Where disputes arise under a strata management statement (SMS), the parties can have an expert appointed to determine the dispute. In a recent matter, James Moir of Moirs Law was appointed as an independent expert to determine a dispute over an increase in the BMC’s insurance premium, due to a tobacconist use within one stratum lot. 

 1. There were two members of a Building Management Committee (BMC), a residential strata scheme, and a retail shopping centre owner (not subdivided). 

2. The retail owner leased a street-fronting shop to a tobacconist. 

3. The insurers who were co-underwriters of the policy withdrew, due to the tobacconist use. 

4. Other local insurers would not offer cover due to the tobacconist use. 

5. There were also unresolved defects the subject of legal proceedings, and some insurers refused to offer cover because of the defects (and possibly tobacconist use too). 

6. The BMC had to go offshore to a much more expensive insurer. 

7. The 2 BMC members could not agree on who should pay the increase in the premium. 

8. Where there is a BMC, s 162 of the Strata Schemes Management Act says the premium for the damage policy is to be paid by the parties according to the proportion that the replacement value of their part of the building bears to the replacement value of the whole building. We will publish a further article specifically covering this, and what it means for valuations. 

9. Clause 28.2 of the Strata Management Statement (SMS) said if a Member does anything which results in an increase in any insurance premium, that Member must pay the increase to the BMC, and it may be added to their Administrative Fund contribution. This is in similar terms to s 82 of the SSMA, which allows the Tribunal to order that an owner in a strata scheme pay the increased premium as additional contributions, if the use of their lot causes the premium to increase. 

10. The question for James Moir to determine was whether one party did something which resulted in the increase. The determination was that whilst the defects took away some alternative insurers, neither stratum owner did anything to create the defects, and the primary cause for the increase was the tobacconist use. Clearly the retail owner did something (leased to a tobacconist) which resulted in the increase (the 2 incumbents and 2 alternatives withdrew). 

11. Leasing to a tobacconist remains fraught with danger in the current climate. It is against the policies of many leading Australian insurers to offer cover to a strata scheme containing a lot used as a tobacconist. The insurer’s decision is sometimes influenced by the tobacconist being internal (ie within a shopping centre) and not street-facing. 

12. For strata schemes, if there is a tobacconist occupier, various people need to be contacted, and well before the policy needs renewal: 

• The broker, to see (A) will there be an increase to the premium, and (B) can steps be taken to mitigate the increase (such as re-naming, re-configuration, bollards and security screens)? 
• The occupier, especially where they are part of a chain, to see if they have other insurers they have dealt with and can they help keep the overall premium down. 
• The owner, to see (A) if they agree to pay any increase and (B) if they understand they can be forced to pay for the increase. 
• In case legal proceedings might arise, in order to properly quantify the increase in premium attributable to the new use, (1) ask the broker for the premium without disclosing the tobacconist, and then (2) disclose the tobacconist and ascertain the new premium with the tobacconist.

13. Commercial or mixed use schemes should consider a by-law which: 

• Does not ban but requires consent for certain high-risk uses (so as not to breach Cooper), that can be withdrawn 
• Sets a process for seeking approval from the OC as early as possible 
• Sets conditions for approval, including agreeing to reimburse the increased premium, compliance with fire safety, provision of planning approval 
• States that the OC will enforce its rights in the Tribunal including by recovering the premium increase 
• Gives the owner/tenant the chance to find a cheaper insurance alternative (on a non-exclusive basis). Some tenants are part of a chain and may be able to assist.

14. Separately, we have a strata case running before the Tribunal under s 82 of the SSMA, which also raises interesting issues. We will report back after the outcome of that case.