Owners Corporation Insurance & Commissions

Insurance Requirements Under the Owners Corporations Act

The Owners Corporations Act 2006 mandates that Owners Corporations must maintain certain insurance policies. These policies provide protection for common property and shared spaces within the property and are intended to ensure that repairs, damages, and liabilities are properly managed.

Compulsory Insurance Policies

Under the Owners Corporations Act 2006, the OC must hold two primary types of insurance:

1. Building Insurance:

   • This insurance must cover the reinstatement and replacement of the building, including the cost of demolition, removal of debris, and architectural fees.

      

2. Public Liability Insurance:

   • Public liability insurance must cover the OC for claims of personal injury or property damage that occur in relation to the common property. This type of insurance is essential in protecting the OC from potentially costly legal proceedings and compensation claims.

   • The minimum coverage required by law at the time of writing is $20 million.

Optional Insurance Policies

In addition to these compulsory insurance requirements, Owners Corporations can also elect to take out other types of insurance coverage based on their specific needs. Optional policies may include:

• Fidelity Guarantee Insurance: This covers the OC against fraudulent acts committed by committee members, employees, or agents of the OC, protecting against financial losses.

• Voluntary Workers Insurance: This provides cover for individuals who are performing unpaid work for the OC and sustain an injury during the course of that work.

• Office Bearers Liability Insurance: This protects committee members from legal claims made against them in their capacity as office bearers, safeguarding their personal assets in case of a dispute.

How Owners Can Obtain their Own Insurance

Although the Act mandates insurance for common property and public liability, there is a provision that allows owners within an OC to insure their own dwelling separately and not have the OC take out insurance. This does however require a unanimous resolution at a General Meeting of the OC and only applies within an Owners Corporation with multiple single dwellings – think of an Owners Corporation that has five villa style lots with a shared driveway. It should be noted that this is a very uncommon scenario.

The Unanimous Resolution Requirement

For an OC to self-insure, it must first obtain a unanimous resolution from all lot owners. This means that 100% of the owners must agree to the self-insurance decision. It can often be difficult to achieve such agreement, particularly in larger OCs where there are many owners with varying opinions and financial situations.

The Process of Insurance Renewal

Managing the insurance needs of an Owners Corporation is an ongoing process. Each year, the OC must review its insurance policies to ensure they remain compliant with legal requirements and provide adequate protection for the property and its owners.

Engaging a Broker

In most cases, the OC Manager will engage an insurance broker to assist in the renewal process. An insurance broker is a specialist in the field of insurance who works on behalf of the OC to secure the best coverage and premium rates. They will:

1. Review the Existing Coverage: The broker will review the current insurance policies to ensure that the building and public liability insurance are adequate and compliant with legal requirements.

2. Obtain Quotes from Insurers: The broker will seek quotes from multiple insurance providers, ensuring that the OC has a range of options for its coverage.

3. Negotiate Terms: Brokers will negotiate on behalf of the OC to secure the best possible premium rates and policy terms.

4. Recommend a Policy: Based on their expertise, the broker will recommend the most suitable insurance policy to the OC, considering both the cost and the coverage provided.

Timing and Process

The insurance renewal process typically starts two months before the policy expiration date. This allows sufficient time to gather quotes, negotiate terms, and present recommendations to the OC for a final decision. Although its not uncommon for a Broker to provide quotes just a few days before the renewal date leaving the OC Committee to quickly review and approve an option provided – not the best outcome.

Insurance Commission: How Brokers Get Paid

When an insurance broker is engaged to handle the OC’s insurance, it’s important to understand how they are compensated. Typically, brokers are paid a commission by the insurance company from which the policy is purchased. This commission is a percentage of the total premium and is built into the price of the insurance policy. The Broker may also charge a “Broker Fee” which can be on top of the Commission or in lieu of receiving Commission.

Transparency and Disclosure

In many jurisdictions, including Victoria, brokers are required to disclose the amount of commission they will receive for brokering the insurance deal. This ensures transparency and allows the OC to understand how much of the premium is going towards broker commissions. However in a recent report by the Insurance Brokers Code Compliance Committee (2023 Annual Data Report) it found that many Brokers failed to adequately disclose Commissions they have received (and this is voluntarily reported) which leaves some room for questioning if the Broker your OC uses doesn’t list Commission received.

Potential Conflicts of Interest

While brokers play a valuable role in securing insurance coverage for Owners Corporations, it’s important to note that their commission structure can sometimes lead to a conflict of interest. Since brokers are paid based on the premium, they may have an incentive to recommend more expensive policies to increase their commission. It is the responsibility of the OC committee to ensure that the broker’s recommendations align with the OC’s best interests and are not unnecessarily costly.

Alternative Fee Structures

Some brokers may offer alternative fee structures, such as a flat fee for their services, rather than a commission-based model. This can help eliminate any potential conflicts of interest, as the broker is paid a set amount regardless of the premium cost. OCs should discuss these options with their broker to determine which arrangement works best for their needs.

OC Manager Commissions

In addition to brokers receiving commissions from insurers, Owners Corporation (OC) Managers may also receive a portion of the commission that the broker earns from the insurance policy. This practice is common, as OC Managers often play a role in facilitating the insurance process, coordinating with the broker, and managing the renewal on behalf of the Owners Corporation. While this commission sharing is legal and standard in the industry, it is important for OC Managers to disclose any financial benefits they receive from insurance arrangements to ensure transparency with the OC. Owners Corporations should be aware of these commission arrangements and ensure that the OC Manager’s recommendations are made in the best interests of the OC, rather than being influenced by financial incentives. Regularly reviewing and discussing these commissions with the OC Manager can help maintain trust and avoid potential conflicts of interest.

In Summary

Insurance is a vital component of managing an Owners Corporation. The Owners Corporations Act 2006 sets out clear requirements for building and public liability insurance, and most OCs engage brokers to help them navigate the complexities of insurance renewal.

While there is an option for owners to obtain their own insurance through a unanimous resolution, this path is rarely taken due to the limitations of obtaining such cover and the costs involved. Instead, OCs typically rely on brokers to ensure they have the right coverage in place to protect the common property and the interests of all owners.

Understanding the insurance renewal process, the role of brokers, and how commissions are structured can help Owners Corporations make informed decisions and ensure they are getting the best possible coverage at a fair price. By maintaining transparency and keeping the lines of communication open, OCs can safeguard their assets while keeping insurance costs under control.