The law, insurance and combustible cladding on strata properties

By taking action today, owners corporations can be better prepared as the situation evolves

An examination of building defects in residential multi-owned properties across New South Wales, Queensland and Victoria and Queensland found 40 per cent of these defects related to building fabric and cladding. The study, which was jointly run by Deakin and Griffith universities and funded by PICA Group, identified around 600 New South Wales buildings and 500 Victorian cases of combustible cladding on strata properties — revealing a crisis is affecting major cities in these states.

To help owners better understand the implications of combustible cladding on strata properties and how they can mitigate associated costs, we spoke to Paul Jurdeczka. Mr Jurdeczka, a strata defects expert from Chambers Russell Lawyers, works with many strata properties dealing with the problem and is well-positioned to provide advice on the issue.

  1. An increased safety risk
  2. A financial burden
  3. Insurance implication

An increased safety risk

Setting the tone for our discussion, Mr Jurdeczka stressed the gravity of issues relating to combustible cladding on strata properties. “Property owners shouldn’t underestimate the importance of dealing with high-risk cladding. Defective cladding can catch fire, and fires can damage buildings and kill people,” Mr Jurdeczka said.

“It’s a crisis and a huge problem affecting the strata industry, insurers and Australian state governments.”

In Sydney, 130 buildings were issued safety notices and told to replace flammable cladding or reveal more details about the composition of materials used. The City of Sydney is investigating a total of 299 properties with potential combustible cladding.

A financial burden

The community sees the issue as an unfair financial burden, especially since the financial impacts of the COVID-19 pandemic. Bills to replace flammable cladding on strata properties can run into the tens of thousands and render apartments unsalable and uninsurable.

Mr Jurdeczka explained that many owners corporations are dealing with lengthy legal battles with builders and developers, who are legally obligated to foot costs.

“Owners corporations are responsible for their own buildings, but third-parties may stand to be liable for remediation or compensation including builders, developers, insurers and
others. The law is far from settled in this space.

“Detailed investigations on combustible cladding on strata properties are necessary so that clear advice can be provided. In some instances, court cases have commenced, but in the meantime, councils are auditing buildings and wanting to know how cladding is being dealt with.”

It can often be impossible for owners to seek or receive compensation for some defect to properties due to builders or developers having closed, gone under, or gone into administration.

Insurance implications

Many apartment owners in New South Wales, Queensland and Victoria are likely to pursue insurance claims to finance their cladding rectifications.

“In New South Wales, owners corporations will hold insurance required under the Strata Schemes Management Act. Generally, these insurance contracts have a number of discrete policies, which may respond in certain circumstances to at least some of the losses arising from cladding on a building,” Mr Jurdeczka said.

However, there have also been reports of some insurers hiking premiums and excesses or refusing to insure altogether.

“The challenge here is when owners corporations tell their insurer, the insurer may in the future only offer insurance on terms with significantly increased premiums or excess. We have also seen situations where insurers exclude indemnity for loss arising from cladding or have simply refused to insure at all.”

To help avoid such circumstances when it comes to insurance and combustible cladding on strata properties, Mr Jurdeczka recommends taking action early to identify if you have non-compliant or combustible cladding on your strata property and seek advice from your strata manager, insurance broker and a legal representative.

“It’s important to be proactive and deal with flammable cladding if it affects your strata property. There’s never been a time more crucial than today as laws continue to change and evolve.”

Another way to improve your chances of making successful insurance claims is by disclosing non-compliant or combustible cladding on strata properties early.

“Having high-risk cladding on a building is an issue that insurers will need to know about. If the insurer isn’t notified about it, they might be able to deny liability for claims down the track.”

While state governments move to catch up with their cladding crises, property owners can fall back on strata management to provide guidance and support.
When it comes to managing a strata property, there are various compliance or legislative requirements that are needed to protect owners and residents.  Also, when the situation allows, you don’t want to miss out on the chance of an insurance claim.  Click here to learn more about Community Health & Safety and related services to ensure your protection.  You can also download our FREE Community Living guide series on defects here.  If you would like to learn more about the services we offer, click here for a free assessment.