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INSURANCE REBATES

Is there a backroom deal happening between your insurer and your OC manager, or is everything on-the-level?

If you’ve had substantial experience in an owners corporation, or you’ve read my post about the legislative requirements in relation to insurance, you’ll know that all owners corporations have to have insurance by law. An uninsured building results in an evacuation, banks defaulting on mortgages, and all owners losing out.


In Victoria, most OC managers receive a commission from the insurer as part of the insurance policy. This can at first seem untoward, given that the owners corporation doesn’t have a choice about having insurance in the first place. It is completely legal, as long as it is disclosed to the owners at each AGM.


Why should the manager get this money?


Owners Corporation Management firms are businesses, and to be fair, the role of all business is to make money and turn a profit. But when it comes to insurance rebates, the real question here is often one of ethics rather than profit.

Take a hypothetical owners corporation, of say, 25 apartments. An owners corporation firm may calculate that in order to manage this precinct, provide an agreeable service level, and be viable, the revenue must be $10,000 a year. This will come from a variety of sources – the yearly management fees, disbursements, additional services (such as lodging BAS returns, or VCAT attendances), and the insurance rebate. If the management firm doesn’t receive the money from the insurance rebate, the income stream will have to come from another source.


These other sources could include an insurance ‘dividend’ instead of a rebate, so that the manager can declare to the owners that they don’t take a rebate, but in reality they do, it just has a different term and is not disclosed. Or the source of revenue could be undeclared commissions coming from maintenance providers for the referral or works, which means the committee is only presented with maintenance providers who are privy to the underhand deals, and who are not necessarily going to provide the best service or value. Alternatively, it could simply come in the form of a higher annual management fee.

Does the manager really need this revenue?


A different approach from the manager could be a decision to lower the revenue from $10,000 a year to $9,000 a year by not taking the rebate, and instead provide a lower service level, which is not an advantage to the owners corporation. (There are of course management firms who would both take the rebate, and lower the service level, at which point we would recommend that the committee look to change the manager).


If there are two firms both generating $10,000 per annum of revenue from this owners corporation, but the first firm has a percentage of this revenue through a disclosed insurance rebate, while the second firm instead generates the additional profit purely through higher fees, undisclosed dividends, and recommending unethical maintenance contractors, the owners are going to be better off with the first firm. And the reality is that many firms who take the second approach will in fact create even more revenue from these owners through multiple backhanded deals.


Rebates to the manager can save owners corporations money in the end.


While the concept of rebates between third parties resulting in a saving of owners' money seems counterintuitive, business transactions are often anything but straightforward, and the agreements between insurance brokers and owners corporation managers are no exception. In exchange for the rebate from the insurer, the professional manager assists with processing insurance claims, which lowers the insurer’s overheads. The manager can also refer the insurer more business, saving the insurer advertising and marketing costs.

You need the best outcome for your owners corporation.

In many AGM agendas stands the declaration “In accordance with the provisions of the current legislation we confirm that brokers share the fee they receive from the underwriter the owners corporation manager as a charge for services relating to the referral of business and the assistance in the management of insurance claims, management of the insurance policy, issuance of certificate of currencies and general insurance negotiations on behalf of owners. It is to be noted that the underwriter confirms the annual insurance premium is not reduced in the event the fee is removed.”


Insurance Case Study:


The Owners Corporation that Removed the Manager’s Insurance Rebate


There was a Melbourne-based owners corporation of around 400 lots who had an annual premium of around $117,000. There was no significant claims history. At an AGM, a new committee was elected and at the top of their agenda was to liaise with the insurer directly, circumvent the manager, and manage the claims themselves - they then removed the rebate from the insurer to the manager. Despite the notification in the AGM stating that the insurance premium was fixed regardless of whether or not the manager was paid a rebate, the committee members proclaimed to all owners that they would save themselves around $20,000 a year, or around 2% a year on their OC fees by doing so.


Unfortunately for the owners corporation, the situation did not pan out the way the committee had hoped.


Upon being asked to quote for the new premium, the building insurers realised that the clams work would be increased, because the committee were neither qualified enough nor insured to undertake this task in light of the manager being removed from these duties. This would mean increasing their overheads.

The building insurers also understood that with the OC manager removed from the decision making process, the safeguard of the manager’s public liability insurance was also removed, passing on this liability directly to the building insurer. And the building insurer also knew that no business would be referred to them through this arrangement with the committee directly.


Out of all the insurers in Victoria, only two were willing to quote for an insurance policy. The incumbent provider quoted a policy over $300,000 (up from $117,000), and a second insurer quoted over $260,000. The committee had been so unprofessional in obtaining the quotes, due to their lack of experience, that the two quotes were presented literally hours before the policy was due to be renewed.


And so committee reluctantly accepted the $260,000 policy, saw their OC fees increase by 14% with nothing to show for it, and were left trying to explain to the rest of the owners why their promise of a $20,000 reduction had turned into an increase of over $140,000 instead.

 

Want to know what insurance arrangements will work for your owners corporation? Talk to Melb OC to find the best policy for you.

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