While the strata insurance market is facing a range of challenges, including reduced insurance capacity, trades and material shortages, inflation, and longer open claim lifespans, a new challenge is growing. We are seeing far more buildings with defects and maintenance issues and insurers and underwriters are struggling to provide solutions for the volume of requests. In fact, the 2021 Construct NSW – Improving Consumer Confidence report revealed 39% of strata buildings in the state had some form of serious defect, with only 15% reported to fair trading.

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GOVERNMENT SCHEMES TARGETING DEFECTS

State governments, particularly NSW, have introduced schemes to combat building defects, a lack of reporting, and inaction. In NSW, the following initiatives are currently in place:

• Project Remediate: an opt-in program to replace flammable cladding for eligible Class 2 residential apartment buildings. It offers a 10-year interest-free loan with financial support for eligible building owners.
• Defects Liability Scheme: this is set to replace the Strata Building Bond and Inspections Scheme and it will see owners have protection for up to 10 years against defects.

We welcome the government’s push to further enhance standards in the construction industry and protect owners against the costs associated with defects. However, they can often lead to delays in rectification as matters either move through the schemes or through the legal system at a reduced speed.

HOW ARE INSURERS RESPONDING TO DELAYS?

While owners’ corporations take up the help and advice offered to them by state governments, it is common to see insurers refuse to quote insurance renewals until defects and legal proceedings are fully resolved. Generally, an insurance broker works closely with the existing insurer to negotiate continuity of insurance cover.

There is no standard response from insurers on premiums for buildings with defects. We have seen situations where the existing insurer has not issued renewal terms based on a lack of defect resolution. The main factor behind an insurer’s willingness to insure a building is the severity of the defect/s. These include:

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1. Cracking and structural integrity of the building
2. Water ingress risks
3. Flammable cladding fire risks
4. Drainage and plumbing problems
5. Glass panel defects
6. The amount of time defects have been unresolved and the risk of further building deterioration

Insurers will be influenced by how proactive and invested the owners are in having the defects resolved. If the defects are severe and delays occur during the rectification process, insurers are likely to increase the standard insurance excesses to $10,000 or $20,000 (or more) and apply special excesses depending on the risk that the defect may present in the event of fire, water ingress or bodily injury. Insurers may also add exclusions onto policy renewals to prevent future losses. 

OPTIMISING YOUR REQUEST FOR INSURANCE

Here are some important considerations to keep in mind when requesting insurance for a building with defects:

• Start out strong: Invest in an insurance risk engineering survey. The insurance risk engineer will report on the overall building quality and highlight positive factors such as functional fire protection, whether structural issues pose any imminent or distant danger, as well as risk recommendations (e.g., improvements to fire protection or prevention of bodily injuries).
• Prioritise building rectification: Remind owners’ corporations that delays can occur when engaging in legal proceedings against builders or developers or when participating in government initiatives. This does not automatically remove the building’s defect risk and the building insurance premium will reflect the current insurance market conditions. A premium loading will be incurred if defects remain unresolved.
• Prevention matters: Sometimes, professional recommendations to prevent further loss or damage arise during the investigation of defects. These should be undertaken as a priority because it sends a positive message to insurers.‍
• Keep a record: Maintain high-level notes and details on proceedings throughout the defect rectification process and regularly update your insurance broker on progress, no matter how small. We can use this to demonstrate that the process is moving as quickly as reasonably possible to the insurer.

We are here to advise and support you. Feel free to reach out at any time to discuss your insurance needs.

Teighan Carr

Head of Client Services – Strata & Real Estate

teighan.carr@honan.com.au

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