Strata Insurance Obligations

October 23, 2018

If William Shakespeare was a Queensland strata title property owner (particularly in North Queensland), he might at this very stage be writing:

To insure, or not to insure, that is the question:
Whether ’tis nobler in the mind to suffer
The slings and arrows of outrageous cyclones, non-conforming cladding, terrorism risks and the like,
Or to take arms against the insurers
And by opposing tell them to get stuffed.

In writing that particularly poorly worded prose, Bill would seemingly assume that he has a choice as to whether he insures his strata title property or not. But does he?

Let’s start with some basics.

The obligation to insure
This is all set out based on the Standard Module, but the same provisions are included in every other Module – Accommodation, Commercial, Small Schemes and Two Lot. There is even consistency with older legislation like BUGTA, MUD, IRDA and SCRA.

Every body corporate must insure the common property and body corporate assets to the greatest practicable extent to cover damage and all costs incidental to the reinstatement or replacement of insured buildings.

Damage extends to:
1. earthquake, explosion, fire, lightning, storm, tempest and water damage;
2. glass breakage; and
3. damage from impact, malicious act, and riot.

The obligation to insure can also be built into leases, like those quasi-body corporate entities that are lessees on Hamilton Island and surrounds. If the lease obliges you to insure, then you must. The consequences of the failure to insure here are not in the Commissioner’s Office – they are termination of the lease.

Why must bodies corporate insure?
For us, there are two answers to this:
• Leaving aside the insured entity is the body corporate itself – not an individual owner – an owner of a lot cannot be left affected by another owner’s failure to take out insurance. Imagine the position if everyone could do their own building insurance, and some insured, and some didn’t. How do you replace the building if it was damaged?
• Banks need the certainty that they are secured. If a building of 50 lots burned down, the banks could not be left scrabbling over 1/50th of the value of the land across all of the individual mortgagees.
So the prospect of the obligation to insure ever changing is remote.

Types of plan format
There are two types of plan format for strata title lots – building or standard. This is going to be over-simplified, but:
• In a building format plan, the boundaries of the lot are the middle of the walls and roof. Outside that is common property. This is always the type of plan format in a high-rise, but it can be used in low rise/townhouse style format too.
• In a standard format plan, the boundary of the lot is via survey pegs on the ground, so the owner owns the land on which their lot is built.

Bodies corporate in building format plans must insure the buildings of which the lot forms part. Standard format lots that standalone must be insured by the owner of the lot, unless there are common walls, in which case the body corporate must insure the buildings. Owners of standalone lots can enter into a voluntary insurance scheme under that same section and insure jointly with other owners.

A lot more information is available here on the Commissioner’s website.

What if you cannot get insurance?
We get this question a bit.
Unfortunately, what is always left out is the tail-end of the question, which would then have it framed as:

‘What if we cannot get insurance … that we:
1. can afford;
2. like; or
3. that was like last year’s.’

The brutal reality of the situation is that there will almost always be insurance available. It is just that the costs of it might be extortionate. None of this is to make light of what is a serious issue for those suffering from it. But it is what it is.

The Commissioner has even issued a practice direction on this very topic that addresses what a body corporate must produce to have the Commissioner waive compliance with their statutory insurance obligations. Even more interestingly, we cannot find a decision that has ever been made on this actual topic!

What can be done?
The Commissioner and the Insurance Council of Australia have produced this tip sheet about how to reduce insurance premiums.

The ACCC had an enquiry about insurance in North Queensland. The updated report is here. There is a final report to come.

The joy of our capitalist system is that we think it is unlikely that the government can make insurers provide insurance. If an insurer is to provide insurance, it is assuming risk, and it is entitled to price that risk in the way it chooses. If you don’t like it, the insurer doesn’t get the business, and if the insurer doesn’t like the risk, it doesn’t have to offer insurance.
We agree the situation is coloured a lot by the compulsory nature of it when it comes to strata. Bodies corporate simply do not have the choice about whether they insure – just who it is with.
One thing that would be an easy fix from a state perspective is the state insurance tax. The state government adds a cheeky 9% to every premium, and as best we can tell, that raises nearly a billion dollars or so of revenue each year. We’ve highlighted the relevant sections of the Budget Strategy and Outlook (Budget Paper No.2) that reflect this here. When a premium goes from $50,000 to $250,000, that 9% can add up to a lot more than it did the year before.

Your local state member (if they are from the left side of politics) might be able to do something about that if you ask nicely. Any other state member might be able to make noise from the opposite side of the chamber but government departments, at any level, will never give up revenue easily.
We do not have the solution – just the explanation of what the legal position is. We are getting quite a few questions about body corporate costs at the moment, of which insurance can form a large part.

Sometimes these newsletters just help us get through what could be a long explanation with the click of an email, and the intent is that strata managers might be able to do the same.
*sincere apologies to the Shakespeare fans among you all

This article was contributed by Frank Higginson, Director of Hynes Legal.