Building Defects, Maintenance & Insurance

Professionally managing Defects and Maintenance & Repairs now take up a considerable portion of Strata Manager’s time, at an increasing cost to Owners [1]. Strata Community Insurance held an educational forum on this topic around the country during November 2016, with some 300+ attendees. We summarise a few of the key observations within this note.

Over the past fifteen years there has been a significant increase in non-compliant building practices (i.e. works not meeting the Building Code), and more recently non – compliant building products (for example the much published imported Cladding, fitted to buildings such as Lacrosse in Melbourne Docklands). Coincidently, this timing appears to correlate with the move to privatise certification across the country (i.e. away from councils and other public authorities). Insurers are seeing an increase in issues such as inadequate or defective waterproofing, poor design of balconies and poor maintenance of roofs, downpipes, gutters and drains during the claims management process.

Owners have a statutory duty to maintain and repair common property, regardless of whether such damage is a defect, has been caused by a defect, wear and tear, or a combination of factors. Owners need to rectify these promptly, as Insurers will not pick up any subsequent loss or damage caused by the defect or maintenance issue until it’s been repaired. Importantly, there is a statutory duty on Owners (and Strata Managers as their agent) to disclose information to insurers relevant to their decision to accept and scope out the terms of a risk. Defects and other maintenance items that remain unrepaired call fall into this category, and your Insurer/Broker ought to be notified.

If the defect is due to general wear and tear, the owners will require funds to rectify promptly, and well provisioned reserve funds support such contingencies. Though the law associated with Defects can entitle Owners to claim from the developer/builder, economics may dictate it’s more pragmatic to repair at Owners costs, rather than incur the delays in making a defects claim/rectification and associated legal costs.

Strata Managers are delegated responsibilities for repairs, maintenance and insurance as part of their Management Agreement, and though the law puts the obligation on Owners, the Management Agreement transfers this obligation over to Strata Managers as their agent. Therefore, Strata Management companies face increasing exposures from Owners related to the perceived management of these issues. Risk management of these contingencies through tighter business process is more important now than ever. Consumer expectations are rising and you need to take precautionary steps to protect yourself and your business. Ultimately; if you can lower exposures for Owners, then you lower your own risk and any possible damage to your business and reputation.

A risk process: Embed a process that proves you have managed all your professional obligations and allows you to demonstrate to owners that they had all reasonable information to make decisions.

A good practice could include the following tools:

  • A defects register, with a final defects audit prior to the expiry of statutory warranty’s. (NB: In NSW there is also a statutory duty for defects to be on the agenda of every Annual General Meeting (AGM) until statutory warranties expire for the building. This process make sense to adopt to raise awareness, promote transparency and lower risk of complaints coming in later around the management of the defects period.)
  • A maintenance register, audit and/or conditions report.

When these two registers are complete, bring them to the attention of owners and use them as a tool to enforce decisions to act to address the problems identified, or not to action them as the case maybe. Always minute Owners decisions on each item, even if their decision is to ignore addressing any item.

Use these tools to comply with the duty of disclosure to insurers. Disclose any defects, maintenance and issues to the insurer in advance. Give them a copy of the defects register and conditions reports even if they don’t ask for them – then there can be no question around your compliance with the duty to disclose as agent of the Owners.

An additional benefit of these registers are is they sit on the record of the scheme and so any prospective buyers can access and make informed decisions when considering to buy in, hence avoiding any allegations downstream that you as the agent of the Owners did not make all information available. Transparency is key over the coming decade, and you need to protect yourself by de-risking your business through continuous refinement of business process.

Finally, if you have great business process like this in place, tell your Insurance Broker, demonstrate it to your Professional Indemnity Insurer, and ask for your business to differentiated from your peers, be treated more favourably and for this to be recognised through premium savings.

Paul Keating
Strata Community Insurance

[1] We have used the term “Owners” to reflect both the ultimate owner, and their Owners Corporation, Body Corporate, Strata Company, Strata Corporation, or other such terms used within the Strata Community across Australia.