Property Insurance for strata schemes – Industrial Special Risk vs Hybrid Strata Policies

The insurance replacement values of strata plans have increased in past years, particularly as a result of escalating construction costs. Along with recent well publicised building defects and cladding issues, strata plans are become more complex to underwrite.

This is presenting significant issues within the more traditional strata insurance market. Many are struggling to meet the required amount of insured values for material damage (capacity issues) due to the significant uplift in declared values. Simultaneously, where a strata plan presents with defects and cladding issues, the underwriting guidelines (insurer appetite) will not permit those insurers to offer quotes (see our market update on Strata Insurance here).

It follows that where confronted with these issues, Bellrock has been engaged to assist the owners’ corporation in resolving these challenges. We have done so by looking to experts to assist with independent risk mitigation and management strategies (so as to present the strata plan as a favourable insured, see our article here that explains this approach), but more saliently for this article, we have looked to the commercial insurance market to overcome the capacity, coverage and appetite issues.

It is a common misconception that an owners’ corporations must insure under a standard strata insurance policy. This advice is misconceived. Section 164 of the Strata Schemes Management Act 2015 (NSW) (SSM) and r39 of the Strata Schemes Management Regulation 2016 (NSW) (SSMR)- the latter as it relates property insurance – do not insist on the policy form but purely on the indemnity conveyed by insurance (in whatever form that takes).

The other commonly spruiked and very misleading statement advocated by many Strata Managers and Insurance Intermediaries is that strata policies can only be used to insure strata plans (particularly larger residential plans) because those policies are “appropriate retail insurance (financial) products“. We would direct those who provide this advice to s8(2) of the SSM. The subsection removes application of the Corporations Act 2001 (Cth) (the Corporations Act) to owners corporations. The concept of retail financial product derives from the Corporations Act.

What is a traditional strata insurance policy?

The policy was developed over time to meet the needs of strata schemes by providing a suite of covers under one policy wording including: property, pubic liability, office bearers, liability, crime, voluntary workers and machinery breakdown.

This combined cover lends ease of administration and transaction for insurers, brokers and strata managers. The intention being to pass on the saving of same to the Owners’ Corporation. For smaller and non-complex plans not requiring advice the methodology is suitable. We would implore however when dealing directly with insurers to seeks valuations (at least every 2 years) so as not to under-declare insured values.

Using the commercial property insurance market to insure high value and complex schemes

Insofar as the capacity issues, the commercial insurance market is accustomed to the concept of sharing risk. In fact, the very foundation of insurance contracting has at its heart this methodology. There are a number of ways insurers may share risk, but ordinarily for property insurance it is on a subscription or co-insurance basis.

One insurer (the lead) will set policy terms and conditions, prescribe a premium rate and agree to a percentage which they assume as part of the declared values of the property being insured. The subscribing insurer (or insurers) will participate to fill the balance of the sum sought to be insured. Each insurer’s entitlement to premium is commensurate to its participation and likewise in the event of a claim each insurer will be liable for its proportion of the claim amount.

By way of example, take a property with declared values of $200m. The lead insurer prescribes a premium of 0.1%  but may only deploy 50% of its capacity ($100m) to the strata plan. Two additional insurers can each subscribe 25% each to the sum insured:

Insurer  Participation Indemnity declared value Premium payable
Insurer 1 50% $100,000,000.00 $50,000.00
Insurer 2 25% $50,000,000.00 $25,000.00
Insurer 3 25% $50,000,000.00 $25,000.00
Total 100% $200,000,000.00 $100,000.00

It follows, in the context of this example, where a claim is made for $1m (a partial damage claim) then insurer 1 will pay $500,000, insurers 2 & 3, $250,000 each.

The benefits of an ISR policy form for high value and complex placements

The commercial insurance market uses a standard policy form to insure for material damage and consequential loss (which are the coverages provided under the property section of a Strata Insurance policy). The policy form is known as Industrial Special Risk. (In the subscription example above, the participants agree to be bound to the terms and conditions of the same policy.)

We have experienced that where sharing of risk happens across those in the strata insurance market, each participant insists on its own policy terms and conditions. This can present significant issues in the event of a claim. Whilst the property coverage section under strata policies intends to cover material damage and consequential loss, insurers terms, conditions and exclusion are different. The issue does not arise where the sharing of risk occurs in the commercial property markets as the ISR policy is an agreed form.

The other benefits of insuring in the commercial insurance market under an ISR policy are:
  • Broader policy benefits than most strata (property) insurance policy sections.

  • ISR calculates total declared values on different methodology wherein the sum insured is a lower value — this yields savings on premium.

  • There are significantly more insurers in the commercial property insurance market than the strata insurance market. This broadens competition and leads to better premium and coverage outcomes for strata plans. This in many ways resolves the appetite issue larger and complex plans face.
Take aways

Strata insurance policies remain critical to strata plans and serve as an adequate and appropriate method for them to insure. Bellrock however warns that where there is limited insurer appetite for property risk exposure (due to capacity or due to defects and other risk considerations) then the strata insurance market may not be equipped to insure those particular plans.

It follows that even when the property section is removed from the strata insurance policy, most cooperative strata insurers will continue to enliven all other coverage sections. In this case, the ISR policy will sit alongside the strata policy to replace the property section within the strata policy.

Bellrock is engaged by BMCs across number of high profile, high value, complex and unique strata plans. In most cases we are retained directly by BMCs but in some instances via Strata Managers seeking appropriate risk management and insurance advice. This is in addition to policy placement, administration, and the claims services we provide at Bellrock.

It is becoming more apparent that there are significant issues with conflicted service offerings and remuneration across the Strata Insurance Industry. The most recent inquiry regarding same may be found here. Bellrock can say with confidence that our retainer and first obligation is to the BMC or Owners Corporation retaining us for the advice we give.

For further information and advice regarding insurance for Strata schemes, please contact us via the form below.

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