Imagine receiving a bill and finding your insurance had risen sixfold.
Such was the experience of one owners corporation whose building was found to have flammable cladding and whose strata insurance bill went from $100,000 to $600,000. Initially, they bargained this down to $180,000, on condition that liability caused by cladding be excluded. After the dust settled in following months, full insurance without the exclusion was offered for $250,000 – still two and a half times the original amount.
This highlights the rocky nature of strata insurance since the Grenfell fire in London last June. Whilst cladding issues had been highlighted through Melbourne’s Lacrosse fire in 2014, the problem’s extent has become more evident through state-based audits which followed the Grenfell blaze.
Regarding insurance, this raises questions about how flammable materials are impacting strata policies and actions which strata managers and owners corporations should adopt to manage exposures.
In its submission to the Senate Inquiry into Non-Conforming Building Products, the Insurance Council of Australia notes that any installation of building products including non-combustible façade materials which do not meet requirements of the National Construction Code “critically undermines the ability for an insurer to rely upon the safety and performance of the building” and thus impacts how underwriters assess the likelihood and magnitude of events involving serious losses.
In response, the Council said underwriters could adopt several measures. These include refusing to insure buildings or to renew existing policies, raising premiums, passing on additional reinsurance costs to consumers, increasing excess amounts and including other conditions such as specific exclusions or requiring non-complying building products to be replaced.
According to Antony Vatner, managing director of BAC Insurance Brokers, consequences are serious.
To be sure, Vatner applauds the insurance sector’s response. Following an initial period of chaos after Grenfell, he says underwriters improved their understanding of cladding and worked to support their clients.
Nevertheless, in Grenfell’s immediate aftermath, he describes a three to four-month period of panic. During this time, he said many underwriters refused to take on new buildings which had cladding and responded to ‘unfavourable’ cladding scenarios with existing policies through massive premium increases, larger excesses, new exclusion clauses and, in some cases, refusing to offer renewal. One insurer brought out coverage which excluded cover for cladding problems – a move Vatner said drew criticism but provided an alternative for owners corporations who may otherwise be without insurance.
Speaking particularly about New South Wales, he said this is problematic for strata managers. Under reforms introduced in 2016, managers need to obtain at least three quotes for insurance. Whilst this was designed to improve strata manager accountability, it effectively placed those struggling to obtain even a renewal offer for existing policies, let alone additional quotes, in a bind.
All this has happened, Vatner said, as owners face rectification costs which can run into the millions. In at least four of the buildings he looks after, Vatner says owners have forked out in excess of $1 million to have cladding replaced.
“After Grenfell in late June, the industry went into panic,” he said.
“No one was looking for business that was not within their existing portfolio. Insurers were looking at how they could help their existing clients but no one was looking for new buildings that had cladding. And some existing insurers did not even want to offer renewal.
“The first three or four months was meltdown.”
As for strategies, Vatner said owners corporations should adopt a proactive approach involving initial inspections, talking with insurers early and subsequently confirming what is on the building and where.
Commencing early, he said, is critical. To renew policies, he said insurers would need to see copies of the façade finishes schedule and exterior elementary drawing of the building. This includes schematic drawings showing cross sections (vertical combustible cladding is worse than its horizontal counterpart as this can facilitate the spread of fire up the building). They will also want to know what material is on the building (not just supplier but make and model) and information about any large-scale test results.
All this will help secure policy renewals at manageable rates. Armed with this information, insurers can make informed assessments about risk. Without this, they are forced to adopt ‘worst case’ scenarios and assume that the entire building is covered with façade material containing a polyethylene core (the most flammable cladding type). Obviously, this would impact risk assessments, premiums and conditions offered.
According to Vatner, there are examples of such approaches paying off. In one case, an owners corporation which had identified that their building had flammable cladding in a horizontal arrangement covering around 10 per cent of the façade was offered an increase of in premiums of six per cent. Whilst leaving any flammable cladding intact raises safety issues, this at least was a manageable outcome from an insurance viewpoint.
Starting early is important as this takes time. This is especially the case where documentation is not available (e.g. where the building is old or the builder is uncooperative) and samples of the cladding need to be tested.
At any rate, some policies require ongoing disclosure of known risks as a condition of the agreement.
John Paul Whitbread, managing director of Whitbread Insurance Brokers, encourages strata managers and owners corporations to work with insurers.
Where there is flammable cladding, he says insurers are generally prepared to work with owners corporations to devise a rectification strategy, even if that may take up to around 18 months. As well as removal and rectification of cladding, this could involve installation of automated sprinklers or (speaking particularly about Melbourne) applying to have buildings included on a Metropolitan Fire Brigade list for which a ‘heightened response’ will occur in the event of a fire.
Insurance, Whitbread says, is about relationships. Where strata managers and owners corporations engage with underwriters about cladding problems up-front, he says insurers can work with this, make risk assessments, talk with their own reinsurers and become party to workable solutions. By contrast, those who fail to address issues and approach insurers late may be disappointed.
Beyond insurance, Whitbread said there are important social issues. By 2040, he says almost half of all Australians will be living in dwellings governed by strata title. Declaring buildings unsafe and putting hundreds out on the street will not be acceptable. Instead, he says, a collaborative approach is needed.
“Government, insurers, strata managers, agent/brokers, owners corporations and/or also the respective builders have to work collaboratively to come up with a fair and equitable approach which deals with the issue appropriately,” he said.
Flammable cladding is affecting owners corporations from an insurance perspective.
In response, strata managers and owners corporations must collaborate with insurers on workable solutions.