Best Practice Disclosure Guidelines for Strata Insurance

An increasingly complex area of strata management involves placement of specialist strata insurance products. Strata is a unique model of property ownership. Insurance for “Common Property”, the owned and shared responsibility (joint and severally) of all owners in the corporation, once typically involved cover for the physical structures and infrastructure of the development, including stairwells, driveways, rooves and any common area contents. Modern schemes may now also have additional recreational facilities such as pools, BBQ areas, gymnasiums, tennis courts, playgrounds etc. High rise schemes will invariably have lifts, heating and cooling, plus other significant machinery infrastructure. They typically have cafes, shops and other commercial lots occupied by an owner’s business or leased to a tenant.

Occupancy of schemes is also becoming more variable, with owners choosing to reside in their units or lease them out on either short term or longer-term arrangements, by themselves privately, or via an onsite manager or third-party agency etc.

Strata Managers are playing an increasingly crucial role in the insurance supply chain, supporting owners, often mums and dads, sometimes investors, some absent and of course tenants, who while not having direct responsibility for the scheme must abide by the rules and by-laws. They act for all residents and interested parties, as the commercial interface, adapting to their varying degrees of knowledge, commercial experience, and engagement levels.

All of us with experience as purchasers of strata or freestanding home insurance will realise that premium costs have been increasing significantly in recent years, especially for those in areas affected by catastrophic storm, hail, and flood events that have borne tragic loss of lives, livelihoods, and lifestyles. These huge losses have followed on the heels of headline news about poor building quality standards that have left owners with a legacy of defects, remember cracking buildings, problematic building materials e.g. flammable cladding in newer schemes and asbestos in older ones to mention only a few.

Unlike the freestanding homes insurance market, strata insurance in each state and territory is a statutory requirement, meaning there isn’t the option to not take it out. The legislation prescribes the compulsory areas of building damage cover often requiring compliance to full replacement cover together with public liability for claims from third parties for bodily injury or damaged property. The market policies for strata have evolved to offer many cover sections, not just the minimum statutory covers, seeking to serve the growing complexity of the developments, their usage, construction materials and occupancy and other changes.

Currently, the complexity of complying with various pieces of legislation and regulations, obtaining appropriate building replacement cover valuations, and incorporating cover for complicated building elements such as lifts, gyms, pools and other systems, makes obtaining insurance choices that offer adequate levels of protection, difficult and extremely onerous for strata committees. Naturally, preparing quote submissions for brokers, submitting, and providing advocacy for owners through the claims process has also become more involved and time consuming. Strata committees usually do not have the expertise or time to make these undertakings, keep records, interpret insurance covers and legislation and so they seek support from strata managers and partner brokers to navigate and engage with the marketplace on their behalf.

Boosting strata insurance understanding, disclosure and transparency

SCA has been working incredibly hard to explain the complexities of the strata insurance market and how it works to regulators, consumer groups and owners. A key initiative in mid-2020, was the establishment of SCANSIT, a nationally representative strata insurance task force to tackle the emerging crisis of affordability and availability in strata insurance. SCANSIT’s first major undertaking was to pursue an evidence and data-based solution to some of the issues identified both internally and by external parties.

Dr Nicole Johnston from Deakin University completed an SCA-commissioned report – A data-driven, holistic understanding of strata insurance – which outlined the value proposition that strata managers provide.

The report outlined 47 different services regularly provided by managers in strata insurance and their value pillars, namely being bound to act in the strata committee’s best interests, being a custodian of records and a knowledge bank of the scheme.

The report made two recommendations. Firstly, that strata managers better explain the wide breadth and depth of services they provide in the strata insurance supply chain to their clients, and second (and related), that disclosure and transparency should be built on and improved to ensure consumers fully understand the products they are taking out and providers they are contracting with.

A further external report conducted in 2022 by John Trowbridge also explored strata insurance market practices and issues affecting availability and affordability. SCA engaged closely as a stakeholder while the report was produced and endorsed several of its recommendations in its Phase 1: Disclosure and Transparency report, most notably the introduction of standardised disclosure templates, improved timing of documentation delivery to strata committees and a minimum set of financial items to be disclosed.

What is SCA doing next? The Best Practice Disclosure Guides

Building on the evidence base of the reports, the recommendations from the SCANSIT task force and the SCA National Board, SCA is producing in-depth best practice guides to tackle the dual issue of boosting understanding and improving disclosure and transparency in relation to strata insurance.

The Best Practice Guides will incorporate the following elements, which when rolled out and communicated effectively to the SCA membership will be transformative to how we talk about and disclose current insurance practices:

• Strata insurance background – what it is, what it covers, why it is a compulsory product and concepts such as replacement value cover.

• The context for insurance in Australia and New Zealand over the last 5 years, including premium increases, affordability and availability of insurance, a hardening market and the high cost of government stamp duties, taxes and levies.

• The strata insurance supply chain – what parties are involved, definitions of each role, the value of each role and their activities and differing models of insurance placement.

• Strata insurance models – the commissions model, the fee-for-service model and hybrid models.

• The need for disclosure and transparency – including the series of recommendations over the last two years from the Deakin Report, ACCC Report, Trowbridge Report Phase 1 and Quality of Advice Review.

• The current NSW disclosure regime, which currently has the most stringent disclosure requirements.

• Putting the report recommendations into practice.

Including the eight specified financial items from the Trowbridge report, the makeup and implementation of the standard format or template, the ins and outs of inclusions on quotations and invoices, the timing of quotations and the renewal process, the challenges of implementation, state-by-state current disclosure practices and laws.

• A glossary of terms in relation to strata insurance to ensure everyone is on the same page with some of the more complex terminology.

• The current SCA Code of Conduct inclusions relating to disclosure for members.

• How SCA is partnering with NIBA to implement changes coming from this guide and new templates and processes.

Look out for the Best Practice Guides and the series of communication, workshop and events that will be held to explain and roll out these critical changes.