We received this question about running a home business in strata, and how this can affect the owners corporation’s insurance. The following response has been provided by Ann Farrugia, National Client Relationship Manager – Strata, Whitbread Insurance Brokers
Question: Running a home business in strata – how does this effect our insurance?
“Our body corporate has residential insurance to cover our 8 units. This includes public liability insurance. We have an owner/occupier who runs her Pilates business from her unit.
In speaking with the insurer, they advised that if a client of the business was injured on site we would not be covered unless the insurance was upgraded to commercial insurance.
To my knowledge, the owner setup her business without notifying the body corporate management group and has run it for some years from her unit. To move to commercial insurance will mean an increase in the insurance fee.
Can you advise if the business owner can be charged the difference between residential and commercial insurance costs or if the business can be stopped from running out of the unit putting the other owners at risk?”
Answer
There are several important factors to address in relation to the insurance here…
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Duty of Disclosure – Tell the insurer and / or your insurance broker
Before entering into a contract of general insurance with an insurer, the Owners Corporation (OC) has a duty under the Insurance Contracts Act 1984, to disclose to the insurer every matter that they know, or could reasonably be expected to know, is relevant to the insurer’s decision whether to accept the risk of the insurance and, if so, on what terms. The Owners Corporation has the same duty to disclose those matters to the insurer before they renew, extend, vary or reinstate a contract of general insurance.
Essentially, the OC has a duty to disclose to the insurer anything that may increase or change the risk at the property, for example, knowledge that an owner or tenant is running a business from their unit. If changes like these are not disclosed on the insurance schedule, and a claim is made, it is very likely the insurer would deny the claim. Denial in such instances could be based on non-disclosure, particularly if risks like this are outside the insurer’s underwriting guidelines. The insurer could even go so far as to cancel the policy and refund the insurance premium paid. The OC would then be exposed to the costs and outcomes associated with a claim.
However, if the insurer is informed of a business being operated from a unit, and they have the opportunity to amend the policy according to their risk appetite and underwriting guidelines, a claim would more than likely be covered by the insurance – subject to the terms and conditions of the policy wording.
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Non-disclosure extends beyond Strata Insurance
It is worth noting that the issue of non-disclosure applies to all policies in place at a Strata property. Therefore, it is important for all insurers to be notified of any changes in circumstances within a property.
In this instance, in addition to the Strata Insurance, it is important for the Landlord and / or the Contents Insurer to know about any business activity taking place within the insured unit. This will help to ensure that insurance cover is maintained under the relevant policy.
Often, insurers may be happy to note on the Landlords / Contents Insurance policy schedule that a business is operating within the unit, but again it is up to the individual insurer as to whether they are able to cover it. If the insurer is not satisfied with the change in circumstances, the owner in question may require a Business Insurance policy.
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Residential or Commercial Strata Insurance?
It is the insurer’s discretion as to whether they decide to keep the policy as aResidential Strata Policy or change it to a Commercial Strata Policy.
Each Strata Insurer has specific underwriting guidelines to determine if the policy would be rated as a Residential or Commercial Strata policy. One of the major factors taken into consideration by insurers, is the percentage of commercial floor space versus percentage of residential floor space.
Based on specific circumstances assessed on a case by case basis, insurers may still be content to rate the property as a Residential risk, but this does not appear to be the case in this specific instance.
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Potential premium increase
Whether the premium increases or not is up to the individual insurer. It is important to note however that if the policy does change from a Residential Strata policy to a Commercial Strata policy, this will almost definitely attract an increase in the insurance premium.
So, who absorbs the cost…? In general, the Strata Insurance premium is shared by all of the units based on the lot liabilities outlined on the plan of sub division. As such, any premium increase should be shared according to the plan of subdivision.
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Setting up a business in an OC
Prior to conducting any business activities within a Strata unit, we recommend discussing the matter with the Strata Manager. The Strata Manager will then likely review and refer this matter on to the OC Committee.
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Stopping a resident from carrying out business activities in their unit
This is a matter for the Strata Manager / OC Committee to handle. Legal advice may also help provide guidance here.