurance, which may include liability cover. 

What can we do if we’re unhappy with the service provided by our Broker or Insurer? 

One of our most common questions!

Firstly, it’s important be aware the Complaints process is outlined in your FSG, which is included with your Insurance renewal documentation. It’s also available online either on your Insurer or Broker’s website. 

A complaint must first be lodged with the appropriate entity (either your broker or Insurer) who will process your complaint through their internal dispute resolution process. 

If at the end of this process you are still unsatisfied, you can take your dispute to the Australian Financial Complaints Association (AFCA). AFCA provides a free dispute resolution service for Strata schemes/OCs, and all brokers and Insurers agree to abide by its recommendations.