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Q: I plan to buy an investment property and many of the properties I have been looking at have been unit titles. I have heard that insurance for unit titles is different from other types of properties and that an owner of a unit title can end up paying more for insurance. Can you tell me how insurance works in relation to unit titles?
A: The Unit Titles Act 1972 contains provisions relating to three different types of insurance. Section 15 of the act requires the body corporate to:
Insure and keep insured all buildings and other improvements on the land to the replacement value thereof (including demolition costs and architect's fees) against fire, flood, explosion, wind, storm, hail, snow, aircraft and other aerial devices dropped therefrom, impact, riot and civil commotion, malicious damage caused by burglars, and earthquake in excess of indemnity value, as well as: effect such other insurance as it is required by law to effect or as it may consider expedient.
The body corporate must therefore arrange for one policy to be put in place to cover the whole unit development. If there are facilities such as swimming pools and gymnasiums these will be covered by the policy. Insuring the whole development with one company avoids problems that might otherwise arise if each of the units and any facilities were individually insured with different companies.
The body corporate will pay the premium and recoup the cost, together with the cost of the other outgoings, by way of the body corporate levies. Body corporate levies are calculated based on the relative value of the units.
Section 39(1)(a) of the act provides that a unit owner is not prevented from taking out insurance for his or her own unit even where the body corporate has a policy in place. In normal circumstances it would not be necessary to have separate cover, but if an owner believed there was a problem with the body corporate policy then he or she might arrange temporary cover until the problem was resolved.
The third type of insurance provided for in the act is mortgage redemption insurance. Under section 39(1)(b) of the act a mortgagee of a unit title may require an owner to obtain a mortgage redemption policy.
It is not mandatory and mortgagees do not always require such policies, although in practice they are more likely to require them if the borrowing is high in relation to the value of the unit and the unit is tenanted.
Where a mortgage redemption insurance policy is in place and the unit concerned is damaged or destroyed, the owner of the unit is indemnified against liability to repay the mortgage.
A unit development may have more in the way of shared facilities to be insured, but apart from this it is unlikely that insurance for a unit in a unit development insured solely under a body corporate policy would cost more than insurance for a comparable non-unit titled property.
However, in situations where a mortgagee requires a mortgage redemption policy, a proprietor chooses to obtain additional separate insurance, or the body corporate has effected additional insurance, then the insurance costs are likely to be higher.
Before entering into an agreement to purchase a unit title property, it is wise to obtain as much information as you can about the unit and the development as a whole.
You should ask for a copy of the body corporate budget for the year, which will show the insurance premium as one of the outgoings, and find out how much the annual body corporate levy is for the unit concerned and what proportion of the levy relates to insurance.
The act is under review and insurance provisions may change.
One area being considered is whether the shared expenses for a unit development based on the relative value of the units, should be more closely aligned to an owner's use of the unit and the other parts of a development.
