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Insurance is important to protect your owners corporation (formerly body corporate) and the personal assets of all lot owners. The law sets out the minimum insurance required but your owners corporation may also want to consider extra cover.
The minimum insurance required for an owners corporation is:
- reinstatement and replacement insurance of buildings on common property
- public liability insurance for the common property. Insurance for common property protects owners in the case of unexpected damage and injuries.
This is not the case for two-lot subdivisions and owners corporations which only have shared services.
If your owners corporation represents a two-lot subdivision, it does not have to take out public liability and reinstatement and replacement insurance for the common property.
But as owners of the common property you risk legal and financial liability. You should insure the buildings and have public liability insurance.
Reinstatement and replacement insurance
All owners corporations, except two-lot subdivisions, must take out reinstatement and replacement insurance for all buildings on the common property.
A building is defined as:
- a structure and part of a building or structure
- walls, out-buildings, service installations and other things attached to the main structure
- any pipes or cables used to provide services to a party other than the owners corporation or its members (shared services)
- a boat or a pontoon permanently moored or fixed to land.
The insurance must cover:
- replacement, repair and rebuilding of the damaged property
- costs of demolishing and removing debris from the site
- other costs such as employing an architect or surveyor
- shared services
- replacement of services and structures such as driveways and fences.
When renewing insurance, all owners corporations must ensure that the sum insured is more than the value of the buildings.
An owners corporation should obtain valuations of the buildings it is required to insure. A prescribed owners corporation must:
- obtain a valuation every five years of all buildings that it is required to insure
- present the valuer’s report at the next general meeting.
Reduce insurance and other inequities between lot owners
An owners corporation may levy fees to cover the costs of the premium for reinstatement and replacement insurance. The fees must be based on lot entitlement. An owners corporation may determine the times for payment.
Owners corporations may separately levy lot owners for:
- an excess amount, or increased premium, resulting from or attributable to an insurance claim (if the claim was caused by a culpable or wilful act or negligence of a lot owner, a lessee, or their guest)
- damage caused to the common property by a lot owner or lessee, if:
- it is not covered by insurance
- the cost is less than the excess amount,
- an excess amount on an insurance claim if the claim solely relates to an owner’s lot.
VCAT can, on application, make an order requiring a lot owner to pay the owners corporation’s reasonable costs for recovering an unpaid amount from the lot owner (pre-litigation costs).
Public liability insurance
Public liability insurance covers your owners corporation’s liability to pay compensation in the case of any:
- injury, illness or death of a person
- damage or loss of property.
Owners corporations with common property, except two-lot subdivisions, must have public liability insurance of not less than $20 million for the common property.
Your owners corporation should get professional advice about its level of risk. Some owners corporations have lots with different uses (for example, residences and shops), which can mean significant differences in risk.
Lot owners in an owners corporation without common property can make a unanimous decision that each will arrange their own insurance.
Insurance for multi-storey developments
An owners corporation must take out both reinstatement and replacement insurance and public liability insurance for all lots in a multi-storey development if any of the lots are:
- above or below another lot
- above or below common property.
This is not the case when:
- the lots are actually single-storey, such as multi-storey plans that define the space above and below the lots as common property
- the multi-storey development was registered under the Strata Titles Act 1967 or Cluster Titles Act 1974 and does not have lots above or below one another.
Insurance for mixed-use owners corporations
Developments with lots used for different purposes, such as shops and homes, are called ‘mixed use’. The cost of insurance may be higher for some lots than others in a mixed-use development.
Specific lots within an owners corporation can pay an extra premium for increased risk.
What happens if the owners corporation cannot get insurance?
If your owners corporation cannot insure the common property on reasonable terms, the owners corporation may apply to the Victorian Civil and Administrative Tribunal for an exemption from the required insurance.
Your owners corporation can, by ordinary resolution at a general meeting, decide to take out any extra insurance that it considers important to safeguard the interests of its lot owners.
This insurance might cover:
- office bearers’ legal liability
- voluntary workers insurance (a form of personal accident cover)
- workers compensation
- fidelity guarantee
- machinery breakdown
- catastrophe insurance
- lot owners’ improvements to the building
- legal defence expenses
- government audit costs
- appeal expenses
- common property contents (for items such as carpet and paintings in foyers).
Additional insurance should always be on the agenda and considered at the annual general meeting.
Insurance for individual lot owners
Individual lots owners can take out their own insurance cover in regard to destruction of or damage to their lot or their interest in the common property. This can be separate to or over and above the insurance provided by the owners corporation.
Professional advice about insurance
Consumer Affairs Victoria recommends that your owners corporation only use insurers approved by the Australian Prudential Regulation Authority (APRA). This industry-funded authority regulates the Australian financial services industry and lists approved insurers on its website.
Approval means APRA considers that the insurer is able to meet its policy holder liabilities. Your owners corporation should always seek guidance about approved insurers, the range of insurance products and the amount of insurance to cover its risks.
Your owners corporation may save money and find it easier to make a claim if all lots and common property are covered by the same insurer.
We recommend that owners corporations obtain at least three quotes from different insurers.
Owners corporation managers and insurance
When it comes to obtaining quotes for insurance, owners corporations should seek a minimum of three quotes from different insurers.
Owners corporations managers may be authorised representatives of an insurer and hold an Australian Financial Services licence.
Consumer Affairs Victoria considers that it may be a breach of duty if a manager does not disclose to the lot owners that they:
- act as an insurance agent offering to contract insurance for the owners corporation
- receive commissions from a third party, such as an insurer, for selling that insurance.
These disclosure requirements exist to prevent a situation where a manager may be, or be seen to be, influenced to place insurance policies with an insurer offering the better commission, rather than choosing the best policy for an owners corporation.
The interests of the owners corporation take precedence over other considerations.