Insurance claim settlement – Paddocks Club discussion

By Graham Paddock and Mike Addison

Using the term “complex” for community scheme living definitely carries multiple layers. It seems that every day brings new challenges and obstacles that can seem too complicated to address for those who don’t have a law degree. Fortunately for owners, trustees and anyone involved in the management of these types of properties, expert assistance is actually just a few clicks away. By joining the Paddocks Club as a Community-level member, you can have quick, easy access to industry experts who can help to simplify the most “complex” community scheme queries.

Recently, a member of the Club asked a question on the online discussion forum as to whether the payment of an insurance claim settlement needed to be made to the body corporate, or whether it was possible to pay the amount directly to an owner within the scheme:

Good day Paddocks,

Can the Body Corporate pay an insurance claim settlement directly to an owner or advise the insurers on the Agreement of Loss to make payment to the owner instead of the Body Corporate?

Graham Paddock offered some initial advice to the Club member:

Hi Club member,

The answer may have to be sought in the terms of the policy as well as in any arrangements a BC has made to allow the owners to deal directly with the insurer and receive direct payments.

However, unless it has been agreed otherwise, where the BC is the insured, the insurer should be paying the money to the BC’s account directly and allowing it to pay owners.

Graham then requested that Mike Addison weigh in on the query. Mike is one of the Directors of Addsure, an insurance brokerage that specialises in insurance, financial, and risk planning for community schemes, and is one of the experts who often assists Club members with any insurance-related queries. As this is his area of expertise, Mike offered the following sage advice to the Club member:

Hi member, 

The short response is that I agree with Prof. Paddock that the insurer should pay proceeds of a claim into the body corporate’s account for a number of good reasons. I recommend that claims are always paid into the premium payment account initially.

Background and Practical Issues:

PMR 24(3)(b) actually states that any amounts received under an insurance policy in respect of damage or destruction of property for which the body corporate is responsible should be paid into the reserve fund. Whilst this is theoretically a good idea as such, these are not administrative or operational costs per se, it does complicate issues and is more open to cyber fraud. So in practice, the premium paying account should be used. This means that the insurer is responsible to pay a claim into the account from which it receives (or debits) premiums to and their systems are sure to pay the claim to the correct account.

Subsection 3(1)(j) of the STSM Act (Functions of the body corporate) is quite clear in that the proceeds of any claim should be applied to the reinstatement of the damage caused.

This means that:

1. Owners do not really have a right to insist on cash in lieu of damages.

2. Trustees should not automatically set off damages claims proceeds against outstanding levies before repairs are dealt with.

These two points are often raised. Owners with limited cash flows are often tempted to use claim proceeds towards the settlement of their own debts or financial priorities than repair their section. This is especially true during these times. Some people would rather live with old damaged carpets, soiled ceilings and damaged cupboards, and use the money for something else. This should be discouraged as failure to repair damages will bring down the overall value of the building. Owners have a duty to repair their sections and the Act requires claim proceeds to be used for the purpose intended. This is sometimes difficult to manage but we often see well-managed schemes only paying owners when proof of payment to contractors is provided or the schemes pay contractors directly.

Where owners are in arrears with levies or in dispute with fines, sometimes trustees are tempted to hold back payments or set off claim proceeds against levies owed. This is understandable but setting off payments should only be applied if the owner has already had the repair done and already settled the contractor.

Remember, an owner always has rights and needs to be treated fairly but any insurance claim issue is a matter for the trustees. The trustees are the elected representatives of the owners and the insurance arrangement and claims are a function of the body corporate. The owner has a financial interest but dealing with the claim they take the role of witness and should assist in proving the claim.

Then there is the matter of the excess: The owner would usually pay the excess where there are damages to his or her section but this depends on the specific rules of the body corporate. Where one excess is applied to an event affecting numerous sections, the trustees/managing agent will need to allocate according to damages and or apply their minds in instances such as security gates and doors.

Therefore, claims should always by default, unless otherwise arranged by the body corporate, be settled by way of deposit to the body corporate’s premium paying bank account. This way, the body corporate can control settlement of the claim, correctly allocate the excesses and distribute where numerous sections and common property have been affected. Furthermore, proper accounting and recording keeping is assured. The cyber fraud risks are high when an owner asks an insurer to pay into the owner’s account – insurers would need to insist on proof of owner banking details, and go through verification processes. Accounting and Reconciliation are easily overlooked.

So, to keep a long story short, and there is more – always better not to have funds paid by the insurer to the owner directly.

As you can see, community scheme living is never a simple matter. If you feel that you or one of the members of your body corporate, HOA or company would benefit from having access to this type of assistance and this level of expertise, consider joining the Club today as a Community-level member. You can download the brochure for more information, or register for the Club, using the links below:

Paddocks – Club brochure

Register – Community membership