Cyclone Insurance North Queensland
Insurance costs in North Queensland have risen at a rate which has placed an unreasonable burden on bodies corporate. In fact, in some cases premiums are twenty times higher than that of insurance in other parts of Australia
Forecasters are anticipating a higher frequency and severity of cyclone events coming into the next season due to La Nina weather patterns. This has made insurance arguably more important in the coming cyclone season than in past seasons, despite the higher expenses related to it.
With the withdrawal of a number of key insurers, and other insurers changing guidelines to reduce their appetite for insuring buildings in North Queensland, remaining compliant with legislative requirements to have insurance for full replacement value is becoming increasingly difficult for body corporates.
There are a number of aspects in relation to self-insurance to consider so, we will focus on The Body Corporate and Community Management (Standard Module) Regulation 2008 applying. This new regulation will come into effect from March 2021 with similar provisions applying. While this article provides opinion on certain provisions of the legislation, the commissioner and ultimately judges have a higher authority on any determination or interpretation of legislation.
Ways of “Self Insuring”
There are several ways self-insuring can be done. It can mean the body corporate:
- takes out a policy with a very high cyclone excess;
- takes out a policy with a cyclone exclusion;
- does not take out insurance at all.
We will explore these three ways of self-insuring in further detail.
High Cyclone Excess
One consideration for the body corporate are High cyclone excesses.
Insuring a $5,000,000 building and electing say a $1,000,000 or even $5,000,000 cyclone excess may comply with section 179 to insure the building for damage for the reinstatement of property to its condition when new.
However, section 184(2) requires that the excess does not impose an unreasonable burden on owners of individual lots.
An owner may suggest that the election of a $1,000,000 or higher cyclone excess, when a much lower excess option was available, would create an unreasonable burden on the owner, especially if there was a claim affecting only one lot and the lot owner was responsible for the excess.
In order to reduce the burden on a lot owner/s, the body corporate may choose to pass a motion at a committee or general meeting that in effect means the body corporate pays the excess for all cyclone claims, given all owners are benefiting from the lower premiums. This then may avoid an instance where one lot owner becomes responsible.
It may also be argued that say a $1,000,000 cyclone excess paid for by the body corporate still may create an unreasonable burden on owners - for example, a $1,000,000 excess paid for by 20 units would cost $50,000 per person. Likewise, if say only one or two units suffered severe damage of say $100,000 each and this was below the excess, it may be argued the excess may create an unreasonable burden on owners. The body corporate is not able to pay for repairs inside an owners lot.
Legislation has so far remained silent on any consideration the burden of excessive premiums is having on owners.
As to body corporate commissioner decisions, we were unable to find any reference material on this particular point.
Section 179 and 176 of Standard Module Regulation requires cover for “storm damage” to be insured by the policy. Storm damage is not just limited to cyclones, for example, other types of storms can include (but not limited to) hail, thunderstorm, heavy rain/winds etc.
So, is insuring for storm damage but specifically excluding the event of cyclone compliant?
The legislation is not quite clear on whether the policy must cover all types of storm without the possibility for certain exclusions (such as cyclone category 1-5). In this case, no insurance policy in Australia would comply with the requirements in regulation if certain events could not be excluded.
Regulation states that damage, for coverage under strata insurance must include (among other things) “...earthquake, explosion, fire, lightning, storm, tempest and water damage...”. Below are the common exclusions seen in strata insurance policies today where compliance would be an issue if they were required to insure these events in all circumstances, without the ability to exclude certain events.
- Action from the sea, high water or tidal wave (water damage),
- Flood (water damage),
- Where the building is unoccupied for more than sixty days (all types of events),
- Damage due to warlike activities (fire, explosion),
- Damage caused intentionally (fire).
- Damage indirectly caused by faulty workmanship (all events).
We believe there may be a fair argument to suggest that a policy covering storm damage but excluding damage caused by cyclone category 1-5 can comply with the act, factoring in other examples stated above.
We would be interested to hear the commissioners position on this.
Alternate or No Insurance
Regulation requires that the body corporate must, among other things, insure for the reinstatement of property to its condition when new for full replacement value.
If a body corporate cannot comply with this requirement, section 179(4) provides a substitute where the commissioner may authorise a form of “alternative” insurance.
Having no cover whatsoever is a contravention of the act and not considered “alternative” insurance. However, the commissioner can authorise alternate cover if they are satisfied that what is being proposed gives cover that is as close as practicable to the requirements in the act. For example, the commissioner has approved a combined cover amount of 70% of the full replacement value – in that case, the commissioner determined having some cover was better than no cover at all.
Self-insurance does not constitute alternative insurance and cannot be approved by the Commissioner.The only way to have “no insurance” whatsoever would be for the body corporate to disregard the requirements under the BCCM Act – this could expose the body corporate to fines and penalties and expose the office bearers to legal negligence claims.
If you are considering alternative insurance we recommend reading Practice Directions (no. 28) which provides more guidance on an application for alternative insurance.
If the body corporate does end up considering a form of self-insurance for the risk of cyclone, the body corporate should place strong consideration into managing its exposure to cyclone damage.
We recommend consideration is placed into contacting James Cook University for a Cyclone Resilience Report.
This FREE report can be ordered by filling the form https://stp1.hpc.jcu.edu.au/#/ - the report gives practical measures bodies corporate can consider in relation to making their building more resilient to cyclone.
This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Shandit Pty Ltd T/as Strata Insurance Solutions strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances and the specific coverage afforded under their policy wording. Shandit Pty Ltd T/As Strata Insurance Solutions is a Corporate Authorised Representative (No. 404246) of Insurance Advisernet Australia AFSL No 240549, ABN 15 003 886 687.