When a new strata development is completed and transitions over to the management of an Owners Corporation (OC), there are many costs and responsibilities that shift from the developer to the collective Lot owners. One item that often raises questions is the first year’s building insurance premium — specifically, why it isn’t included in the OC’s initial budget, and who pays for it.
In almost all cases, the first year’s insurance premium is paid by the developer. Rather than being absorbed by the OC’s operating budget, this cost is typically recovered by the developer through the settlement process with the purchasers of the individual lots (Owners).
What is an Owners Corporation Budget?
An Owners Corporation budget is a detailed breakdown of the expenses that an OC is responsible for each year. It covers everything from maintenance and repairs to utilities, administrative fees, and, of course, insurance premiums. These budgets are reviewed and set annually, with the intention of ensuring that there are enough funds to cover the OC’s ongoing operational costs.
Is OC Insurance included in the budget?
Insurance is one of the most important components of any OC budget. It provides coverage for common property and dwelling replacement (if applicable). The OC is typically required by law to take out certain types of insurance, including reinstatement and replacement insurance and public liability insurance. These policies are generally renewed annually, and the premiums for these policies form part of the OC’s operating costs.
However, the first year’s insurance premium is an exception to this rule.
Why isn’t the First-Year insurance premium included in the budget?
The OC budget is prepared to cover the ongoing, future expenses of running and maintaining the Common Property. This includes maintenance, utilities, management fees, and the insurance premium from the second year onwards.
However, when the OC is first formed — often just before or after the settlement of the first lots — it doesn’t yet have funds or a functioning budget. The OC cannot technically operate or raise funds until it has Owners contributing via levies, which means it isn’t able to arrange or pay for the first year of insurance. But the insurance must be in place before settlement can occur.
Because of this timing, the first year’s insurance is arranged and paid by the developer who does so to ensure the property is adequately covered from the outset. Read more…
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