Nov 1, 2023Blogs

Chambers Russell Lawyers Feature: Understanding Risk, Disclosure, and Effects of Strata Insurance Premiums

In recent years, strata insurance has witnessed a dramatic transformation, with insurers growing more risk-averse and introducing new terms of cover. This evolution has redefined the requirements for strata schemes to secure insurance on reasonable and commercial terms. It’s essential for strata committees (and their broker where applicable) to dive deep into the current insurance landscape, collaborating closely with strategic partners in management and legal expertise, to ensure they’re not only meeting their scheme’s obligations but also securing the optimal terms and coverage available in today’s insurance market.

Chambers Russell Lawyers and Bright & Duggan Property Group are your trusted partners in navigating this evolving terrain. With the combined expertise of legal counsel from Chambers Russell Lawyers and the proactive strata management solutions from Bright & Duggan, you can confidently ensure that your scheme secures the best insurance terms and cover in this dynamic insurance market. Let us guide you towards a secure and successful strata future.

Navigating Risk Factors in Strata Insurance

Insurers meticulously calculate their premiums, and willingness to insure based on risk. Ultimately insurers use probability and statistics to gauge apparent or perceived risk and calculate their potential exposure and premiums accordingly. Commercial and industry factors can also affect this – when the market conditions favour a “buyers’ market”, premiums will tend to drop and insurers compete for market share. But like most things, such markets operates in cycles.

Recent years have ushered in a different landscape – a ‘sellers’ market,’ insurers have become increasingly risk-averse, with a keen eye on a set of emerging risk factors that are reshaping the strata insurance landscape in Australia.

1. Combustible Cladding and Construction Quality of Residential Construction Work: The specters of combustible cladding and the overall quality of residential construction work have emerged as pressing concerns for property owners, government bodies, and Australian society at large. The high-profile incidents of ‘Lacrosse’ in Melbourne and ‘Grenfell’ in London, have heightened the awareness of fire compliance and brought combustible cladding into public alert. ‘Opal Tower’ in Sydney at the end of 2018 shifted the spotlight on defects generally in residential buildings. As these challenges have emerged, communities have been working diligently to address them. Meanwhile, individuals living in strata properties are increasingly finding the need to understand their rights and obligations and placing greater reliance on the value of effective and robust management.

2. Construction Industry Tightening: The construction industry, in particular, has experienced a “tightening” of the insurance market in recent years. Some insurers have withdrawn offerings to insure for construction professionals and consultants in Australia as a result. This shift has left brokers with the task of sourcing policies overseas through insurers with a willingness to consider such risk, although usually with higher premiums as a result. Enter Chambers Russell Lawyers, we can transparently advise you on legal intricacies related to the construction industry’s evolving insurance market and assist that your strata property remains well-protected at all stages.

3. Challenges for ‘High Risk’ Strata Schemes: The same challenges have befallen ‘high risk’ strata schemes that encounter obstacles when seeking insurance locally. Strata schemes grappling with combustible cladding issues and unresolved defect repairs often find themselves in complex situations. This is where the combined expertise of Chambers Russell Lawyers and Bright & Duggan Strata Management comes into play. Chambers Russell Lawyers can transparently advise on the legal risks and obligations related to strata properties. On the other hand, Bright & Duggan Strata Management provides proactive solutions for managing your strata scheme effectively. Together, they form a formidable team to help you navigate the complexities and challenges of securing the right insurance coverage and maintaining the overall health of your strata property.

The Importance of Disclosure in Strata Insurance

One of the most important requirements under insurance policies, and the applicable law generally, is that insureds disclose risks and potential risks when applying for or renewing insurance. While insurance forms will usually prompt to disclose such issues, and insurance brokers can assist and ensure necessary disclosure is provided, strata schemes need to understand such disclosure obligations are ongoing. They are not something to be dealt with at the next insurance renewal and often need to be disclosed promptly. When in doubt strata schemes should consult with their strata manager, insurance broker and sometimes the insurer itself to be sure.

The Effect: Consequences of Inadequate Disclosure in Strata Insurance

Failure to disclose risks can, at worst, lead to insurance being cancelled after the fact and an uninsured strata scheme. However, in such circumstances, it falls to the insurer to establish its written underwriting guidelines would have led to insurance being declined.

More commonly strata schemes will be faced with:

1. Increased premiums (sometimes significant, and in multiples of normal terms),

2. Increased deductibles or excesses for certain types of claims or claims that generally leave strata schemes with more of an insured loss component (e.g. a $10,000 deductible would mean that the amount for any loss is covered by the strata scheme before the insurance begins paying beyond that amount). And/or,

3. Exclusions for certain types of claims or losses (e.g. exclusions for consequential damage caused by cladding or notified defects).

In such circumstances, strata schemes will almost certainly have to provide the insurer with some sort of plan to show it is taking steps to deal with the risk issues, usually in the form of a repair plan to deal with cladding or defects, at the end of which the strata scheme can hope to return to “normal” terms of insurance. Insurers will want to see progress under such plans and are usually willing to work with strata schemes to ensure they have some form of cover.

Both Chambers Russell Lawyers and Bright & Duggan Property Group offer invaluable guidance to strata schemes during these challenging times. They can give guidance on legal rights and obligations, assist in formulating and implementing these plans, and cooperate with insurers. It’s crucial to remember that insurers are generally willing to work with strata schemes that take active steps to address these issues. However, insurers may refuse to provide coverage to schemes that fail to take action.

Securing the Future with Expert Guidance

Obtaining and renewing insurance in today’s insurance market presents an additional hurdle for many strata schemes, especially those contending with defects, including cladding issues. Managing these challenges requires a comprehensive approach.

To achieve a ‘successful’ outcome and return to addressing the ‘normal’ day-to-day issues of running an owner corporation, an engaged strata committee, well-informed owners, and a network of trusted advisers are essential.

This network includes experienced strata managers, insurance brokers, and other trusted advisers, such as the expertise of Chambers Russell Lawyers and Bright & Duggan Property Group. Their experience, guidance, and support can make all the difference in securing the future of your strata property, even in the face of ‘risky’ building challenges. With the right partners by your side, you can confidently navigate the complexities of strata insurance, ensuring the best terms and coverage for your strata scheme, and ultimately, a prosperous future.