Strata insurance risk requirements

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The body corporate industry is full of jargon, and especially when it comes to insurance. Your body corporate may have received a letter from its insurer discussing a ‘risk requirement’.

This article explains what that is, why you might get one, and tips to deal with it.

What is a risk requirement?

A risk requirement is a term used by the insurance industry, and it is effectively a warning notice.

Your body corporate will have property insurance to cover the common property, and this usually also covers the individual lots depending on your scheme type.

The insurer will usually issue a ‘risk requirement’ to the client (your body corporate) if they believe that the body corporate or lot owners need to take some action to reduce the risk of a claim. The body corporate insurer will often take this action if a body corporate discloses a defect to the insurer, or if the insurer identifies a pattern in claims that may indicate a larger problem.

These are some examples of recent risk requirements, and the circumstances which lead to that requirement being issued.

Risk requirement – bathroom waterproofing test of all lots

In this example, two separate lots in a body corporate both made a similar claim for damage to walls and ceilings as a consequence of a leaking shower. Both claims were relatively minor in cost, but reviewing the claims, the insurer identified that the bathrooms in the building may not be correctly waterproofed (as two failed close together).

The insurer issued a risk requirement that every bathroom must be professionally inspected within a 3-month period, and the findings reported to the insurer.

Risk requirement – roof maintenance inspection

In this example, the body corporate made a claim for water damage to ceilings arising from a roof leak. The insurance assessor observed that the roof appeared to be in a generally deteriorated condition with several cracked tiles, rusted gutters and other maintenance issues.

The insurer issued a risk requirement that the body corporate must:

disclose the history of any maintenance or inspections on the roof,
carry out an independent roof inspection,
confirm that the resulting maintenance recommendations had been completed

Risk requirement – repair of retaining wall

In this example, a body corporate committee became aware of a failed retaining wall at the site. This was not an insurance matter, however the body corporate has a general obligation to inform the insurer if the quality of the building deteriorates, or a defect is identified. The body corporate committee informed the insurer about the failed retaining wall under its insurance policy obligation.

The insurer issued a risk requirement that the retaining wall must be repaired and evidence provided to the insurer within 6 months.

Who must action the risk requirement

Under body corporate insurance policies, the body corporate is the policy holder or ‘insured’. Any risk requirement is therefore issued to the body corporate committee, and the committee is responsible to take appropriate action in response to that notice.

In some cases, the actual requirement may not be a body corporate legal responsibility. For example, the maintenance of the shower waterproofing in example 1 is the cost of the relevant lot owner and cannot be funded by body corporate levies. In that case, the body corporate committee has an obligation to notify the individual owners about their obligations, and generally mange the compliance process.

Is it compulsory to comply with a risk requirement?

The body corporate has a specific legal obligation to maintain the common property in good condition. Lot owners also have a specific legal obligation to maintain their lot in a good condition.

Therefore, if the insurance risk requirement identifies that part of the property is not in good condition, either the body corporate or individual lot owner/s will be required to take action.

What does the insurer do if the risk requirement is not complied with?

The insurer cannot ‘enforce’ a risk requirement directly. Insurance is a commercial contract between the body corporate and the insurer. Bodies corporate are required to have insurance, but it is up to each individual insurer to decide whether to offer an insurance policy to a particular building, and at what price.

If insurer A issues a risk requirement and the body corporate does not comply, insurer A may:

Exclude claims relating to that defect/issue;
Terminate the insurance policy;
On renewal – decline to renew the policy;
On renewal – agree to renew the policy but with a cost penalty;
Impose higher excesses for all or certain claims.

If the body corporate then chooses to ask insurer B and insurer C for a quote, the body corporate is required to disclose to those other insurers the risk requirement or defect status. Insurers don’t like risk, and so Insurer B and C will nearly always copy insurer A and will generally match whatever action Insurer A has taken to mitigate its risk.

Should the body corporate comply?

Bodies corporate should generally take all available steps to comply with insurance risk requirements. The goal of compliance is to:

Avoid future damage to the common property and lots
Improve the body corporate’s ability to get insurance at a reasonable price

If the body corporate makes a genuine attempt to satisfy the risk requirement, that may also be looked at favourably by the insurer.

At the end of the day insurance is based on estimating risk, generally any steps taken to reduce the risk of an insurance claim, or reduce the potential damage arising from a claim, makes the body corporate a more attractive potential customer to insurance companies.