Who pays insurance excesses?
This is not to be construed as providing legal advice, or as prescribing how any particular Owners Corporations (OC's) should manage its affairs. It is a summary of how some important concepts are provided for in the legislation, and how OC's might take account of those provisions when formulating their management philosophies and procedures.
A Regulation under S 100 (3) (a) Insurance Excesses – Who should pay?
The Unit Titles (Management) Act (Act) and all of its predecessors right back to 1970 have made it clear that OC's have an insurable interest in the buildings up to their replacement value. The various Acts have each provided that the contract of insurance that has to be arranged by the OC covers the OC’s insurable interest in the buildings. The insurance contract is between the OC and the insurer. Notwithstanding what seemed to be the clear intent of the law, various OC's, and various managers advising OC's, have over the years required their unit owners to pay insurance excesses levied by insurers in respect of claims related to their units. The Act, which came into effect on 30 March 2012, introduced provisions that allowed the requirement that OC's pay the excess to be changed by regulation, but made it quite clear that until such a regulation is made, OC's have no legal way to require members to pay excesses.
The article on insurance discusses the responsibility of OC's in respect of insurance policies and payment of excesses under the Act. It examines the pros and cons attaching to any change of its present provisions.
Pressures for change
Some OC's and some managers have, in recent times, been lobbying for amendment of the Act to include a regulation empowering OC's to require unit owners to pay any excess levied by an insurer in respect of any claim made in relation to their unit. Such a regulation would in some cases retrospectively legitimise dubious, if not illegal, practices pursued in the past.
The changes sought have been justified on various grounds, including:
owners who will have to pay an insurance excess will be more likely to maintain and protect their property and so avoid claims,
an owner whose unit does generate a claim on the corporate policy should not get off “scot free” while other owners pay the excess for him,
having to budget for unpredictable expenses poses difficulties for OC's, and
owners who generate multiple claims place an unfair burden on other owners.
What does the Act say?
Section 16 (1) (a) states that the first function of an OC is the enforcement of its rules.
Section 35 (1) states that the Executive Committee (EC) exercises the functions of the corporation.
Default Rule 3 (1) requires that a unit owner must ensure that the unit is in a state of good repair. The very large majority of owners corporations will have retained this rule unaltered.
Section 107 states that there are taken to be legally binding agreements between an OC and each of its members, and between each member and each other member, under which the corporation and its members agree to be bound by the rules of the corporation. Each owner has therefore formally agreed to keep the unit in good condition.
Section 109 provides that where the EC considers that an owner is contravening a rule and that that contravention is likely to continue, the OC may give the owner a rule infringement notice requiring the owner to remedy the contravention.
Section 110 provides that failure to comply with a rule infringement notice is an offence punishable by a penalty not exceeding 5 penalty units ($550).
Section 100 (4) states that for all purposes related to any insurance taken out by it under this section, an OC is taken to have an insurable interest in the buildings on the land to the extent of their replacement value.
Section 100 (1) requires that the OC must insure and keep insured all buildings in the plan for their replacement value against specified risks.
Section 103 provides that where an OC receives insurance money for damage to or destruction of any building on the land, the corporation must, without delay, apply the insurance money to rebuilding and reinstating the building.
Section 74 (1) provides that an OC for a units plan may, by special resolution, establish funds for particular purposes (a special purpose fund).
Section 31 states that where an OC has, in carrying out its functions incurred an expense, or carried out work that is necessary because of the wilful or negligent act or omission by a member of the corporation or an occupier of the owner’s unit, the amount spent or the cost of the work is recoverable from the member as a debt.
Section 100 (3) empowers the Minister to make regulations in respect of, inter alia:
payment by unit owners of any excess payable under the policy,
combining the policy with other insurance policies,
notification requirements by unit owners in relation to improvements made to units,
the proportion of the premium payable for the policy by particular unit owners by way of a general fund contribution, and
valuation of the insured buildings.
Note 1: No regulations have yet been made under this section.
Note 2: With the exception of sub-section 100 (3) these provisions are essentially unchanged from those of their predecessors in earlier versions of the Act going back to 1970.
Having to pay excesses will encourage owners to maintain and protect their units. The default rules prescribed by the Act require owners to maintain their unit in good condition. Owners who do not comply with the corporation’s rules commit an offence.
Apart from any sense of pride in where they live, owners are legally bound to maintain their unit and liable to financial penalty if they don’t, Section 103 shows that it is the OC as the insurer of the building who must apply any insurance money it receives to the restoration and repair of the building, and making good any difference between the amount received and the cost of the work (the excess).
It is worth noting that it is the OC’s insurable interest that is being reinstated, and that the OC therefore has a valid interest in the quality and timeliness of the repairs and reinstatement.
Section 31 provides that if, in exercising any of its functions, an OC incurs expense or does work, which is the consequence of wilful or negligent act or omission by an owner or occupier, the amount spent or value of work done may be recovered from the owner as a debt. An excess paid by the corporation in these circumstances would qualify for recovery action.
The Act already makes adequate provision for the maintenance of units in good condition
An owner who does make a claim on the corporate policy should not get away “scot free” while the other owners have to pay the excess for him. This ignores the fact that each owner pays a share of the excess in proportion to their unit entitlement. Over the years, all else being equal, each owner will get the benefit of joint payments and will contribute appropriately to the corporate funds. All claims are of course liable to the provisions of section 31, and the owner having to pay the excess if it can be showed that the claim arose from wilful or negligent act or omission on the owner or occupant’s part.
If the owner contributed to the damage the owners corporation has a remedy under S31
Having the OC responsible for excesses imposes unreasonable budgeting difficulties for the corporation. A special purpose fund set up under section 74 could be used to accumulate money for the payment of insurance excesses. The target amount to be collected for the fund might be set initially at some multiple of the current excess, and refined in the light of experience or in accord with actuarial advice obtained from the insurer. Note that special purpose funds must be spent on the purpose for which they are established unless authorised by a special resolution.
Getting the corporate budget set up to handle excess claims (and other insurance related costs too) would not be difficult for a competent book keeper
Owners who generate multiple claims place an unfair burden on other owners. There are many circumstances in which a particular part of the unit plan might be more prone to incurring damage than others. The very design of the common property might direct water run off to a particular unit; a unit might be more exposed to the weather or the likelihood of vehicular impacts than others, or it might be at risk of a tree growing on common property falling on its roof; in class A buildings water might leak from common property into a unit, or damage to one unit might well spill over into its neighbours. And the list of possible causes of claims for things the unit owner is innocent of goes on.
If the owner is at fault the owners corporation can take action under S31 to recover costs
The proposition that individual owners should pay the excess on a corporate insurance policy is fundamentally inequitable. The insurer views its client, not as a group of owners, but as one person; it sets its premiums and excesses on the basis of its assessment of the overall risk of insuring the owners corporation (i.e., all the members’ buildings and the common property). The amount of the excess levied by the insurer at any time will be varied to reflect the insurer’s view, at that given point in time, of the likely future number and size of claims against the policy overall.
The insurer will have no regard to which member of the corporation generates which claim (or indeed how many claims relate to any given member), but will take account of how many claims it thinks are or may be likely, and their total value. If individual unit owners have to pay those excesses, one owner may have to pay a given amount at a given time, but if the insurer then increases the excess, another owner may, only a little later, with a similar claim, face a much greater excess. Insurers have been known to have increased excesses to be as much as 15 times what they had been previously
The arguments advanced ignore that what is being insured is the OC’s insurable interest in the buildings, individual members of the corporation have no contractual relationship with the insurer, and their personal claims experience has no bearing on the size of the excess that might be set by the insurer. All of the members are presently required to contribute to the corporation’s budget, which pays the premiums and the commissions and the excesses, in proportion to their unit entitlements. Individual members of the corporation will sometimes have difficulty getting used to these joint responsibilities which may be at odds with their recollections from the times when they lived in separate houses with entirely separate title, and no shared responsibilities with their neighbours.
The arguments advanced in support of the amendments sought ignore the practical difficulty in many cases of determining where the boundary between common property and unit lies, and worse, the allocation of liability for the damage between unit and common property and unit and unit.
If the government chose to regulate so as to fully provide for all the possibilities, it would find that while it might be possible to write a regulation to suit Class A plans it might not suit Class B plans and vice versa. The government might be persuaded to make a regulation that would simply allow OC's to make rules requiring their members to pay any excess arising from a claim relating to their unit. But before doing so, it would perhaps be appropriate to consider the ability of OC's to write rules that would properly address the issues of equity and probity and to administer such rules with scrupulous impartiality. Account would perhaps also be appropriately taken of the possibility and frequency of discord and disputation, and any implications for the workload of the ACAT.
The arguments advanced in support of owners paying the excess do not stand up well when examined against the provisions of the Act, nor do they address the practical difficulties in administering any such regulation that might be made.
The prospect of the limited resources of government being diverted onto a project so likely to be of such little discernible benefit to a minority of electors would seem unlikely.
OCN would support a comprehensive review of insurance as applied to strata title, but no persuasive case has yet been made for making a regulation under section 100 (3) (a) simply giving OC's the option of requiring their members to pay insurance excesses.