How defects are handled in residential strata insurance

Building defects are a common issue across Australia for apartment owners and strata managers. In fact, according to a Deakin University report, building defects are considered inevitable, with common defects including design flaws, plumbing and drainage issues, faulty wiring, unsafe cladding and defective roof coverings. The report examined that the rising number of defects has led to significant distress in affected residents and owners.  

It is important to note, that while defects may be excluded from the property section of the policy, it may not carry over to the liability section of the policy.

The good news is… buildings with defects are still insurable – if insureds act proactively.

Residential strata insurance policies typically have exclusions when it comes to covering buildings with defects. But that doesn't automatically mean insurers have no exposure to potential claims. Insurers will evaluate the severity of the defects, the age of the building, any pending legal action, and any plans for remediation of these defects when determining the risk and level of insurance they will undertake, as well as the premium and excess.

Known defects may be excluded under the property section of the policy, however, these exclusions may not carry over to liability coverage. In the event of a building disaster that injures or causes death, the bulk of the claim may likely come from the liability section of the policy. While exclusions for defects may apply under the property section, unless the insurer can categorically prove the exclusions apply in the event of a claim, there is potential for the insurer to pay claims that may be attributable to defects.

Does this mean that strata property owners can ignore defects?

The exposure of accepting risks with defects will be determined by the insurer and if accepted will most likely come with a higher premium and excesses.

Strata property owners are strongly advised to address the defects in their buildings, either immediately, post construction, or as soon as they are identified (hopefully within the warranty period).

At CHU, we recommend owners work with reputable suppliers who are committed to rectifying the defects and maintaining their good reputation.  Remediating defects as they come to light will reduce the risk of these becoming the cause of larger issues down the track.

Owners and strata managers must take reasonable care to provide accurate information about the known defects and have a duty to not to misrepresent the details of a building they are seeking to insure.

If the owners have been as proactive as possible, by making attempts or establishing plans to rectify the issues (including make safe works, where required), an insurer will look upon this more favourably.

Extraordinary circumstances warrant extraordinary outcomes.

In some cases, especially in extraordinary circumstances, outcomes can vary – here are some examples of cases we know of:

The collapse of the Champlain Towers South complex in Miami in June 2021 was a tragic incident that resulted in the loss of 98 lives. A consultant had urged the managers of the building to repair the cracked columns, crumbling concrete, and poor waterproofing three years before the collapse. However, the repairs were delayed, and the building eventually collapsed before the work could be completed.

Following the tragedy, investigations revealed that the building had persistent water leaks and had been exposed to corrosive salt air for years. The exact cause of the collapse is still under investigation.

In June 2022, a settlement was reached in the case, with a total payout of $1.02 billion to be carried across the insurance carriers for the 31 entities involved. The building's insurer contributed towards the settlement.

According to Mark Friedlander, a spokesperson for the Insurance Information Institute, the insurers' decision to pay their portion of the settlement was a business decision made to avoid the time, expense, and inconvenience of litigation. . While the insurers involved have settled, they have denied any wrongdoing or liability in the case. He also noted that insurers would not volunteer to pay such a large amount of money if they did not believe they had some liability in the case.

The settlement in the Champlain Towers South case highlights the importance of building maintenance and prompt repairs in ensuring public safety. It also underscores the role of insurance in mitigating the financial risks associated with liability claims arising from such incidents.

There are examples within Australia as well. Some of which are still to be determined, such as Opal Tower, Mascot Towers where litigation is still taking place between owners, developers and insurers.

It's important to note that every strata insurance claim is unique, and the outcome of each claim will depend on the specific circumstances of the case.

To ensure the best insurance outcome, the most important thing for owners of a building with defects is to provide as much information as possible to the insurer, including the nature and severity of the defects, and any plans for remediation. The insurer may also require additional safety measures to be put in place, such as fire safety equipment or safety barriers until such time as the defect is addressed.

Every insurer has a different view on the level of risk they can accept.

Steve Tchepak, Head of Underwriting at CHU commented “Our client base is looking to CHU as a market leader for help wherever possible - so whilst conversations may be frustrating from time to time, we always put our customers at the heart of every decision, which includes our duty of care. Insureds need to understand that the exposures defects present are real, and this is why we assess defects the way we do.”

If you have a client with known building defects or you would like to discuss our policies further, please get in touch with our underwriting team or your CHU BDM.