How do they respond in the event of a claim?
Owners’ corporations and strata managers are generally aware that a strata policy includes mandatory public liability (PL) cover, and that legal defence expenses (LDE) cover is a separate, optional cover. However, there is often confusion about which policy applies when an owners' corporation is served with a letter of demand or other legal notice(s).In this article, we address the key differences between PL cover and LDE cover, explain how insurers generally assess claims coverage against both, and share some helpful tips on managing litigated claims.
Which cover will respond? (i.e., nature of the claim)
PL cover, also known as general liability cover, refers to claims made against an insured owners' corporation by a third party that is seeking compensation for either property damage or personal injury. This third-party claimant can be anyone other than the owners' corporation, including lot owners', tenants, and even employees/contractors working for the owners' corporation.
Typical PL claims may include claims from occupants in a residential strata building seeking compensation for personal injury or damage to their personal property, accompanied by allegations that the owners' corporation is responsible for their loss.
LDE cover responds to most other types of litigation and legal actions taken against the owners' corporation and relates to the management of owners' corporation affairs. This can include ownership of common property, disputes falling under consumer protection legislation, and disputes between the owners' corporation and employees, such as caretakers and building managers.
How will each cover respond?
Owners' corporations must notify their insurers as soon as they are aware of legal threats against them, even if formal demands or formal legal actions are yet to be made.
1. Notification
PL cover responds to a claim on an occurrence basis. This means the date when the relevant incident occurred is taken as the appropriate date of loss. This date determines which period of insurance the incident falls under. An insurer may sometimes claim prejudice and limit their liability towards the insured's loss/costs in the event of late notification.
LDE cover responds to a claim on a claims-made basis. This means that the date when an insured owners' corporation receives summons or notice of the third party’s intention to initiate legal proceedings will be taken as the appropriate date of loss. However, if it is found the owners' corporation was made aware of such intention at an earlier date, then that earlier date may be considered the correct date of loss. Late notification can have significant negative consequences in terms of cover under LDE.
2. Limit of cover
Under both covers, an insurer can pay up to the policy limit available to an insured owners' corporation. The policy limit of each cover is specified on the certificate of currency and policy schedule.
Under PL cover, insurers will pay any compensation that the insured is legally required to pay, including settlement awards, court-ordered damages, and costs. If a matter is litigated, insurers will also pay for legal defence costs and court-ordered costs.
Under LDE cover, as suggested by the term itself, insurers will only pay for legal defence expenses incurred and reasonable investigation/expert fees incurred with the insurer’s written consent. However, insurers will not pay for any compensation ordered by a court/tribunal or negotiated between parties.
3. Critical information insurers require in claim assessment and management
PL cover is generally triggered when the owners' corporation receives a demand from the third-party claimant including the reasons why they are holding the owners' corporation responsible for compensation for personal injury or property damage. Generally, insurers will not take active management until a demand against the owners' corporation is received.
Once insurers have granted indemnity to the owners' corporation under PL cover, insurers will take control of the matter and correspond with the third-party claimant directly. The insurers will examine whether the owners' corporation can be held legally responsible for the claimed loss. If a matter is complex, insurers may appoint factual investigators, liability investigators, or even lawyers with whom the owners' corporation is required to co-operate and provide any relevant information as requested.
The information an owners' corporation is required to provide is different when a claim is considered under LDE cover. The owners' corporation can appoint its own lawyers with the insurer’s written consent. To determine policy coverage, insurers will usually require the owners' corporation to obtain from its lawyers both of the following:
- An estimate as to total legal costs; and
- Defence strategy and advice as to defence prospects.
If it is not economically viable to defend a claim OR the prospect of successful defence is low, insurers will likely deny coverage under LDE cover.
Useful tips
Neither PL cover nor LDE cover will respond to a claim made by the owners' corporation against others. However, if a third party makes a counter claim in a matter brought by the owners' corporation, there is a possibility that the cost to defend the counter claim may be covered under the PL cover or LDE cover.
It is important to understand what information insurers will require to consider coverage in the event of a PL or LDE claim. Gathering relevant information as quickly as possible can assist insurers in deciding on a coverage position faster. For example, insurers will usually request the following information from the owners' corporation in the event of a PL claim:
- Records of a past similar incident, if relevant
- CCTV footage, if available
- Maintenance programs and records, depending on the issue
- Proof of mitigation works undertaken, if relevant.
Insurers are mindful of incurring legal costs under PL cover and LDE cover. For PL claims, insurers will likely insist on appointing their preferred lawyers. For LDE claims, although an owners' corporation can appoint its own lawyers, written consent must be obtained from the insurers beforehand.
This publication is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Honan shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modelling, analytics, or projections are subject to inherent uncertainty, and any analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change.
