Richard Gration Ninth Floor Selborne Chambers (02) 8915 2113 - - PowerPoint PPT Presentation

Richard Gration – Ninth Floor Selborne Chambers (02) 8915 2113 rgration@selbornechambers.com.au

Topics

What is insurance and why does my strata plan have

to have it?

Individual owners’ contents insurance / owners

corporation insurance

Terrorism insurance Players — insurer, broker, strata manager ‘Authorised Representative’ / ‘Insurance Distributor’ Commissions

What is insurance?

The insurance relationship most commonly arises by a

contract of insurance.

A contract of insurance exists where one person (the

‘insurer’) undertakes, in return for some agreed consideration (the ‘premium’), to pay another person (the ‘insured’ or ‘assured’) a sum of money, or provide an equivalent benefit, on the happening of a specified event, the occurrence or timing of which is uncertain: Prudential Insurance Co v Inland Revenue Cmrs [1904] 2 KB 658.

Why must my strata plan have insurance?

Section 83 SSMA: Owners corporation to insure building (1) The owners corporation for a strata scheme must insure the building and keep the building insured under a damage policy with an approved insurer in accordance with this section. (2) The building is to be insured for at least the value of the building indicated by the last valuation obtained for the building. (3) The damage policy is to be in the name of the owners corporation.

What is the ‘building’?

Section 81 SSMA: Building includes:

owners’ improvements and owners’ fixtures forming

part of the building other than paint, wallpaper and temporary wall, floor and ceiling coverings, but does not include:

fixtures removable by a lessee or sublessee at the

expiration of a tenancy

Owners’ improvements and fixtures

 Fixture: an item ‘affixed’ to the building (ie. not just resting by its

• wn weight) for the purpose of better use or enjoyment of the

building, as distinct from use or enjoyment of the item itself

 Includes: kitchen cupboards, built-in furniture, attached or built-in

light fittings and other such electrical appliances (such as stoves and water heaters), bathroom and kitchen fittings, marble, slate, tiles, vermiculite, plaster, plasterboard, parquet or rendered floor, wall and ceiling finishes, fixed carpet, floor coverings fixed with an adhesive (such as vinyl, cork or rubber), exterior awnings and blinds and intercom systems within a lot

Temporary wall, floor and ceiling coverings

Office of Fair Trading’s policy is that the following items are not included in the definition of ‘building’:

 paints, varnishes, stains and similar treatments  carpets and underlay  wallpaper, fabric or similar soft wall and ceiling finishes  coverings of vinyl, cork or similar material which are not fixed with an

adhesive to the floor

 curtains and blinds within a lot  light fittings or other electrical appliances that are not built-in and can be

removed without interference to the electrical wiring

What is a ‘damage policy’?

Section 82 SSMA: A damage policy is to provide for

 the rebuilding of the building or its replacement by a similar building in the

event of its destruction so that every part of the rebuilt building or the replacement building is in a condition no worse or no less extensive than that part or its condition when that part was new.

 the repair of damage to, or the restoration of the damaged portion of, the

building in the event of its being damaged but not destroyed, so that the repaired or restored portion, is in a condition no worse or no less extensive than that portion or its condition when that portion was new.

 the payment of expenses incurred in the removal of debris.  the remuneration of architects and other persons whose services are necessary

as an incident to the rebuilding, replacement, repair or restoration.

Other compulsory insurance

Section 87 SSMA: In addition to building insurance, the owners corporation must take out insurance:

 for Workers Compensation if required by law (if it has any employees)  in respect of damage to property, death or bodily injury for which the

• wners corporation could become liable in damages. Must be for not less

than $10 million for each event in respect of which any claim or claims may be made

 against any damages for which the owners corporation could become

liable by reason that, without fee or reward or any expectation of fee or reward, a person acting on behalf of the owners corporation does work in a building or on the common property in the strata scheme

Damage to property, death or bodily injury

 Not ‘public risk insurance’ (which would cover only third persons, but not

• wners). Covers property damage, death or bodily injury to owners,

tenants, invitees or any other person

 Key concept is ‘for which the owners corporation could become liable

in damages’

 Note: ‘damage’ = the injury or harm done; ‘damages’ = compensation for

damage suffered; a court-awarded sum of money which places the plaintiff in the position he or she would have occupied had the legal wrong not

• ccurred

 Must first establish that owners corporation has a legal liability to

another person for the loss or damage

Owners Corporation Liability

 Under the common law of the tort of negligence, a plaintiff must prove (on

the balance of probabilities) each of the elements of the action:

 the existence of a duty of care  breach of that duty by the defendant owners corporation  reasonably foreseeable damage as a consequence of the breach of duty

 Whether a defendant has breached a duty of care is determined by

considering the standard of care a reasonable person would have exercised in the circumstances, including taking reasonable precautions to avoid the risk of harm

Owners Corporation Liability

 Not every accident on or involving common property gives rise to liability

• n the part of the owners corporation

 Example: kitty litter flushed down the toilet by a tenant in a high-rise

apartment building causing a blockage of the main sewer downpipe and subsequent flooding of several apartments below as the raw sewerage backed up the pipes and began to flow out of the floor wastes …

 As the sewerage emanated from the common property sewerage pipes

• wned by the owners corporation, is the owners corporation liable for

damage to individual owners’ contents that are not part of the building?

Is the OC liable for the damage to owners’ and

• ccupants’ private property?

No.

 The owners corporation undoubtedly owes a duty of care to owners and to

• ccupants of the building

 However, even though the damage was caused by sewerage coming out of

common property pipes, there was no act or omission by the owners corporation that breached its duty of care

 Even if a plaintiff argued that the owners corporation was negligent in not

taking preventative steps, such as warning occupants of the risk of flushing kitty litter down the toilet, the act of the tenant would be an ‘intervening cause’, breaking the chain of causation between the OC’s

• mission and the damage (called a novus actus interveniens)

Optional Insurance

Section 88 SSMA:

 Any property in which the owners corporation has an insurable interest

(garden and indoor furniture, pot plants, garden tools, equipment etc)

 Insurance for damage to property, death or bodily injury for which an

executive committee member could become liable in damages due to an act or omission, committed or omitted in good faith, in performing the functions of office – commonly called ‘office bearers liability insurance’

 Insurance in respect of misappropriation of money or other property of

the owners corporation – commonly called ‘fidelity insurance’

Terrorism Insurance

 Terrorism insurance is available for residential buildings (at a price)  Mixed use buildings with < 20% commercial use and value < $50 million

classified by insurers as ‘residential’ property and able to access terrorism insurance; but ≥ 20% commercial use classified by insurers as ‘commercial’ property and those policies exclude terrorism

 Terrorism Insurance Act 2003 (Cth) establishes terrorism insurance scheme

for commercial property, including ‘mixed use’ buildings that are ‘predominantly’ for commercial use, ie. > 50% commercial use.

 Gap in the market for terrorism cover for mixed use high rise buildings

valued >$50 million and 20-50% commercial use

Other players in the game

 ‘insurance broker’ means a person who carries on the business of arranging

contracts of insurance, whether in Australia or elsewhere, as agent for intending insureds — Insurance Contracts Act 1984 (Cth) section 11(1)

 ‘authorised representative’ of a financial services licensee means a person

authorised in accordance with section 916A or 916B to provide a financial service

• r financial services on behalf of the licensee — Corporations Act 2001 (Cth)

section 761A

 ‘insurance distributor’ means, in relation to a financial services licensee, a

person who is authorised to provide financial services in relation to risk insurance products on behalf of the licensee — ASIC Class Order CO 05/1070

Authorised Representative

 Licensees may authorise a company or an individual as their authorised

representative to provide financial services on their behalf.

 An authorised representative can be given authorisation to give personal advice.  Authorised representatives must be notified and registered with ASIC.  They must display their AR number and who they are acting for on all business

• documentation. They must clearly display that they are not operating as a

principal.

 They must operate under a written agreement.  They must issue their own personalised FSG declaring who they act for and

remuneration received.

 A licensee must ensure their PI arrangements cover their authorised

representatives.

Insurance Distributor

 Class order 05/1070 allows for licensees to appoint distributors. The intention is

to create distribution channels with travel agents, car dealers, real estate agents and the like

 Distributor does not have to be registered with ASIC and they do not have to

give a personalised FSG

 A distributor cannot give any advice at all  The licensee is still responsible for the training, monitoring and supervision of

the distributor

 A distributor cannot give an oral FSG, hence a written FSG must be given prior

to or during the insurance discussion

 Licensees are responsible to ensure professional indemnity cover for the

distributor

Commissions

 Clause 3.4 of SCA standard Strata Management Agreement provides:

If item 6 is marked “Yes”, the agent may retain rebates, discounts and commissions paid to it by the providers of goods and services to the owners corporation described in the disclosure schedule C1 or as otherwise notified in writing to the owners corporation from time to time and agreed in writing by the owners corporation.

Conflicted remuneration

Corporations Act 2001 (Cth) section 963A: Conflicted remuneration means any benefit, whether monetary or non- monetary, given to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given: (a) could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients; or (b) could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative.

Conflicted remuneration

However, section 963B(1)(a) provides: (1) Despite section 963A, a monetary benefit given to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients is not conflicted remuneration in the circumstances set out in any of the following paragraphs: (a) the benefit is given to the licensee or representative solely in relation to a general insurance product;

OCN’s Position

 All conflicted remuneration, including commissions calculated by

reference to the insurance premium, should be prohibited in connection with any insurance acquired by an Owners Corporation.

 Strata managers’ loss of income from insurance commissions should be

replaced by an appropriate variation in the management fee negotiated between the strata manager and the Owners Corporation.

 Insurance brokers should be remunerated by a negotiated brokerage fee

(but that is not ‘conflicted remuneration’), payable by the Owners Corporation.

 Should be a two-year transition period into the new arrangements

Any questions ??