Body Corporate
Committees need to be active in the management rights assignment process
Article by Frank Higginson
Current as at March 6, 2025
This article first appeared in Resort News, March 2025 Edition
With climate events becoming more extreme and more frequent, the question of how to handle insurance in strata schemes has never been more in need of a firm answer.
Far North Queensland has been on the receiving end of record rainfall this summer, and the wildfires that whipped through Los Angeles in the USA provided sobering viewing on the news programs. Brisbane has also just seen its first cyclone in 50 years, bringing with it the more common SEQ experience of flooding.
Insurers are now making the call that they will not offer coverage in some regions. They have determined that the risk (and cost) is just too high.
So where does that leave strata schemes in regions such as FNQ where flooding and storm damage have become more commonplace?
Schemes are obliged to have insurance to cover common property and scheme assets against possible disasters such as storm and water damage.
The BCCM insurance fact sheet notes: “flood insurance is not always included in a standard insurance policy. In flood-prone areas, in order to satisfy the requirement that it obtains coverage to the greatest practicable extent, a body corporate may need to investigate whether it can obtain additional coverage for damage caused by flooding.”
That seems to leave schemes with little choice. They have to go cap-in-hand to an insurer and negotiate bespoke flood coverage – probably from offshore somewhere – which is likely to cost well above market rates for similar schemes in less risk-prone areas.
At first glance, this seems a textbook case of market failure and thus a case for government to step in and provide some level of insurance coverage or premium subsidy so strata schemes can meet their insurance obligations.
However, as with most things in life, it is not so straight forward.
The market for flood insurance hasn’t so much failed, as run screaming from the room.
For government to step in and simply offer flood cover for all schemes in flood-prone areas risks providing inefficient signals to the property market — what is known as “moral hazard”.
Put simply, moral hazard is the potential for risky behaviour to increase when an individual knows the potential cost of that behaviour has been mitigated, such as through insurance. A hire car with full coverage will be driven with less care than one with basic or no coverage.
In the case of property, the market signal from the commercial insurers that a particular region should not be developed because of flood risk would be lessened by the government promising to cover the risk.
Building on flood plains has been an indulgence that Australia can no longer continue to afford.
Self-insurance simply isn’t possible for strata in Queensland. Even if it was, how do you think banks would look at the prospect of not having insurance on properties they have lent against? Not favourably, is the simple answer! And when banks don’t want to lend, it invariably leads to lower prices because buyers cannot borrow money to purchase.
A recent report by analysts from Climate Valuation found about one in 20 homes in Australia are currently either uninsurable or unaffordable to insure. That figure was likely to increase to one in 10 within the next decade, the report found.
None of which makes for comforting reading for anyone needing to find affordable flood insurance for their scheme.
Indeed, an Insurance Council of Australia factsheet about strata insurance from late 2024 is upfront that worsening extreme weather is a key driver of rising premiums.
And the ICA makes this blunt statement: “Where cost for repairs or rebuild are not (fully) covered by insurance, these will need to be paid by an owners corporation’s accumulated funds.”
There is clearly a role for government in this situation, but straight underwriting or subsidies are unlikely to be the full answer. What it needs is leadership to bring about a solution that includes property owners, insurers, and all levels of government.
New Zealand’s Natural Hazards Commission – formerly the Earthquake Commission – could be a model to consider. Because ignoring the problem and hoping it will go away is far too risky.
People often tell us that we don’t seem like lawyers. We make a point to have real conversations with our clients in everyday language. At our core, we know that success is built on relationships.
