A Guide to Owners Corporation Strata Insurance Requirements

Introduction

Strata insurance is a fundamental responsibility for every Owners Corporation, ensuring that strata properties and their common areas are protected from unexpected risks and financial loss. Meeting these insurance obligations is not only essential for safeguarding shared assets but also for maintaining compliance with legal requirements in New South Wales.

Understanding the specific strata insurance requirements helps Owners Corporations and lot owners manage their risks, clarify coverage, and avoid costly gaps in protection. This guide provides a clear overview of the key obligations and considerations for strata insurance, supporting effective management and peace of mind for all involved.

Understanding Your Strata Insurance Obligations

The Legal Duty to Insure Your Strata Property

“In New South Wales, it’s important to understand what is an Owners Corporation, as it has a legal requirement to insure the strata property to protect the common property and assets of the scheme. This duty provides financial security and peace of mind for all lot owners against various risks.

The core of this obligation is found in Section 160 of the Strata Schemes Management Act 2015 (NSW). This legislation mandates that the Owners Corporation must insure the building under a damage policy, which covers destruction or damage caused by events such as:

• Fire
• Lightning
• Explosions

Insuring for Full Replacement Value

The Strata Schemes Management Act 2015 (NSW) requires that a strata scheme’s damage policy must cover the full cost to rebuild or repair the property to a condition that is not worse or less extensive than when it was new. Failing to meet this standard can result in non-compliance and potential penalties.

Recent increases in construction, labour, and material costs have made it more challenging to maintain adequate coverage. If a building’s valuation is outdated, the strata scheme may be underinsured and unable to cover the significantly higher costs of rebuilding in the current market.

To ensure the policy reflects the full rebuild value, it is recommended to obtain a new valuation from a certified valuer every 2 to 5 years.

A comprehensive valuation for a strata building typically accounts for several key expenses, including:

• The cost of demolition, disposal, and storage of materials
• Expenses associated with the removal of debris from the site
• The full replacement cost of the buildings and all common areas
• Professional fees for architects, surveyors, and engineers
• Any government fees, contributions, or taxes

Mandatory Strata Insurance Cover for Your Owners Corporation

Building Insurance (Damage Policy)

Under Section 160 of the Strata Schemes Management Act 2015 (NSW), an Owners Corporation must insure the strata building under a damage policy. This policy is designed to cover the costs of replacement, repair, or rebuilding if the property is damaged or destroyed by events such as fire, lightning, or an explosion.

The insurance must provide comprehensive coverage to restore the building to an “as new” condition. According to Section 161 of the Act, the policy must also account for additional expenses associated with the rebuilding process, including:

• The cost of removing debris from the site.
• Fees for professionals like architects and surveyors whose services are necessary for the restoration.

Public Liability Insurance

An Owners Corporation is legally required to hold public liability insurance. This policy protects the corporation from financial liability in the event of personal injury, death, or property damage that occurs on the common property of the strata scheme.

Section 164 of the Strata Schemes Management Act 2015 (NSW) specifies a minimum coverage amount of $10 million for each event. However, it is common practice for many strata schemes to secure policies with a higher limit, often $20 million, to ensure more comprehensive protection against potential claims.

Workers Compensation Insurance

The Owners Corporation must have workers’ compensation insurance as required by law. This insurance covers work-related injuries or illnesses sustained by any workers directly employed by the strata scheme.

An exemption applies if the strata scheme does not employ any workers, excluding contractors, and the property is used exclusively for residential purposes. In such cases, this specific insurance is not required.

Optional Strata Insurance Policies for Added Protection

Voluntary Workers Insurance

An Owners Corporation can take out voluntary workers insurance to cover liability if a person performing unpaid work is injured on the common property. This policy is especially beneficial for a strata scheme where volunteers assist with the upkeep or improvement of the property.

Under the Strata Schemes Management Act 2015 (NSW), an Owners Corporation is permitted to insure against damages it could become liable for when a person acts on its behalf without any fee or reward. This provides a layer of protection for both the volunteer and the strata scheme.

Shared Contents & Office Bearer Insurance

Owners Corporations can also choose to insure shared contents on common property. This policy covers damage to items that are for communal use, ensuring they can be repaired or replaced if needed. Examples of items covered by shared contents insurance include:

• Washing machines
• Gardening equipment
• Gym facilities

Additionally, office bearer insurance protects key members of the strata committee from personal liability. Section 165(2)(a) of the Strata Schemes Management Act 2015 (NSW) allows a strata scheme to insure its chairperson, secretary, treasurer, and other committee members for acts or omissions made in good faith while performing their duties.

Temporary Accommodation Insurance

Temporary accommodation insurance is another optional policy that provides significant benefits. It covers the cost of alternative housing for lot owners if their unit becomes uninhabitable as a result of damage. This ensures residents have financial support and a safe place to stay while repairs are completed.

What Your Strata Insurance Policy Does Not Cover

Inside Your Lot Personal Contents & Fixtures

While the Owners Corporation’s strata insurance covers the building and common areas, it does not extend to the personal belongings and certain fixtures inside an individual lot. It is important for lot owners to understand these exclusions to ensure they have appropriate personal contents insurance.

Items typically not covered by the strata policy include:

• Personal Possessions: This includes all your personal belongings like furniture, clothing, electronics, and artwork.
• Curtains and Blinds: Window coverings are considered the owner’s responsibility to insure.
• Carpets and Flooring: Carpets are generally not covered, and some policies may also exclude floating floorboards.

Individual Appliances & Removable Items

The responsibility for insuring individual appliances and other removable items within a lot falls to the owner, not the Owners Corporation. Strata insurance is designed to protect the building’s structure, not the appliances that serve a single unit.

Owners should ensure their personal insurance covers items such as:

• Single Air Conditioners: Split system air conditioners that service only one lot are typically excluded.
• Kitchen and Laundry Appliances: This includes dishwashers and washing machines that are not part of a shared laundry facility.
• Single-Unit Hot Water Systems: Hot water systems that exclusively serve your individual lot are your responsibility to insure.
• Removable Fixtures: Any fixtures that are not permanently part of the building structure are generally not covered.

Landlord-Specific Risks

For lot owners who rent out their property, it is crucial to recognise that strata insurance does not cover risks associated with tenancy. These policies are not a substitute for landlord insurance, which is designed to protect property investors from specific financial losses.

Strata insurance policies will not cover you for risks such as:

• Loss of Rent: If a tenant defaults on their rental payments, strata insurance provides no coverage for the lost income.
• Theft or Damage by Tenants: Any accidental or deliberate damage to your property or theft of your belongings by a tenant is not covered.

Special Considerations for Strata Insurance

Insurance Exemptions for Two-Lot Strata Schemes (e.g. Duplexes)

Under certain conditions, a two-lot strata scheme (such as a duplex) may be exempt from the legal requirement to hold building insurance, which is one of the unique advantages of duplex two-lot strata schemes as outlined in Section 160(4) of the Strata Schemes Management Act 2015 (NSW).

For an Owners Corporation to opt out of mandatory building insurance, all of the following conditions must be met:

• The buildings within the two lots must be physically detached from one another.
• No part of any building can be situated on common property or outside the boundaries of the two lots.
• The Owners Corporation must pass a unanimous resolution to not take out the building insurance.

If these requirements are satisfied and the resolution is passed, owners may then choose to obtain individual building insurance for their respective lots instead.

Insurance Premiums in Mixed-Use Strata Developments

In strata developments that feature a mix of lot types, such as residential homes and commercial shops, the insurance risks can vary significantly between them. The cost of insurance may be higher for certain lots due to their specific use.

To address this, an Owners Corporation has the option to:

• Require specific lots to pay an additional premium to cover any increased risk they introduce.
• Ensure a fair distribution of insurance costs, so that lots with a higher risk profile contribute more to the overall premium.

Navigating the Strata Insurance Process

Understanding Your Strata Insurance Premium Components

The total insurance premium for a strata scheme is composed of several distinct elements that contribute to the final cost. Understanding these components can provide clarity on how the overall premium is calculated.

These components typically include:

• Risk Premium: This is the core part of the premium kept by the insurer to cover potential claims. It is calculated based on factors like the building’s size, age, construction type, location, claims history, and any known structural defects.
• Emergency Services Levy: A contribution required to fund emergency services in NSW, such as Fire and Rescue, the Rural Fire Service, and the State Emergency Service.
• Stamp Duty: A state government tax applied to most insurance policies in New South Wales, currently set at 9%.
• Goods and Services Tax (GST): A standard federal tax that is applied to the insurance premium.
• Commissions and Fees: These charges cover the services provided by insurance brokers or strata managers for securing coverage, negotiating rates, and managing claims.

How to Make a Strata Insurance Claim

When damage occurs, the first step is to determine whether it affects private property or common property, as this dictates the claims process. If the damage is to your personal property or contents, you should contact your own insurer, as this begins the process of making a claim for property damage.

For damage to common property, the Owners Corporation Manager must be notified immediately. The process generally involves several key steps to ensure the claim is handled efficiently:

• Provide the Owners Corporation Manager with full details of the incident.
• Take reasonable measures to prevent any further damage or loss.
• If the damage is the result of a criminal act, it should be reported to the police.
• Allow access to the property for any necessary tradespeople to carry out repairs.
• Avoid altering the site of the damage unless essential temporary repairs are required.

Who Pays the Insurance Excess in a Strata Scheme

Determining who is responsible for paying the insurance excess depends on the cause and extent of the damage. The responsibility is generally assigned based on the following circumstances:

• An individual is at fault: If a person’s actions, whether accidental or malicious, cause the damage, that individual is typically responsible for paying the excess.
• An external event occurs: When an event like a hailstorm damages a single lot, the owner of that property is usually responsible for the excess. However, if the event damages more than one lot, the Owners Corporation will often pay the excess.
• A maintenance failure is the cause: If the damage results from a failure in building maintenance, the party responsible for maintaining the faulty item is generally liable for the excess.

Conclusion

Fulfilling your strata insurance obligations, which include mandatory building and public liability cover, is crucial for protecting your property and meeting legal requirements in New South Wales. Understanding policy exclusions, special considerations for different schemes, and the claims process ensures all owners are safeguarded against financial loss and their investments are secure.

To ensure your strata scheme is fully compliant and adequately protected, contact PBL Law Group’s owners corporations strata lawyers today for expert advice. Our specialised strata lawyers in Sydney provide trusted expertise to help you navigate your insurance obligations and safeguard your investment with confidence.

Frequently Asked Questions