Renewing an owners’ corporation’s policy of insurance just got harder

It is compulsory under the Owners’ Corporation Act 2006 for a strata building with areas of common property to have a policy of insurance for reinstatement and replacement, and must hold a policy for public liability insurance as well, for a minimum of $20 million.

However, the strata insurance market is becoming tighter and tighter. There are only a dozen local insurance companies that offer a policy for residential or commercial strata schemes in Australia.

And of these insurance providers, three of them only specialise in smaller schemes where the value of the building is less than $20 million.

Of the remaining companies, at least five of those insurance providers have had their underwriters adjust their risk policies so that they are unable to insure any owners’ corporation (OC) that has reported water ingress damage, combustible cladding or unresolved building defect issues within the building.

Just to make it harder still, several of the insurance providers have also adjusted their risk policies so that they will not extend any insurance coverage to any building where a risky business activity is being conducted. This may extend to a tobacconist shop, or tattoo parlour, massage parlour and even to some industrial uses where chemical treatments are being used or stored onsite.

So, it is no longer the case that insurance companies will increase their policy premiums by a percentage to cover the increased risk, or to decline to pay any claims related to certain subject matters. Instead, we have a situation where the local insurance market simply won’t insure certain buildings at all.

This situation forces insurance brokers to consider the international insurance market, which is a very expensive option, and can leave some apartment buildings with policy premiums that are 200 to 300 per cent more expensive year-on-year.

The Victorian government enacted amendments to the Owners’ Corporation Act in 2021 to permit the passing on of higher insurance premiums to certain lots if it were to be determined that the use of the lot caused the insurance premium to increase. That is a good amendment but does not help a building if the insurance market just won’t insure the building at all.

To avoid this situation from occurring, OCs are being pressured by their current insurers to take all steps to repair outstanding building defect issues, and to replace any combustible cladding within the current period of insurance.

In doing so, these insurers are enforcing OCs to act incredibly quickly (and sometimes too quickly) to carry out repairs, without allowing for sufficient time for legal proceedings to be concluded, or for proper scopes of work for holistic or staged repairs to be developed, or for competitive tenders to be undertaken.

The current situation is driving up levies, and trapping some apartment owners in debt recovery limbo if they cannot keep up with their costs.

The situation is fast approaching what some might describe as an “insurance crisis.”

It may not be too long before the Victorian Government is requested to underwrite the strata insurance industry. Let’s all hope it does not get that far. •