Overview of insurance and owners corporations
If a building on a plan of subdivision is located above or below common property, a reserve, or a lot, an owners corporation must take out reinstatement, replacement, and public liability insurance (s 61(1) Owners Corporations Act 2006 (Vic) (‘OC Act’)) (except for single-storey buildings or for single-storey buildings registered under the Strata Titles Act 1967 (Vic) or Cluster Titles Act 1974 (Vic), as they have designated common area above and below each lot).
Reinstatement and replacement insurance is required for the owners corporation’s portion of shared services (s 59(2A) OC Act); this includes any pipes and cables used to provide water, electricity, gas and telecommunications to the building that are shared with a person other than the owners corporation or any of its members (s 54).
Insurance is often forgotten in small blocks where the only common property is a shared driveway (see the exception for ‘two-lot subdivisions’ in ‘Functions and powers of owners corporations‘). That omission is sufficient to allow a purchaser to avoid a contract of sale at any time before completion. Often, solicitors and conveyancers will advise a seller to obtain public liability insurance but forget to advise that all buildings on common property must be fully insured and that this includes fences, letterboxes and corrals.
The OC Act (s 46) requires the owners corporation to repair and maintain the common property and common services, but not privately owned property.
The OC Act also provides that a lot owner must properly maintain in a state of good and serviceable repair any part of the lot that affects the outward appearance of the lot (s 129(a)). The OC Act does not mandate that an owner must maintain the internals of their lot, but it follows that a lot owner must repair and maintain any privately owned part of a lot and meet the cost incurred.
For example, if a shower screen is damaged in a lot and an insurance claim is made under the owners corporations reinstatement insurance, is the owner of the lot liable to pay the excess? If the damage is caused by an insurable event and a claim recovers the cost, less any applicable excess, then the lot owner receives the amount recovered after the deduction of the excess and can therefore be said to have ‘borne’ the excess.
The new section 23A of the OC Act clarifies when an owner may be levied for insurance excesses and repair costs that are below an excess. If the damaged property is owned by the owners corporation, then the excess is ‘borne’ by the owners corporation. Building movement is generally not an insurable event.
Under current legislation, two-lot plans of subdivision are exempt from having public liability insurance for common property. That position also applies to ‘services only’ owners corporations. This appears to be an important omission.
All owners corporations (other than tier 5) must obtain a building valuation at least every five years. Public liability insurance for common property must not be less than $20 million.
Large multi-level buildings with separate owners corporations on the same plan of subdivision must now insure separately (s 61(3)) and be valued separately (s 65).
Presently, annual administration fees comprise insurance and other recurrent expenses; these fees must be levied based on lot liability. In owners corporations where lot liability and lot entitlement differ, the amended OC Act allows insurance to remain part of annual recurrent expenditure, levied on lot liability, but the owners corporation may also elect to levy insurance separately based on lot entitlement. This will impose an equitable balance in situations where larger lots with greater entitlement often have similar lot liability compared with much smaller lots.
By unanimous resolution, an owners corporation may resolve that if there is no common property, each lot owner must arrange individual insurance. The resolution does not need to be registered (s 63 OC Act).
A change of use of a tenancy may attract a higher insurance premium (e.g. to a restaurant has a higher fire risk than some other business types). Also, the concept of a moral risk relates to certain businesses (e.g. tattoo parlours and brothels) and attracts higher premiums, as will improvements to a lot. Under section 24(2B) of the OC Act, the relevant lot owner is liable to pay the increased premium.
The owners corporation may consider the merits of separate lot insurance, if permissible under section 61, or it may seek the unanimous consent of members to change the schedule of entitlement and liability. Failing consent, an application to VCAT under section 34D of the Subdivision Act 1988 (Vic) may be considered.