Property Damage & Strata Insurance Excess: An Owners Corporation Guide

Introduction

Dealing with property damage is a significant responsibility for an owners corporation. When damage occurs in a strata building, it raises complex questions about the strata insurance policy, particularly regarding the insurance excess and who is liable for payment. These situations can create disputes between the owners corporation and individual lot owners, affecting the scheme’s overall insurance premium and financial stability.

This guide provides essential information for the owners corporation on managing property damage and the associated insurance excess. It explores how to determine liability for a repair, the strategic considerations when deciding whether to make a claim, and how these decisions impact future insurance cover. Due to the complexities involved, obtaining professional advice from a strata lawyer is often crucial for resolving disputes and ensuring the strata scheme is adequately protected.

Defining the Insurance Excess & Premium for the Strata Property Owner

How the Excess Acts as Self-Insurance

An insurance excess is the amount a policyholder must contribute towards a claim before the strata insurance coverage begins. This serves as a form of self-insurance, allowing the owners corporation or individual lot owner to:

• Handle smaller claims themselves
• Reduce the insurer’s exposure to frequent payouts for minor property damage

By agreeing to an excess, the owners corporation or individual lot owner covers a portion of the repair costs out of pocket.

The amount of the insurance excess also directly influences the cost of the insurance premium. Generally, a policy with a higher excess will have a lower premium, since the policyholder assumes more financial responsibility if a claim is made. This trade-off between premium and excess is an important consideration for the owners corporation when arranging insurance cover for the strata building.

Determining Who Pays the Excess

Deciding who is liable for the insurance excess after property damage occurs depends on the specific circumstances of the incident. While the default position is based on which areas of the strata building are affected, the final determination often comes down to what is considered reasonable.

As a general guide, liability for the excess is determined as follows:

Scenario of Damage	Typically Responsible for Excess Payment
Affecting only one lot	The individual lot owner, unless the owners corporation decides it is unreasonable for them to pay.
Affecting two or more lots	The owners corporation, unless it decides it is reasonable for the affected lot owners to contribute.
Affecting common property & one or more lots	The owners corporation, unless it decides it is reasonable for affected lot owners to contribute.

A crucial factor in these decisions is the responsibility for maintenance. For example, if damage to a lot was caused by the owners corporation’s failure to properly maintain the common property, it would likely be considered reasonable for the body corporate to pay the excess.

Because these liability questions can be complex, it is often wise to seek professional advice from a strata lawyer to resolve disputes.

Assessing Liability for Damage in Strata Below the Excess

The Duty to Maintain Common Property & Individual Lots

When property damage occurs in a strata building, determining financial liability often depends on who was responsible for maintaining the item that caused the issue. The owners corporation has a strict duty to maintain the common property, while each lot owner must maintain their individual lot in good condition. This distinction is especially critical when the cost to repair the damage falls below the insurance excess.

For example:

• If a leak originates from a failed window seal, which is common property, the owners corporation would likely be responsible for the damage.
• Conversely, if a burst pipe is located within a lot and services only that lot, the owner is typically liable for the resulting property damage.

The duty to maintain involves not just fixing malfunctions but also taking preventative measures to ensure issues do not arise. Because these liability questions can be complex, seeking professional advice from a strata lawyer is often recommended to interpret legislation and resolve disputes effectively.

Responsibility for Fixtures & Fittings Versus Temporary Floor Coverings

Strata insurance is designed to cover permanent structures and fixtures within the strata building. However, it is important for individual lot owners to understand what is typically included versus what they must insure themselves.

Covered by Strata Insurance	Excluded from Strata Insurance (Lot Owner’s Responsibility)
Permanent fixtures and fittings (e.g., kitchen cabinetry, sinks).	A lot owner’s personal contents and property.
Fixed plant and equipment (e.g., built-in ovens).	Temporary floor coverings (e.g., carpet, floating floors).
Structural improvements (e.g., paths, retaining walls).	Blinds, curtains, and mobile or fixed air-conditioning units servicing one lot.
Services to buildings and other fixed items (e.g., awnings, signs).	Appliances that are not permanently attached (e.g., dishwashers).

Managing Water Damage Claims & Repairs for the Owners Corporation

Identifying the Source of the Leak & Maintenance Failures

When water damage occurs, the first step is to identify the source of the leak. Common causes include:

• Burst pipes
• Failed waterproofing membranes in shower recesses
• Issues with common property such as roofing and guttering

Establishing the cause is critical, as liability for the insurance excess and repairs generally falls to the entity responsible for maintaining the failed property.

The responsibility for maintenance plays a key role in determining who pays. For example:

• If a burst pipe inside an upstairs unit causes damage to the unit below, the owner of the upstairs unit is typically responsible for the excess. This is because the lot owner has an obligation to keep the pipes that service their individual lot in good condition.
• Conversely, if water damage results from the owners corporation’s failure to properly maintain common property, such as a leaking roof, it is generally considered reasonable for the body corporate to cover the insurance excess.

Determining the source and subsequent liability can become complex. In such cases, obtaining professional advice from a strata lawyer may be necessary to resolve disputes.

Why Insurers May Deny Claims Related to Defects or Lack of Maintenance

Insurers may deny a water damage claim if the underlying cause is related to:

• A building defect
• Wear and tear
• Lack of maintenance

Strata insurance policies are designed to cover sudden and accidental events, not issues that arise from gradual deterioration or known problems that have been ignored.

Before an insurer considers paying for the resulting property damage, they will require proof that the cause of the leak has been rectified. An insurer will often exclude coverage for the cost of repairing the defect itself, such as:

• Fixing faulty waterproofing
• Replacing corroded pipes

If a known defect is proven to have caused the water damage, the insurer may deny the claim entirely. This places the financial responsibility for both rectifying the source of the problem and repairing the subsequent damage on the party responsible for maintenance, whether it is the lot owner or the owners corporation.

Strategic Decisions on Making a Claim & Protecting the Insurance Premium

The Impact of Frequent Claims on Future Premiums & Excess Amounts

A history of frequent claims can significantly affect a strata building’s insurance profile. Insurers view multiple claims, particularly for water damage, as an indicator of higher risk, which can lead to adverse consequences for the owners corporation.

Proactive management of the building’s claims history is essential to maintain favourable insurance cover. When an insurer identifies a pattern of claims, they may take several actions:

Potential Insurer Action	Explanation
Increase the Insurance Premium	A poor claims history often results in a higher premium, increasing costs for all lot owners.
Impose Higher Excess Amounts	Insurers may apply a larger excess for specific damage types (e.g., water) to reduce their exposure.
Refuse to Provide Cover	In high-risk cases, a building with a history of frequent claims may be declined insurance cover altogether.

When the Cost of Repairs is Lower Than the Excess Amount

There are situations where the cost to repair property damage is less than the strata insurance excess. In these instances, the owners corporation or the responsible lot owner must cover the repair costs directly, as it is not possible to make a claim.

Even when the repair cost is slightly above the excess, it can be a strategic commercial decision to fund the repair without involving the insurer. By avoiding a small insurance claim, the owners corporation can protect the building’s claims history.

This approach helps prevent future increases to the premium and excess, safeguarding the scheme’s long-term financial stability. Determining liability for these repairs can be complex, and obtaining professional advice from a strata lawyer is often beneficial.

The Importance of Professional Advice for the Strata Committee

Consulting a Strata Lawyer for Liability Disputes

Determining who is liable for the insurance excess or the cost to repair property damage often involves complex legal questions. Strata disputes between the owners corporation and an individual lot owner can arise, especially when:

• Interpreting legislation
• Deciding what is reasonable in a specific situation

Engaging a strata lawyer provides the strata committee with expert guidance to resolve these issues effectively. Professional advice is crucial for:

• Interpreting the scheme’s responsibilities
• Ensuring that decisions regarding liability for damage in strata are fair and legally sound

Working with Insurance Brokers & Valuers

An experienced insurance broker or risk advisor is essential for helping the owners corporation make informed decisions about its strata insurance policy. These professionals can:

• Analyse complex policy documents
• Recommend appropriate insurance cover
• Ensure the premium and excess levels are suitable for the strata building

Their role is to empower the committee to choose adequate protection that is also priced competitively.

Working with a valuer is also critical for protecting the strata scheme. An owners corporation should:

• Obtain a building valuation every few years to ensure the sum insured for reinstatement and replacement insurance is accurate
• Prevent the strata building from being underinsured
• Ensure the committee meets its legal obligations

Conclusion

Effectively managing property damage requires the owners corporation to determine liability for the insurance excess and consider the long-term impact of claims on the scheme’s premium. Proactive maintenance is crucial for preventing issues and claim denials, while obtaining professional advice from a strata lawyer is vital for resolving complex liability disputes.

If your owners corporation requires assistance with a property damage dispute or an insurance matter, contact the experienced strata lawyers at PBL Law Group. Our strata law firm in NSW and Sydney provides the specialised advice needed to resolve these complex issues and protect your strata scheme.

Frequently Asked Questions