Who is legally liable if your building is not insured for enough?

Strata Matters

Who is legally liable if your building is not insured for enough?

Most strata schemes in NSW are required by law to have in place certain insurance policies to cover damage to or destruction of the building(s).

Insurance premiums, and construction costs to repair or replace buildings, are both increasing. Insurance policies will usually have a limit to the cover provided, and the question arises who is at fault if the cost of repairs or replacement exceeds the limit of the insurance policy, and the building is “underinsured”.

In the usual way, the legal answer is “it depends” – on the particular circumstances of the building, and who was involved. An owners corporation may have a number of people involved in making the relevant decisions – the strata committee, the strata manager, and/or an insurance broker.

The owners corporation

When applying for or renewing insurance the owners corporation will need to declare, confirm or update the estimated replacement value of the building(s). An owners corporation cannot expect or rely on the insurer to update the estimated value itself, and needs to make an active decision about whether the indicated value is correct. Simply “rolling over” the insured value in the policy carries with it the risk the value is too low.

This then involves two major issues – who is turning their mind to that decision, and what is the basis for the insured value?

The strata manager

A strata committee will often not be aware of or turn its mind to such a decision. Some decisions will be made on “auto pilot” and/or the strata manager is relied on to be dealing with such decisions. The strata manager will sometimes be dependent or relying on the strata committee to instruct it to review and make that decision.

Strata committees vary widely in their management styles. Some are heavily involved with members that are commercially savvy and work with the strata manager. Others rely heavily on the strata manager to deal with day to day decisions, and draw any “important” matters to their attention.

Some strata schemes even lack a strata committee leaving management to the strata manager (which thus leaves the strata manager to deal with these issues). Schemes without strata managers will have only the strata committee dealing with such issues.

However, as one in five Australians live in some form of strata-titled property, with estimates of the number of people living in strata reaching close to 6 million2. Most of these people live in apartments or townhouses, but also in retirement villages, mixed-use precincts and large, planned developments.

This has significant implications for EV adoption, particularly when assessing the level of risk they pose, and given that both strata and EV policy are largely driven at a state and territory level.

The insurance broker

Some owners corporations and strata managers work with an insurance broker to place their insurance policies, and attempt to obtain the best arrangement possible in the market at the time. Larger and more complex schemes will often need such a broker to assist.

When an insurance broker is involved, that will often add an additional layer of complexity and communication, with the committee dealing with the manager who then deals with the broker – and increases the risk of miscommunication, assumptions being made and relied on, and issues not being identified and dealt with. Good committees, managers and brokers avoid these by communicating regularly and clearly – but the issues usually arise when that is not the case.

In such circumstances the risk will tend to sit more heavily with the strata manager and insurance broker – they are the professionals being paid for their role and advice, as opposed to the strata committee of volunteers usually not educated or fully aware of the issues and requirements involved in placing and renewing insurance.

How to avoid underinsurance

However, it is always best to avoid having an argument about who did or did not do their role properly, instructed who to do what, or failed to advise or warn properly.

When time comes to renew the insurance policies for the year, and the relevant motion is on the AGM agenda, that is usually the best time to be reminded of the question “Are the policies appropriate for the needs of the owners corporation?” for both the strata committee and the strata manager. If they are turning their mind to those issues and taking reasonable steps to ensure that is the case then, better than avoiding being liable for any failure to, they will usually ensure that issue never arises. Or if it does, it was through no fault of either of them.

Ensuring the proper value of the building(s) is known and insured has the benefit that owners corporations have a standing requirement to obtain a capital works fund report to ensure the maintenance and repair costs for the building are properly allowed for in the capital works budget and levies. This is usually one of the best ways to ensure the value of the building is being reviewed and updated. Such can then be taken into account in obtaining and renewing insurance.

Some owners corporations see these reports as an unnecessary or bothersome step and cost that can be put off for some time, and updated only irregularly or “as needed” (which assumes the strata committee or owners can determine when that is). The opposite is true – owners corporations should make use of them as much as possible, which includes informing decisions about the value of the building(s) and the insurances obtained.

As such, all of these factors and issues (and more) will be relevant to the question of who may have been at fault if an owners corporation proves to be underinsured. If the strata committee, strata manager or insurance broker are each being proactive, and making sure it is informing itself of a proper and reasonable basis for its decisions, then it will likely not be at fault for any underinsurance.

When involved parties are “rolling over” policies and decisions, and not checking that what is being done is still current and appropriate, is when fault will tend to be found when those decisions are examined later.

Like anything in life, proper decision making and properly managing a strata scheme takes time. The important thing for any strata committee (or strata manager or insurance broker) is knowing what to spend their time on – in being costly and detrimental later if decided wrong. Insurance policies are one of those issues worth spending the time to ensure decisions are properly made.

For support and legal guidance on Strata Law matters contact the specialist team at Chambers Russell Lawyers. To discuss your property’s strata management needs or receive a FREE management proposal contact our friendly team. We also offer more helpful resources and community living news in our FREE newsletter.

The information provided is a general guide only and is not intended as a substitute for legal advice. The company disclaims all responsibility and liability for any expenses, losses, damages, and costs which might be incurred as a result of the information provided by the company. This content is published in partnership with Chambers Russell Lawyers.

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