Building defects are a common issue in both new and existing buildings across Australia, especially as the demand for strata properties is growing and currently outweighs the supply. It is estimated the approximate 75 to 85 per cent of strata buildings have at least one form of known defect.
If defects are left unaddressed, they can have a significant impact on the strata insurance policy, to the premium and excesses.
While residential strata insurance policies typically exclude coverage for buildings with defects, this does not necessarily render the building uninsurable but may impact the overall insurance premium.
Insurers assess the severity of the defects, the building’s age, any pending legal action, and any remediation plans when determining the level of insurance coverage and the associated premium and excess.
It is important to note, that known defects or otherwise may be excluded under the property section of the policy, but these exclusions do not carry over to liability coverage. In the event of a building disaster that injures or causes death, a large proportion of the claim is likely to 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 claim, there is potential for the insurer to pay claims that may be attributable to defects.
Some of the common defects identified in strata properties
Building defects come in many forms and can occur in any part of a building, including its structural components, cladding, plumbing, electrical wiring, and more.
Common defects within the building fabric include efflorescence, peeling of paint and minor settlement cracking. While these are minor defects and not a cause for immediate alarm it doesn’t mean that action shouldn’t be taken. If minor building defects are left unattended there is a potential for water penetration and other issues which can lead to more serious issues long term.
Other major defects in strata properties include cladding, waterproofing, plumbing and drainage issues, faulty wiring, leaks, and defective roof coverings. These defects can lead to larger risks down the track and should, therefore, be addressed as soon as they are discovered.
Many strata buildings have been identified as having non-compliant lightweight cladding such as aluminium composite panels (ACP) and Expanded Polystyrene (EPS). Strata properties with defective cladding have a greater potential for fire to spread quickly in a building.
Waterproofing, Plumbing and Drainage Issues
Issues with waterproofing can cause many problems within a building including leakage from roofs, mould, blistering paint, rising damp and cracked walls. Water damage repairs tend to become more expensive to rectify the longer they are left unattended, so it’s essential to remember that prevention is far better than cure when it comes to waterproofing.
Plumbing and drainage issues can be particularly problematic in strata buildings. Problems such as blocked drains, leaking pipes, and sewage backups can cause significant damage to the building’s structure and can also pose health risks to residents. If left unaddressed, these issues can lead to more significant problems such as liquid inundation or mould growth, which can impact the building’s overall value and insurability.
Electrical issues and Faulty Wiring
Faulty wiring is another issue and is particularly more prevalent in older strata buildings. It can occur due to poor electrical design or inadequate installation. Faulty wiring can lead to power outages, electrical shocks, and even fires, all of which can cause significant damage to the building’s structure and endanger residents. Ensuring proper electrical installation and maintenance (including thermoscans of switchboards) is crucial to prevent these types of defects.
Defective Roof Coverings
Defective roof coverings can be caused by poor installation, inadequate materials, or poor maintenance. Defective roof coverings can lead to water leaks and structural damage to the building, which can ultimately affect the building’s value and insurability.
Impact of Defects on Strata Insurance
Strata insurance policies are designed to cover a range of risks, including property damage and liability claims. Whilst most insurance policies exclude coverage for defects under the property section of cover, for reasons mentioned earlier in this publication, defects may impact the overall insurance premium, and some insurers may decline to provide coverage altogether.
Insurers assess the severity of defects, the age of the building, any pending legal action, and any remediation plans when determining the level of insurance coverage and the associated premium and excess. The higher the exposure as a result of a defect, the higher the insurance premium is likely to be. The insurer may also require additional safety measures to be put in place, such as fire safety equipment or safety barriers.
Every insurer has a different view on the level of risk they can accept.
“Prevention is better than Cure – addressing defects as soon as they are discovered is the best approach.” Kimberley Jonsson, CEO of CHU Underwriting Agencies suggests to owners – “It’s important to remember that building defects are very common and are an ongoing issue, even if the defect is identified mid policy, it is important to communicate this with your insurer and take the appropriate courses of action to remediate the issue.”
Brokers and Strata Managers must do all possible to assist their clients to understand the risks associated with building defects in strata properties, and to provide them with guidance on how to address these risks. To ensure the best insurance outcome, the most important things for a building with defects is to provide as much information as possible early to their insurer, and to demonstrate their proactive approach to addressing the defects.
This article was supplied by CHU Underwriting Agencies
Insurance issued by QBE Insurance (Australia) Limited ABN 78 003 191 035 and distributed by CHU Underwriting Agencies Pty Ltd ABN 18 001 580 070 AFSL 243261. Any advice in this article is general in nature and does not take account of your personal objectives, financial situation and needs. Please read the relevant Product Disclosure Statement (‘PDS’), Financial Services Guide (‘FSG’), and the Target Market Determination (‘TMD’) which can be viewed at chu.com.au or obtained by contacting CHU directly. CHU Services Pty Ltd t/as CHU Inspect (ABN 99 616 086 269).
1 UNSW’s City Futures Research Centre, 2018, Defects in Strata: Research Overview