How strata building defects are impacting your insurance

If you sit on the owners committee of a strata titled property on the east coast of Australia, you are probably among the 85% dealing with at least one building defect issue. How can you ensure such issues do not impact your ability to adequately insure your building? What steps must be taken to comply with your disclosure obligations to insurers? Here we provide insights into recent trends in strata building defects and outline best practice for owners’ corporations (OCs) to enable effective management of defects and better insurance outcomes.

There are almost 3 million strata and community-titled properties in Australia, with an insured value of over $1.1 trillion. Recent findings indicate building defects are impacting a growing number of these plans. A combined report by the Office of the NSW Building Commissioner and Strata Community Association NSW has found that 39 per cent of strata buildings in NSW had experienced serious building defects. The Deakin University Study of Residential Multi-owned Properties (2019) found that, among the 212 building reports that were examined across NSW, Queensland, and Victoria, 85% had at least one defect.

Just weeks before NSW’s recent State Government election, the peak strata body in NSW, Strata Community Association (SCA) NSW called on the winner of the election to commit to reforms aimed at weeding out building defects issues in the construction industry.

Stephen Brell, SCA NSW President sought assurance from the incoming government on behalf of the strata sector, that programmes and initiatives developed with the Office of the Building Commissioner (OBC) continue, in an effort to help restore consumer confidence in strata schemes and the property sector.

With a decisive win for Labour in NSW on March 25 after 12 years of Liberal leadership, a response to issues raised by Brell is yet to be given. The former Shadow Better Regulations Minister Courtney Housso has previously been outspoken on defects issues. For example, on the issue of defective cladding, the Minister called upon the former Perrotet Government in 2022 to replicate Victoria’s scheme to remediate combustible cladding. Under the scheme the Victorian Government has helped owners with defective cladding pay for remediation- resulting in replacement of cladding on 166 buildings (as at June 2022). Under NSW’s Project Remediate Scheme not a single building had completed cladding remediation during the same period.

The effective management and remediation of these defects requires particular attention from OCs to ensure defects issues do not impede the procurement and placement of essential insurance coverage.

Bellrock has observed cases where insurers have declined to offer coverage for strata plans where defects have not been adequately disclosed from the discovery phase or otherwise, remediation works have been poorly managed. Generally, insurers are open to working with buildings affected by defect issues but they will require ongoing advice with respect to what is being done to remediate the issues and how the building defects are being managed.

The Insured (in this case the OC) is subject to “duty of disclosure” obligations. When the OC discovers building defects they are required to advise the insurer of matters relevant to the insurers decision to insure the plan. An Insurer can void the insurance policy or deny a claim if the OC has failed to adequately disclose defects. See our article on the duty of disclosure and consequences of non-compliance here.

It is also important to keep in mind the common exclusion relating to “non-rectification of defects, errors or omissions you were aware of” in a strata insurance policy. Damage claims due to known defects may be excluded despite any action the OC is making to rectify said defects. As such, having defects rectified in a timely manner is in the best interests of owners.

A building engineer will normally provide the owners corporation with a detailed and exhaustive list of building defects as part of their rectification claim against the builder/developer and/or home warranty insurance policy. It is imperative that the OC immediately discloses these known defects to their insurer in keeping with duty of disclosure requirements.

To ensure compliance with your duty of disclosure, it is appropriate to have a survey undertaken of the relevant plan. We traverse these procedures in our previous article regarding adequate cover for Strata Plans under the heading “What can OC’s do maintain adequate and competitively priced insurance? Ordinarily, surveys will identify defects and otherwise suggest required remedial work. We have found that insurers will be more inclined to offer quotations to those plans who are demonstratively engaged in such remediation.

It is always recommended that complete disclosure is made to insurers regarding potential defects. The use of third parties in setting out the scope of the defects offers the OC a form of risk management insofar as it has taken all reasonable steps to comply with the duty of disclosure. See our article here on why we recommend the use of third party experts in insurance contracting.

In the context of reporting on those defects, the OC should insist that the third-party expert prioritises most apparent risks from the more remote ones. It should start with emphasis on the most heightened risk of damage to the building (and any impact on lot owners), and exposure to the threat of personal injury.

Where a survey cannot be obtained it is critical that the OC works closely with its risk advisor to ensure that the insurer has an appropriate summary of defects and intended remediation. In short, identifying and disclosing defects is a basic requirement: demonstrating remediation is imperative to gain positive outcomes.

Regardless of the stage of your defects claim, OCs have a duty to ensure safety across the building. Whilst claims may take time to settle it is imperative that risk is mitigated wherever possible.

Bellrock’s Team of strata risk advisors are here to assist you. If you would like further information or advice on managing building defects in strata title properties, please contact us via the form below.