Do any of the OC properties you manage have defect issues? Are your clients hoping Strata Insurance will cover the defect and resultant damage? Unfortunately it isn’t quite that simple.
Renee Cassidy, Claims Manager at Resolute Property Protect explains…
With high demand for property and inner city living, apartment buildings are popping up at record pace.
Yet, with contractors under pressure to meet increasingly tight deadlines, we have seen corners cut and compromises made like never before. In consequence, property defects and property defect insurance claims have gone through the roof.
What classifies as a property defect?
A property defect can result from a defective design, defective or faulty workmanship, defective materials, or a failure to comply with the structural performance requirements of the National Construction Code.
A defect must have consequences that will cause, or is likely to cause, part or all of the building to become uninhabitable, or unable to be used for its intended purpose.
To provide some context, a building defect may include things like faulty waterproofing, poorly constructed balconies, or something essential to the building’s stability or structure such as foundations, footings, walls, roofs, or beams.
One very common example of a property defect, concerns building materials. We often see major defect claims come through for water damage as a result of incorrect protective membranes being used under showers, on balconies, or in some cases where there is no protective membrane at all!
Strata property defects on the more severe end of the scale have also become increasingly pronounced in Australia. Sydney’s Opal Tower and Melbourne’s Lacrosse building are just two highly publicised examples.
In the Opal Tower, parts of the structure were found to have been constructed using ‘lower strength concrete’, and ‘under-designed’ critical support beams, which burst under extreme pressure. In the Lacrosse fire, it was found that the severity and fast spread of the fire was caused in part, due to the exterior of the building not being clad in appropriate fire-resistant sheeting as required by the Building Code of Australia.
What can your clients do about resultant damage from a property defect?
In many Strata properties it is not uncommon to find defects during the first few years after construction, but what can your clients do when the defect is also causing resultant damage to their property?
Most owners seek to lodge an insurance claim under the Strata Insurance policy. Unfortunately, Strata unit owners are often shocked to discover their property damage claim is denied by the insurer. Many denials occur because the defect is already known, or because the insurer deems that any “reasonable person” would have known about it, and if repaired earlier, could have prevented initial or further damage from occurring, avoiding the need to claim.
Unknown defects v known defects – are your OC clients covered?
Claiming due to an unknown defect
If you are managing a relatively new property, and your client discovers a defect which has caused damage to their property, there is a good chance it will be considered an unknown defect if the OC Committee and/or Strata Manager have not informed you of its existence. This generally means the insurer will consider covering repairs for any resultant damage.
Note: Rectification of the defect itself is excluded in most cases.
In general, many insurance policies specify that:
If damage was caused by the non-rectification of a defect you were unaware of, or could not have reasonably been expected to be aware of, then repairs for the resultant damage will be covered.
Claiming due to a known defect
Alternatively, if this same defect is known to have occurred elsewhere in the Strata property, and the defect is known to any one of the owners, the OC Committee, the Strata Manager or the insurer (whether or not a claim has been made previously), the insurer will not accept any insurance claims for this defect, anywhere in the Strata property.
Why? Essentially, if anyone else knew of the defect, it is no longer considered an unknown defect. Insurers’ are of the view that actions could have been taken to prevent the resultant damage caused by the defect, and therefore the insurer’s “known defects” policy exclusion applies to the claim.
What are the options if the defect is already known and your clients cannot make a claim?
If the defect is already known and your clients cannot claim under their Strata Insurance policy, their next step should be to contact the initial builder to explore rectification.
A common misconception is that they can claim against the contractor’s Builders Warranty Insurance policy. Unfortunately, the name of this policy can be a little misleading.
A Builders Warranty Insurance policy will only cover your clients for losses to a residential property if the builder becomes insolvent, disappears or is deceased within 6 years of performing the works.
HOWEVER, if the builder hasn’t passed away, disappeared or become insolvent, the first step, once isolating where the defect lies, should be to contact the contractor who performed the works in question.
If the response received from the contractor is not satisfactory, and they refuse to complete repairs or rectification works for the defect, your clients may then have grounds to pursue legal action, as the contractors may be in breach of the National Construction Code.
Defects – 3 key steps to follow
If your OC clients discover a property defect, there are a number of steps they can take:
- Inform the right people – If a defect is discovered, the OC and Strata Manager should be informed immediately. Information on the defect can than be communicated to all property owners within the building, giving each the opportunity to repair the defect and prevent resultant damage.
- Details – Builders’ / contractors’ details and invoices for any work they carried out should be kept for 6 years following completion. If the OC needs to seek damages to repair a defect, or claim against the contractor’s Builders Warranty Insurance policy, this will prove invaluable.
- Communication – Always encourage good communication practices between the Strata Manager, OC Committee and lot owners. Open and frequent communication will help to ensure that any defect or property issues are identified and dealt with appropriately.
If you would like some further advice on navigating insurance claims for property defects, please contact your Resolute Property Protect Account Manager on 1300 668 033.
This insight article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Resolute Property Protect ABN 53 157 850 827 Licence Number: 425 966 for further information, or refer to our website.