Are You a Risk Seeker or a Risk Avoider?
We’re exposed to many types of risk in our lives. Our attitude to risk is often referred to as our “risk tolerance” and in the insurance world, the term “risk appetite” similarly reflects the amount and type of risk we’re willing to take to meet our objectives.
Risk versus Reward
In general, the more risk you take, the greater the opportunity for potential reward or failure.
This is true for individuals, when investing for example. But it’s not the same for strata insurance, where there’s shared responsibility and consequences. It’s the reason a minimum level of insurance cover has been mandated.
When considering risk, we may refer to two types.
• Calculated risk – a risky decision or chance taken after carefully estimating the probable outcome.
• Foolish risk – blindly going into a situation with no research and essentially just rolling the dice and hoping for the best.
We take calculated risks every day. Buying a lottery ticket is a calculated risk, as you weigh up the amount invested and the likelihood of a return. Some say this is a foolish risk, but the outcome is known – you either win, or you don’t.
Understanding risk through the strata industry supply chain
Stakeholders in the strata supply chain may have a different lens and approach to risk.
• Owners – seek to minimise their exposure to risk by receiving advice on adequate insurance decisions and carrying out regular property maintenance.
• Insurers/underwriters – spread or balance their risk so they can price appropriately. This includes taking on enough business to build a portfolio and manage their highest exposure to risk. They may target a cross-section of risk profiles or geographies to spread risk. Or they may focus on niche segments like large high-rise/complex buildings or small/simpler complexes.
• Intermediaries (brokers) – understand the risk profiles of both the owner and underwriter and match the owner’s risk profile and information with the right underwriter.
Managing information risk in strata
Where the insured knows about an issue that may result in damage, injury or death at their property and doesn’t do anything to rectify the issue, this may be interpreted as “courting the risk”. Think of it as taking the risk on a date! It’s sometimes used to refer to an event for which loss is a reasonably expected outcome.
If the insured knowingly and intentionally decides not to undertake further investigation or remedial works, they take the issue a step further.
If a strata insurer can demonstrate a risk was previously identified and communicated to the insured, and the consequences of the risk were understood yet the issue was ignored, the insurer can decline a claim in its entirety based on its policy exclusions. What’s more, if there’s also a failure under the insured’s Disclosure obligations, the insurer may void the policy altogether.
Accidental and unforeseen or intentional?
What happens if we deal with risk negligently and the risk eventuates? Is the subsequent damage or loss the result of an accident, or not? This is an important issue for insurance policyholders.
There’s a point at which the risk taken by an insured party means the consequences aren’t viewed as “accidental”. In such cases, courts have found that both the damage and the action that caused the damage was “expected” and the insured party’s conduct was reckless, hazardous or culpable leading to damage that was therefore not accidental.
As an activity becomes riskier, and the likelihood of harm occurring increases, courts are more likely to find that a loss was not simply an accident.
The Cladding Issue
The risk associated with flammable cladding on buildings is well known. Local councils have undertaken audits, taskforces have been established and, in some states, legislation has been enacted.
Where a building is identified to have cladding or defects, councils issue notices to the building owners warning them they may require remedial works. If the owners don’t take action to identify the type of cladding or defect and implement remedial works, they may be seen to be “courting the risk”.
In a court of law, where the insured is aware of the risk and intentionally chooses not to do anything about it, any subsequent incident that occurs could be viewed as “expected” rather than “accidental”.
Short-term gain can risk long-term pain!
Some risks are just not worth taking.
Saving in this year’s maintenance budget or delaying remedial repairs to avoid cost may lead to a much bigger financial burden if any repair problems have worsened and/ or additional damage or injury has been a consequence of the delay.
By attending to a risk quickly, you not only extend the serviceable life of a property but also mitigate harm, which lessens the strata scheme’s liability exposure. A wellmaintained property generally leads to more favourable renewal terms and premiums.
Talk to your broker about any known risks at your property, and they’ll advocate for you to find the best solution.
By sharing your risk information, brokers and underwriters can more accurately assess your level of physical risk and price it in the market. They’ll determine what risks can be managed or transferred to insurance or must be retained by you. Insurers view strata schemes more positively if they’re actively identifying and rectifying their issues, and it’ll prove invaluable to the long-term financial stability of the strata scheme.
After all, high risk can still be a calculated risk.
If you have concerns about a property or would like to find out more about managing risk, help is right here.
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