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Short term letting affecting strata insurance

19 Jul 2019

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Have you ever wondered what happens when a lot owner starts short term letting and it affects the ability of the body corporate to get the required statutory insurance?

If so, you might want to read this the story about a dispute between owners of a two-lot scheme in North Queensland and what an adjudicator decided about those particular circumstances.

We have previously written about the statutory insurance requirements for bodies corporate.

The facts of this insurance dispute were relatively simple.

  • Beach Meet is a two lot scheme regulated by the Small Schemes Module
  • One owner started short term letting via Air BnB
  • The body corporate insurance came up for renewal and the existing insurer said they would not renew because of that short term letting.
  • The short term letting lot owner started hunting for alternative insurance.  Of the insurers/brokers who were contacted:
    • Seven said they would not insure for various reasons – with excuses ranging from the location of the scheme through to its claim’s history and the age of the building;
    • Three said they wouldn’t insure because of the short term letting;
    • One said they would insure under a ‘commercial’ policy.
  • The commercial policy was roughly $800 more than the existing ‘residential’ policy and did not include flood cover and had larger excesses than the current policy.
  • There were brokerage fees of $780 incurred for that policy.

Amongst other things, the dispute was over who was responsible for what. Both owners engaged in the submission process and both put their side of view forward.

Our takeaways are these:

Hypotheticals

Adjudicator’ don’t do hypotheticals. They decide disputes before them on the facts.

This dispute was about the new insurance policy. Next year’s policy may be different, so there is no point seeking orders about that. If there is a dispute about a future insurance policy, bring another application and argue the facts of that at the time.

Responsibility for an additional premium

There was no dispute about who was responsible for the payment of the increased premium. The short term letting owner paid that. Presumably, they read this section of the Module.

Responsibility for brokerage fees

Like many small bodies corporate, there were no meetings (be that general or committee) held or books and records kept. All that seemingly happened was that the insurance was renewed once a year and the premium paid equally (which was obviously the genesis of this dispute).

The short term letting owner was the one who had notified the insurer about the short term letting and then seemingly chased all over the country looking for new insurance.The brokerage fees were incurred solely on the instructions of the short term letting owner, and without reference to the other owner.

Even though there was no real scope under the Module for it, the adjudicator exercised their discretion to make an order that was just and equitable in the circumstances to make the short term letting owner responsible for the brokerage fees.

Presumably, this may not have happened had the short term letting owner engaged with the other lot owner in the hunt for insurance.

Responsibility for excess

The new policy had substantially different excesses as follows:-

Excess Old Policy New Policy
All events $100 $1000
Water damage $300 $5000
Vacancy for 90 days $300 $2500
More than 49% of units vacant $300 $3500
Cyclone $100 $20000
Flood $100 No cover

 

Even though there was only one insurer who was willing to offer insurance, there was no evidence that the increased excesses were imposed as a result of the short term letting.

In those circumstances, the adjudicator held that if this was the only insurance on offer, the body corporate had to take it, and there would be no personal responsibility for the excess to either lot owner other than as required by the Module.

Lack of flood cover

A body corporate is not required to insure for a flood.  The non-short term letting lot owner wanted to have flood cover.  The two facts that:

  • it was not offered by the only insurer to even offer insurance; and
  • it was not required by law; 
  • meant that the adjudicator could not order anything with respect to it.

Obviously, there is a lot of increased risk that comes with not having flood cover in North Queensland.

You might even question whether the (presumably) increased returns from short term rental offset the risk of not having flood cover for the short term letting lot owner, but it is a bit brutal on the other lot owner losing that cover without any financial benefit at all.

Of course, we don’t know whether the existing insurer would have renewed on the same terms if there was no short term letting either, but in a two-lot scheme, it was probably a real chance of happening.

This is one of the ‘joys’ of strata title living. Sometimes you are not going to get what you want.

Why this dispute interests us

This is an interesting matter because the framework for the decision of the insurer was very clear cut. The insurance changed because of the nature of the use of one lot. Therefore the costs relating to that were very quantifiable and direct because there was only one other lot.

The argument could have been a whole lot messier in a bigger building with a number of different lot owners engaging in short term use.

The matters with very clear facts and legal principles are always handy for future reference.

Other links you may be interested in

The decision

Our insurance newsletter

The Commissioner’s Office insurance content

The Small Schemes Module

 

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Comments
Errol Anderson LREA Cert IV BCM w
Posted about 3 months ago
Thank you Frank. As you know I am a strong proponent for allowing complexes into group insurance schemes similar to elite sports people, Local Bodies etc. The core problem is that the BCCM Act requires the name of the scheme to be on the policy. This needs to be changed to, simply providing proof of suitable insurance cover. Let's hope this is picked up within the future changes to the Act. The Commissioner currently does have discretion to allow this if no suitable cover can be found. Exorbitant cover with exclusions should not be considered as "suitable cover".