How defects are handled in residential strata insurance
Date Published: 19 Apr 2023, updated 19 September 2024
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 the rising number of defects that have led to significant distress for affected residents and owners.
It is important to note, that while defects may be excluded from the property section of the policy, the exposure may 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, the exposure under liability coverage remains. 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 property 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.
Understanding Common Types of Strata Defects
Building defects can arise in both new and existing strata properties which can significantly impact your finances and the comfort and safety of your tenants and guests. These defects can range from minor aesthetic issues to major structural damage. To maintain your property value and peace of mind, owners must be aware of the common building defects to occur in strata properties:
1. Structural defects
These include issues with the building’s foundation, walls, and roofing. Structural defects may arise from poor construction practices or age, often resulting in wall cracks, sunken floors, peeling paint, and compromised load-bearing walls.
2. Waterproofing
Inadequate waterproofing can lead to water leaks, rot, mould, blistering paint, and risen/cracked walls and floors. This is especially common in wet areas such as bathrooms, balconies/patios, and roofs.
3. Cladding
Non-compliant lightweight cladding, including materials like aluminium composite panels (ACP) and expanded polystyrene (EPS), is a frequent concern in strata buildings. This type of cladding may significantly increase the risk of rapid fire spread within the building.
4. Electrical
Faulty wiring, outdated electrical systems, overloaded circuits, and broken switches can lead to power outages, electrical shocks, and fires – all of which can cause significant damage to the building’s structure and endanger tenants.
5. Plumbing
Common plumbing and drainage issues like blocked drains, leaking pipes, water pressure issues, and broken fixtures can lead to water damage, mould growth, and structural damage. If these issues are left unaddressed, the risk of costly repairs increases, along with potential health hazards due to damp conditions and mould.
Tips for Preventing Defects in New Strata Developments
While building defects are often seen as inevitable in strata properties, adopting a proactive approach can significantly reduce the likelihood of defects in a new strata development.
Thorough inspections during construction phase
Thorough inspections at each stage of the construction phase are essential to mitigate any potential defects early, ensuring they are addressed before they become costly problems. Regular inspections by qualified professionals can identify issues such as poor workmanship, non-compliant materials, or design flaws. This will ensure that building standards are met and potential defects are minimised.
Role of developers and builders in defect prevention
Developers should work with experienced and reputable builders and contractors. These professionals are responsible for overseeing the quality of materials used and ensuring that construction practices adhere to industry standards. Maintaining clear communication between each party will help to address any concerns and reduce the likelihood of defects occurring in your new strata development.
Finding a reliable contractor
Selecting reliable contractors is one of the most important steps in preventing defects. Developers and builders should vet contractors by checking their credentials and cross-checking their Australian Business Number (ABN), reviewing past projects, and checking their references/customer reviews. Look for contractors who are licensed, insured, and have a reputation for high-quality workmanship in strata developments.
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.
