Demystifying Insurance Excess

Who pays the excess on an insurance claim is an issue that our adjudicators are often called upon to determine.

We will try and clear up the confusion surrounding who is liable for the excess on insurance claims by examining past orders of our adjudicators.

It is important to keep in mind that the orders referred to in this article are intended as guidelines only, and not precedents.

Each matter before an adjudicator is determined by its own unique set of circumstances.

We will also explore whether a large excess on an insurance claim can create an “unreasonable burden” on individual owners.

Liability for excess under the body corporate legislation

Working through an insurance claim to repair damaged property can be stressful and the pressure can be magnified when an individual owner in a body corporate is asked to pay the excess, especially if the excess is a sizeable amount.

While the default position for liability is based on what areas of a community titles scheme are affected, it boils down to what is reasonable in the circumstances.

The legislation states that if the damage caused by the insurable event affects:

  • only one lot – the owner should pay the excess unless the body corporate decides it is unreasonable in all the circumstances for them to do so.
  • two or more lots, or, one or more lots and common property – the body corporate should pay the excess unless the body corporate decides it is reasonable in all the circumstances for the excess (or a portion of the excess) to be paid by one or more of the affected lots.

 

Liability for excess – a question of maintenance

When determining who is liable to pay the excess, one of the key questions should be: who is normally responsible for maintaining the property that caused or contributed to the damage?

The importance of this consideration is demonstrated in the decisions discussed below.

 

Water ingress from a failed window seal caused damage to the applicant’s timber floorboards. The applicant sought reimbursement from the body corporate for the excess they had paid towards an insurance claim. The body corporate submitted that when considering the question of liability, the committee at the time found no “extenuating circumstances” to warrant the body corporate bearing the excess instead of the owner.

The adjudicator remarked that the legislative provision that applies when only one lot is affected “is not one which automatically puts the onus on owners to pay the excess in every situation. There is a discretion to be exercised reasonably by the body corporate, taking into account all the relevant circumstances”.

As the body corporate was responsible for maintaining the window, the adjudicator determined that the body corporate should pay the excess and that it was unreasonable not to reimburse the applicant.

 

The applicant’s lot sustained water damage due to a leaking pipe in the bathroom ceiling void. The applicant submitted that the body corporate should be liable for the insurance excess.

As there was no evidence to establish that the body corporate was responsible for the pipe, the adjudicator determined that there was no basis for reversing the applicant’s liability for the excess.

 

A flexi-hose in the applicant’s unit burst, causing flooding to eight other lots. The applicant claimed that it was unreasonable for the body corporate to make them liable for the excess, as the body corporate had previously offered to organise repairs to the flexi-hose and failed to follow through.

In the applicant’s view, the body corporate’s offer – which was accepted by the applicant – meant that the body corporate had assumed responsibility.

The adjudicator dismissed the application and noted the body corporate’s offer “does not alleviate the applicant from its obligations” to maintain its own utility infrastructure in good condition.

 

A pinhole leak in one of the pipes under the applicant’s shower base caused damage to the ceiling of the lot below. The applicant wanted reimbursement from the body corporate for the excess that had already been paid toward the claim.

The applicant contended that they “could not reasonably have predicted the leakage from below the shower base.” However, the adjudicator highlighted that “the duty to maintain involves an obligation to keep something in proper order by acts of maintenance before it falls out of condition” and that the owner was not only required to “attend to cases where there is a malfunction, but also to take preventative measures to ensure that there will not be a malfunction.”

As the applicant was responsible for maintaining the leaking pipe that caused the event, the adjudicator determined that it was not objectively unreasonable for the committee to ask the applicant to pay the excess.

Liability for excess – consider all the circumstances

Even if the body corporate was not responsible for the property that caused the damage, there may still be circumstances where the body corporate should pay the excess.

The case example below highlights the body corporate’s obligation to consider all circumstances and act reasonably when considering who is liable to pay the excess.

 

A faulty main isolating valve in a lot (lot 111) caused a water leak, damaging the applicant’s lot below (lot 107). The committee invoiced the owner of lot 111 for the excess – however, the owner of lot 111 refused to pay. The committee told the applicant that they would need to broach the excess dispute privately with the owner of lot 111.

As the repair work could not proceed until the excess was paid, the applicant submitted that the body corporate should pay the excess. As the event affected more than one lot, the body corporate was liable for the excess by default.

The adjudicator observed that the body corporate “cannot automatically pass on the excess to affected lot owners.” Rather, the body corporate must consider “the particular circumstances” and “act reasonably in making that decision”.

Importantly, the adjudicator observed that although the body corporate had not asked the applicant to pay any of the excess, its actions – in not paying for the excess itself or taking steps to recover the excess from lot 111 – had the same effect.

Given this, the adjudicator resolved that the body corporate should pay the excess, remarking that it was “entirely unreasonable for the body corporate to expect the applicant to bear the cost of the excess that it has not recovered, or to expect the applicant to pursue the owner of Lot 111 for the excess, or to expect Lot 107 to be left in a damaged condition for an extended period.”

Unreasonable burden: when is an excess too much?

We will look at a body corporate’s decision to put in place a specific insurance policy. The legislation provides that, when taking out an insurance policy, the excess must not create an unreasonable burden on individual lot owners.

Contrary to common misconceptions, this is not simply a question of whether the excess is a burden on an owner – a high amount that would be difficult for an owner to pay. The issue is whether that burden is an unreasonable one.

 

An owner in a duplex (the applicant) was unwilling to accept a commercial insurance policy proposed by the other owner (lot 1) due to its lack of flood cover and the “extremely high” excess.

The applicant submitted that cyclones and flooding were serious concerns given the body corporate’s location in far North Queensland. Under the proposed policy, the excess for cyclone cover would increase from $100 under the current policy to $20,000.

The applicant sought an order that a different insurance policy with lower excesses be obtained. When considering whether the proposed policy created an unreasonable burden, the adjudicator observed that “exhaustive attempts have been made to secure alternative insurance” and that there was no evidence that “alternative cover is able to be provided by any other insurer (let alone for lower excesses)” since lot 1 started being used for short-term letting.

The adjudicator determined that “it would not be just and equitable to make an order that cannot be complied with”.

 

The applicant argued that a $15,000 excess imposed was an unreasonable burden. The adjudicator noted that although the amount was substantial and the applicant may “struggle to pay”, no evidence was provided to show it was “objectively remarkable” or “wildly at odds with what insurers generally offer” similar schemes.

Or, that there were “any special circumstances…that would make it illogical, incomprehensible, or otherwise manifestly unreasonable” for the body corporate to choose this policy.

The adjudicator further observed that despite their liability for the excess, the applicant would benefit from the policy. Specifically, the adjudicator remarked that the applicant “will still receive a payment toward repairs that would otherwise have been her sole financial responsibility. In that sense, the excess is not truly a burden at all. It is just a smaller benefit than she would have received if the excess was smaller.”

 

In both cases it was accepted that a lower excess for water damage could not be obtained due to the body corporate’s claim history – evidence to the contrary was not provided by either applicant. Both adjudicators determined that the burden of the excess, though perhaps heavy, was not unreasonable.

Given the potentially detrimental effect that an insurance excess can have on individuals in a body corporate, it is fundamental to understand the legislative requirements.

We hope that the orders examined in this article will provide guidance when considering these questions and help to avoid unnecessary disputes in this area.

In situations where an insurance claim is not a viable option to cover the damage, the provision in the legislation about damage to property may be relevant.

You can read more about this provision in Issue 42 of Common Ground.

Author:  Jane Wilson – Queensland Commissioner for Body Corporate and Community Management. 

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