Strata Insurance in NSW – Are your current arrangements achieving the best outcomes for your building?
Owners Corporations (“OC”) are obliged to arrange insurance cover for their strata plans. Sometimes this obligation is passed to the OC’s Strata Manager (“SM”), who may engage an insurance broker. Other times, the OC may deal directly with insurers or the OC may engage an insurance broker directly.
This article examines how effective the insurance obligations imposed on OC’s under the Strata Schemes Management Act 2015 (NSW) (the “Act”) have been to assist OC’s procure adequate, appropriate, and competitively priced insurance cover.
The “3 Quote Rule”
Section 166 of the Act requires an SM to provide its OC with not less than three quotations from different providers for each type of insurance proposed. If three quotations are not provided, then any reasonable written reasons as to why must be provided by the SM to the OC.
It is arguable then the extent to which SM’s can contract out of this obligation (s270 of the Act). It is uncertain as to the penalty for a breach of s166 of the Act: the section does not contain any indication of maximum penalty units.
The overarching intention of s166 when introduced in 2016 was for the OC to ensure competitive insurance premiums were being sourced by SM’s each year. Our experience suggests the provision has caused some confusion about the extent of the obligation, and otherwise, it has caused premiums to increase and coverage to narrow.
Hardening insurance market
We put this down to the following:
- Insurers are aware of the “3 quote rule” and when assessing risk, they understand that the “cheapest price” wins. To be cheaper they must compromise cover. Some markets are no longer offering officer bearer’s liability cover, whilst others will limit cover for flood, action by the sea, floating floors, machinery breakdown and crime.
Otherwise insurers are reluctant to spend time on properly analysing a risk for fear their time in doing so and presenting quotations will simply be “shopped-back” to other insurers. This may cause insurers to not pay close attention in their underwriting (meaning the quotation will not be their best price) or alternatively, they will not quote at all.
They are more likely to deploy their time and resources to “loyal insured” who in-turn will get the benefit of better underwriting and ultimately a lower premium.
- Where no broker is involved, SM’s are burdened with presenting options to the OC. Whilst most SM’s Bellrock works with are highly trained in insurance many are not insurance practitioners.
Insurance market conditions, subtleties in policy language (which may change year-on-year) and other “insurance” know-how are not their core business.
The interpretation of s166’s has lead many SM’s in to chasing the ‘cheapest price’. The true objective must also include stability of pricing, consistency of appropriate/adequate cover, attention to clear and concise underwriting declarations, risk management, claims advocacy, and, insurer stability/loyalty/claims philosophy and financial strength.
- Insurers and the reinsurers of strata are being presented with significant fluctuations in premium income and claim payments across their portfolios. Generally, where an insurer pays a claim and a new attacking insurer quotes less than the holding insurer (who has paid a claim and must “claims rate” the risk) then the holding insurer, who has paid a claim will miss out renewing because the attacking insurer has quoted less.
In the ordinary course, an insurer who pays a claim is an insurer that should be supported. On renewal of any insurance policy, consideration should be given to claims paid not saving a few thousand dollars on a cheaper premium.
What can OC’s do maintain adequate and competitively priced insurance?
The solution for OC’s will vary depending on their size, complexity (of their risk profile) and their claims history.
Smaller, less complex plans
OC’s who do not present as larger, complex risks and have a ‘sound’ claims history (and have engaged an SM to arrange cover but no broker) may be able to satisfy the carve out in s166 of the Act.
To do so, the SM would need to provide reasonable cause as to why three quotes had not been sought. It may need to review its retainer with the OC and perhaps seek a resolution to satisfy the “carve-out”. Such a statement may include:
due to the current insurance market, based on our experience with other plans of a similar size and because the renewal premium has only increased ($x/x%) and/or because that insurer has paid X in claims, no alternative quotations have been sought for the OC’s renewal
The SM should however seek legal advice on whether this methodology adequately discharges the obligation under s166. The SM however may engage an insurance broker to arrange the cover. The insurance broker is not caught by s166.
For the larger and more complex plans, SM’s have the same option. However, from a risk perspective to the SM and its client, the hardening market presents more challenges. In that regard it is more prudent for the SM to work with a competent insurance broker.
Some of the steps Bellrock has taken (working either directly with OC’s or otherwise with the SM and the OC) include:
- Independent risk surveys – having an independent survey from a recognised and accepted insurance risk engineer will ensure that insurers have adequate and relevant information. It will also allow the OC to identify areas of improvement are needed to improve the risk profile of your strata plan.
- Insurance replacement valuations - we would recommend regular valuations to ensure that the plan has the correct sums insured and importantly that it hasn’t simply accepted inflated values over time by using an arbitrary inflation ‘percentage’. It is also important that the plan has not undeclared values as this could impact claim payments.
- Capital expenditure forecasts – preparing / disclosing 5 or 10-year projection plans demonstrates sound management of the building and the measures being taken to ensure it remains in good condition.
- Defect and building reports – for relatively new plans, those that have undergone significant improvements and particularly those still under builders’ warranty, if there is advice on any defects they should be disclosed, as well as the remediation plan to address the defects.
- OH&S building safety report - provide a copy of it and confirm that steps taken to remedy the concerns raised in the report.
- Claims assessment – review past claims and specify what has been done to avoid future similar losses re-occurring. Whilst some claims are unavoidable where a plan can demonstrate that it is pro-actively mitigating against claims, this will enhance its risk profile.
- Developing claims management procedure - in consultation with the SM you should prepare a claims manual, in particular the steps the plan will take to proactively manage claims, the experts engaged in the process and the protocols for all stakeholders to adhere to. Having an established claims manual will alleviate unnecessary costs and time in the event of a claim (where time is of the essence).
- Claims advocacy – a broker must on behalf of the plan to ensure it receives its full entitlement to indemnity for any insurance claim. The broker must also protect the plan from “leakage” – unnecessary or inflated claims costs and expenses – failing to do so impacts premium. Otherwise the broker should expedite claims decisions from insurers (eloquently and professionally), coordinate with preferred and agreed experts, report on and update all stakeholders (Executive Committee, lot owners, SM, insurer, etc) on claim developments.
As a member of the executive committee of an OC you should:
- Understand the coverage in place for the plan. Ask for detail at renewal so you can understand how the policy works, its shortcomings and how to more effectively address risk.
- Clearly articulate the risk profile of your plan. What information is being provided to insurers? If insurers are only being provided with insurable values and claims experience it is unlikely that any improvements or risk engineering the OC has done is being put to underwriters.
- Remember the importance of insurance. The OC is protecting the interests of all the owners in the plan. In the event of a loss all be relying on the policy that has been arranged at the direction of the executive committee. Any saving achieved by switching insurers for a lower premium (compromising on cover) will be quickly forgotten in the event of an uninsured loss.
Notwithstanding, there are significant risks if continuity of cover is not maintained with the same insurer - particularly in respect of the ‘officer bearers’ liability section of the policy, which is “claims made”. For details on claims made insurance, see our article here.