Insurance Obligations

Pursuant to section 59(1) of the Owners Corporation Act 2006 (“the Act”), the owners corporation must take out reinstatement and replacement insurance for all buildings on common property.

Section 60(1) of the Act provides that the owners corporation must take out public liability insurance for the common property.

Section 61 of the Act provides that the owners corporation must take out insurance in accordance with sections 59 and 61 for all lots on a plan in multi-level developments.

These provisions do not apply to 2-lot subdivisions.

A recent VCAT decision has shed light on the obligations of owners corporations to insure fixtures found in private lots in multi-level developments.

Facts

The owner of a lot in a multi-level development leased it to a supermarket operator. A compressor, which formed part of an air conditioning unit, was owned by the lot owner and located wholly within the lot.

In 2012 the compressor broke down and needed to be replaced at a cost of $12,320.00.

A dispute arose as to who was responsible for insuring the compressor: the owners corporation or the lot owner?

The Decision

The decision came down to whether the definition of “building” in section 61 of the Act extended to lots and whether the compressor was a fixture.

The Act provides that the OC must take out and maintain reinstatement, replacement and public liability insurance, which covers all buildings in lots in the plan in multi-level developments.

In this case VCAT determined that the effect of section 61 is to make the OC responsible for insuring fixtures within lots as well as on common property in multi-level developments under section 59(1).

What is a fixture?

A fixture is an object (chattel) that has been attached to land to such an extent that it is seen as having become part of the land at law.

In order to assess whether an object is a fixture, the following factors are considered:

  • the nature of the object;
  • the way in which the object is used;
  • the degree to which it is attached to the building e.g. by bolts which make it difficult to remove;
  • the length of time that it is intended to remain attached to the building; and
  • the reason why the object was attached to the building.

In the case, VCAT noted that the compressor was a fixture because:

  • the compressor was installed when the lot was purchased;
  • the lot owner did not intend to take the compressor with it when it sold the lot; and
  • the air conditioning unit, together with the compressor would remain attached to the building on the lot for as long as the building is used as a retail business.

While the Tribunal Member conceded that the compressor was capable of being detached from the building, the fact that it was not easily detached indicated that the compressor being a fixture.

Impact of the decision

Practically, OC managers need to be aware of the “nature and value of fixtures located on lots within the development”. If these fixtures are not insured, the OC and its manager can be exposed to a claim.

Practical Strategies

If you are an OC manager of a multi-level development, you should:

  1. Review your procedures for collecting information regarding fixtures contained in private lots.
  2. Check your existing insurance policy to make sure that fixtures in lots are covered by the OC policy. If not, you will need to advise the OC that it should arrange the appropriate insurance cover.
  3. Obtain a warranty from each lot owner that they will advise the owners corporation if a fixture is added to or removed from their lots.

Difficulties may arise where significant fixtures such as air conditioning units are installed in lots which impact upon the insurance premiums payable by the OC.

The OC may need to review and develop procedures for the apportionment of the insurance premiums payable if there is a significant impact on the insurance premium costs of the OC.