How Do Building Defects Impact Strata Insurance In Australia?

Building defects are one of the biggest challenges facing strata buildings in Australia. From minor cracks to major structural issues, defects can compromise safety, drive up repair costs, and can impact the building’s insurance coverage.

Research highlights just how widespread the problem has become. The 2023 UNSW Strata Defects Survey found that 53% of strata buildings had serious defects in common property — a sharp increase from 39% in 2021. Waterproofing and fire safety remain the most common problem areas, together making up nearly two-thirds of all reported defects.

For owners’ corporations and strata committees, this creates two pressing questions:

1. Will defects impact the building’s ability to be insured?

2. What information do insurers need before offering coverage?
   
   

In this article, we’ll explain how building defects may impact strata insurance, how insurers assess the severity of issues, and what steps owners can take to protect both their building and their financial position.

What are the most common building defects?

Building defects are faults or flaws in a building’s design, construction, or maintenance. They can range from minor cosmetic issues to major structural concerns.

Some examples of major defects could include:

• Structural integrity issues 
• Compromised or insufficient fire protection
• Waterproofing
• Roof/rainwater disposal
• Safety hazards
• Electrical/mechanical/ventilation

In 2023, waterproofing and fire safety defects were the most common, accounting for 42% and 24% of all defects respectively.

Building Defects: Key Insurance Factors

In most cases, strata insurance does not cover building defects themselves. Defects are typically considered the responsibility of the builder, developer, or the owners’ corporation, depending on the age of the building and the warranty period.

However, the presence of defects can still impact insurance coverage in two important ways:

1. Exclusions for known or concealed defects

   • Most policies contain exclusions stating that insurers will not cover the cost of repairing construction defects.

   • This means insurers generally won’t pay for the rectification itself (e.g. fixing faulty waterproofing or replacing defective balustrades).

2. Flow-on effects on claims and premiums

   • While defects aren’t covered directly, they can create conditions that lead to an insurance claim (for example, water damage caused by failed waterproofing).

   • If the defect is proven to have caused the damage, the insurer may deny the claim, or apply stricter terms such as higher premiums and excesses.

The key factor is proactivity. Insurers look more favourably on buildings where defects have been identified, documented, and are being addressed through remedial action. A body corporate that takes no steps to rectify issues is far more likely to face exclusions, reduced coverage, or even difficulty obtaining insurance at all.

How do Insurers Assess the Severity of Building Defects?

Underwriters classify defects into minor, major, or severe categories:

Minor 

Minor defects that remain unaddressed have the ability to turn into major defects therefore we still expect the insured to have an action plan in place. Minor defects may still impact the premium and/or a change in the excess.

Examples:

• Non-structural/hairline cracks
• Drummy/loose tiles that have not lifted and are not in common or high pedestrian traffic areas like walkways or stairwells.
• Minor & short-term efflorescence – the process where moisture moves through a masonry, leaving a white staining effect on the outer surface

Major 

These defects are more serious in nature and significantly increase the insurer’s exposure to property and/or liability claims. The body corporate’s attitude to remedial action and actions taken to repair/make safe is important in the decision to insure or not. Insurance may be offered but with an increased premium and a higher than standard excess applied. 

Some examples of major defects could include:

• Structural issues: Issues identified that can affect the structural integrity of the building such as basement cracking or others identified as requiring remedial action within the next couple of years such as concrete cancer in balconies or suspended footbridges, unstable retaining or boundary walls, sagging roofs, etc.
• Fire defects that exacerbate the spread of fire and compromise life safety, such as faulty fire dampers, unsealed penetrations horizontally and vertically between different living spaces and faulty fire suppression systems, such as sprinklers.
• Balcony or roof top balustrading: Balustrading may be unsafe due to gradual deterioration or poor workmanship. In older buildings, remedial works may have to include new balustrading installed to comply with current building codes.
• Water penetration: resulting from failed roof membranes, failed or complete lack of balcony waterproofing, inadequate guttering/downpipes or leaking shower bases, etc.

Severe

This is when the defects create such a significant exposure that any premium loading or high excess structure would be deemed insufficient to cover the risk. It is often described as a ‘hard to place risk’, where a standard strata insurance policy is not appropriate and special insurance terms are required as the potential exposure is too significant.

An example of a hard to place risk could be a building with a number of major defects, including structural elements that may lead to imminent collapse of building components, combined with a body corporate who are inactive in rectifying the defects.  

Does the Age of a Building Affect Insurance Coverage?

There are valid reasons why there is differentiation between new builds and existing/older buildings and how this will influence the cover, premium and excess offered.

Some circumstances unique to new builds may include:

• A body corporate may be more inclined to rectify defects given the defect warranty period that applies under legislation and the legal avenues to get the builder/developer to pay (note warranty periods and times to lodge legal action vary between states and territories).
• Poor maintenance is rarely an issue as the building is new, so defects are more likely associated with poor workmanship rather than wear and tear.

Conversely, some circumstances more in keeping with existing builds may include:

• A body corporate may delay works as statutory warranty periods have long expired and, therefore, all costs associated with rectification are to be borne by all lot owners.
• A lack of general maintenance has led to gradual deterioration of the building, leading to rotting timbers and potential concrete spalling due to steel elements being exposed to long-term water ingress.
• Key building components reaching the end of their serviceable life, such as waterproofing membranes, roof structures, etc.

What documents do insurers need to evaluate building defects?

Insurers require detailed, accurate information about building defects before they can make a decision on coverage. This ensures the risk is properly assessed and helps determine whether insurance can be offered, and on what terms.

Key information insurers usually request includes:

• Professional dilapidation reports detailing the extent and severity of defects commissioned by the insured if not available or recent enough to meet the insurer’s criteria.
• Building contracts outlining remedial works and associated costs will need to be provided
• Minutes of Body Corporate meetings documenting decisions regarding defect rectification, contextual discussions around the issues, funding arrangements etc.
• Specific details about the defect/s, its impact, and proposed remedies from industry experts or repairers.

Please download the Defect and cladding supplementary information PDF here.

How Can Owners Improve Insurance Outcomes if Their Building Has Defects?

While insurers generally exclude the cost of repairing defects, owners’ corporations and strata committees can still take steps to improve their chances of securing insurance on reasonable terms.

Best practices include:

1. Commission a defects report
   Arrange a professional inspection by a suitably qualified expert and keep it updated to show insurers that you are aware of and actively managing the risks.

2. Document decisions clearly
   Record discussions and resolutions about defect rectification in Body Corporate minutes. Transparency demonstrates accountability.

3. Prepare a remedial action plan
   Insurers look more favourably on buildings with formal timelines and funding strategies in place for repairs.

4. Provide supporting contracts and estimates
   Share signed builder contracts, engineering assessments, and cost breakdowns to prove action is underway.

5. Engage proactively with your insurer
   Demonstrating commitment to rectification can be the difference between being offered cover (even with conditions) or being classified as a “hard-to-place” risk.

Proactivity matters. Insurers want to see that defects are being managed, not ignored. By showing progress, owners can maintain coverage and minimise the risk of declined claims or inflated premiums.

Building Defects and Strata Insurance FAQs

1. What are building defects in a strata property?
Building defects are faults or flaws in a building’s design, construction, or maintenance. They range from minor issues (like hairline cracks) to major structural problems (such as failed waterproofing or fire safety systems).

2. Are building defects covered by strata insurance?
No — strata insurance generally does not cover the cost of fixing defects themselves. However, defects can affect whether insurers will offer coverage, at what price, and under what terms.

3. Can an insurance claim be denied because of building defects?
Yes. If a defect directly causes damage (e.g., water ingress from faulty waterproofing), insurers may deny the claim unless the issue is already being addressed through remedial works.

4. How do insurers assess the severity of defects?
Insurers classify defects as minor, major, or severe. Minor defects may only influence premiums, while severe defects could make the building a “hard-to-place risk” requiring special insurance terms.

5. Does the age of a building affect insurance coverage for defects?
Yes. New buildings may still be within warranty periods, making rectification easier. Older buildings often face higher risks due to expired warranties, poor maintenance, and end-of-life building components.

6. What documents do insurers need to evaluate defects?
Insurers typically require: defects reports, remedial work contracts, Body Corporate meeting minutes, and expert assessments outlining the issue and proposed repairs.

7. Can a building with serious defects still get insurance?
They are assessed on a case-by-case basis and if terms are offered, it is  usually with higher premiums, increased excesses, or restricted cover. In some cases, special insurance arrangements may be required.

8. What are the most common building defects in strata buildings?
According to the 2023 UNSW Strata Defects Survey, waterproofing issues (42%) and fire safety system failures (24%) are the most common.

9. How can owners improve insurance outcomes if their building has defects?
Owners can improve outcomes by commissioning professional reports, documenting remedial plans, signing repair contracts, and engaging proactively with their insurer.

10. What happens if defects are ignored by the Body Corporate?
If defects are left unaddressed, insurers may reduce coverage, significantly increase premiums, or refuse insurance altogether. Proactive management is essential.

In conclusion, addressing building defects proactively is essential for maximising insurance coverage and availability and minimising financial risks. By providing thorough information and taking decisive action, owners can navigate the complexities of insuring buildings with defects effectively.

Does your building have defects and you’re not sure if it will be covered by insurance? Reach out to our expert team today to have a chat about your liability and risk.

CHU Underwriting Agencies

^1.  UNSW’s City Futures Research Centre, 2018, Defects in Strata: Research Overview

Important note: CHU Underwriting Agencies Pty Ltd (ABN 18 001 580 070, AFS Licence No: 243261) acts under a binding authority as agent of the insurer QBE Insurance (Australia) Limited (ABN 78 003 191 035, AFS Licence No: 239545). Any advice in this article is general advice only and has been prepared without taking into account your objectives, financial situation or needs.