QLD: Q&A Strata Insurance Commission – the Pros and Cons

This article is about the pros and cons of strata insurance commission in QLD, why they are paid and why they may be the best option for lot owners and body corporate committees.

Table of Contents:

• QUESTION: Our new body corporate manager charged more for insurance commission than originally agreed. We have proof, but they won’t refund the difference. What are our options?
• QUESTION: Our BCM’s insurance commission is no longer included in our total premium paid. We’ve been told it’s now being ‘paid by the insurer’. What’s changed?
• QUESTION: If the body corporate manager does not arrange the insurance for the scheme, should they still be entitled to the commission? This clause is regularly included in management contracts.
• QUESTION: Can our body corporate committee negotiate our own strata insurance coverage and use the body corporate manager’s strata insurance commission to reduce our annual contributions?

Question: Our new body corporate manager charged more for insurance commission than originally agreed. We have proof, but they won’t refund the difference. What are our options?

We initiated a contract with a new body corporate manager in December 2022 based on an emailed quote on letterhead signed by the company principal. Two prices were offered, depending on whether the body corporate company organised the insurance and were paid a commission. The offer excluding insurance commission was $800 dearer than if the manager arranged the insurance and earned a commission.

We chose the cheaper quote, allowing for an $800 insurance commission to be paid from the premium. Within six months, the business sold and the insurance broker changed to a broker who pays higher commissions.

The premium breakdown shows the manager’s commission component of $2300. We provided evidence of the original agreement and requested a refund of the difference, but the new manager hasn’t responded. What are our options?

Answer: Check specific wording in the contracts and what they allow the new management company to do.

I suspect this will come down to the specific wording in the contracts and what they allow the new management company to do. As the next step, the body corporate should probably contact a body corporate specialist solicitor and have them review the wording of your contract and advise. This will cost you a little money, but the certainly this will provide is worth it.

Whatever the outcome, it is odd that the new management company hasn’t responded in a reasonable timeframe or manner to your questions. They may have some reasonable points to make and may be correct in their interpretation of the contract, but starting a new relationship with a dispute and poor service doesn’t seem the best choice. Whatever happens, I expect you will make your own decisions about the value of continuing the relationship on the basis of this interaction.

Another alternative is to arrange your insurance through an independent broker. In that case, they could provide you with a renewal offer that wouldn’t include a commission to the body corporate manager – although there are fees from the broker. Insurance issues would be managed between the committee and the broker. If you went down this path, you would also need to review your contract. Some companies have a penalty clause in their agreement to manage situations where they don’t receive a commission, and some don’t. Check that before making any decisions. By the sounds of things, your insurance is due soon anyway, so it may be difficult to arrange this at short notice. It could be something to consider for future years.

More generally, insurance commissions will be a central battleground between customers and management companies over the next few years. The commission system has had its merits over time. It has successfully helped body corporates nationwide ensure they have the required coverage. However, the fatal flaw with the system is that the commission paid to the management agency is usually based on a percentage of the premium. As premiums have shot up in recent years, manager’s commission payments have also increased, resulting in consumer dissatisfaction with the commission set up. Body corporate companies and related authorities have been slow to react. Hopefully, change is on the horizon. And, as you might expect, many body corporate companies have become more than a little addicted to the extra revenue that has rolled in from rising premiums, making it hard for them to contemplate alternatives. As a result, disputes like yours are becoming more commonplace.

It will be interesting to see how the market reacts. My company, for example, has already moved on to a new insurance management system. You might expect to see more small to mid-sized body corporates with greater flexibility in their operations bring out alternative offers over the next couple of years. Perhaps the number of customers wanting change will reach critical mass, resulting in widespread change across the industry. Maybe your scheme will be in the vanguard of that movement.

William Marquand
Tower Body Corporate
E: willmarquand@towerbodycorporate.com.au
P: 07 5609 4924

This post appears in the June 2024 edition of The QLD Strata Magazine.

Question: Our BCM’s insurance commission is no longer included in our total premium paid. We’ve been told it’s now being ‘paid by the insurer’. What’s changed?

In 2023, the body corporate manager’s commission of $17,000 was included in our total insurance premium to be paid.

This year, the body corporate manager’s commission of $14,534 was not included in our total premium and advice from the committee treasurer states the commission was paid by the insurer.

Why is there a difference between last year’s and this year’s commission payments, considering we’ve been with the same insurer and broker for a few years?

Answer: I think the line that the commission is paid by the insurer is a bit misleading.

Without all the information, we can’t really answer the specifics of the question. As an owner, you should direct this question to the body corporate manager or the committee. If needed, you could table the question for the next committee meeting or submit an owner’s motion to guarantee a reply.

Otherwise, details about the commission structure and payment should have been declared at the AGM, so for information on this, you could go back and look at the last notice you received. You could also ask to be sent all documentation relating to the renewal.

Generally, I think the line that the commission is paid by the insurer is a bit misleading. It implies the commission does not affect your premium, which is incorrect. Whether you think commissions are reasonable, they are part of your premium. Technically, they are not a direct payment from the body corporate to the manager, but you pay for them in your final premium, so who cares about the technicality?

In saying this, I’m not criticising your treasurer. They may be doing their best to explain. As your commission has reduced at a time when all other costs are rising, perhaps there has been some deal negotiated for the benefit of your scheme. As ever, if you have questions about how your body corporate is operating, it’s fine to ask. If you receive a clear answer, that’s probably a good thing. If not, it might be a red flag.

William Marquand
Tower Body Corporate
E: willmarquand@towerbodycorporate.com.au
P: 07 5609 4924

This post appears in the May 2024 edition of The QLD Strata Magazine.

Question: If the body corporate manager does not arrange the insurance for the scheme, should they still be entitled to the commission? This clause is regularly included in management contracts.

A lot of body corporate contracts include a clause that says if the body corporate manager doesn’t arrange the insurance for the scheme, the body corporate manager is entitled to claim back from the scheme any potential commission that they might have received as a result of not doing the work. It’s quite a controversial cause. What is your opinion on this clause?

Answer: Is the insurer going to pay and subsidise the performance of the manager or is the management company going to have to increase the fees to make it commercial to operate?

Todd Garsden, Mahoneys:

This very controversial clause causes a lot of discussion, particularly with the recent reforms to the modules that required the dollar amount of commissions to be disclosed.

It does seem extraordinary that a manager can charge a fee for effectively, missing out on an opportunity of an insurance commission. However, sometimes insurance commissions are up to a third of the revenue of managing a contract. That’s important because we want our body corporate managers to be able to make a fair profit. If you’re cutting a third of their revenue out, they’ve got to make that up somewhere else and it’s only going to come back to the agreed fixed fee services, because they’re probably undercutting on those fees knowing they’ll make some money back from an insurer.

So is the insurer going to pay and subsidise the performance of the manager or is the management company going to have to increase the fees to make it commercial to operate? It’s a very loaded question and there’s no right or wrong answer. You can see it from both sides.

William Marquand, Tower Body Corporate:

Any body corporate that is activating that cause is probably doing so knowing the relationship with the body corporate they’re representing is going to end fairly soon. I can’t imagine any body corporate would be happy with the body corporate manager using that cause. They would see it as taking money without doing any work.

It effectively works as an exclusivity clause, which you can’t really have, to force the body corporate to get insurance through the body corporate manager.

Todd Garsden
Mahoneys
E: tgarsden@mahoneys.com.au
P: 07 3007 3753

William Marquand
Tower Body Corporate
E: willmarquand@towerbodycorporate.com.au
P: 07 5609 4924

This post appears in the April 2023 edition of The QLD Strata Magazine.

Question: Can our body corporate committee negotiate our own strata insurance coverage and use the body corporate manager’s strata insurance commission to reduce our annual contributions?

We have five units in our strata scheme so our annual fees to our body corporate manager are very high. As secretary of our group, I endeavour to keep costs down by getting our own quotes for intended work and doing all necessary research before instructing the body corporate to act on our behalf.

Our annual insurance and the commission increases every year. The strata insurance commission we pay our body corporate manager is now almost $5000. This is paid directly to the body corporate manager by the insurance broker.

Can our body corporate committee negotiate our own strata insurance coverage and use the body corporate manager’s commission to reduce our annual strata insurance contributions?

Answer: Do you get a better deal if the body corporate arranges the insurance directly so there is no commission or fee paid to the body corporate manager and its broker for doing the work?

Body Corporates are entitled to arrange their own insurance if they want, and if you can get a better deal for your scheme then you probably have an obligation to do this. The initial process is relatively simple – advise your body corporate managers that you will arrange your own insurance by holding a VOC to confirm that the committee will be undertaking this function, and then either contact insurers or an independent broker to arrange.

However, this question opens up a much bigger topic of conversation for body corporates which is, do you necessarily get a better deal by going it alone – that is having the body corporate arrange the insurance directly so there is no commission or fee paid to the body corporate manager and its broker for doing the work?

It’s easy just to say that commissions are a rip-off, but the practical reality is, like all systems, this method of arranging insurance has pros and cons and you need to be informed to evaluate these in the interests of your body corporate.

I’ve listed some of the considerations in the appraisal process below, but first, as someone who runs a body corporate company, I have to be transparent saying that our company receives commissions when we arrange insurance for a site. This is declared to owners as part of our contract and also at the time of renewal. We also have schemes that manage their own affairs. Both systems are functional and, I think, reasonably fair to owners in terms of transparency and as a trade for receipt of payment for work conducted. Some people may disagree and that’s OK – I encourage your comments below. As a company, we are also conscious that the commission system is coming under increasing pressure, particularly as premiums are rising steeply. It seems likely that, at the least, body corporate management agencies will have to offer alternative models to the established system in the next few years.

From an owner’s perspective, it has to be considered that arranging insurance and dealing with claims takes a lot of time, organisation and some skill. It may not always feel like it, but most managers I’ve worked with put a lot of energy into trying to keep premiums low for their customers. The amounts paid to managers and brokers are compensation for the time and effort they put in.

In that context, what considerations are there if you want to go it alone?

Firstly, you need to look at who is doing the work. If it is not the body corporate manager, it probably means the Committee is responsible, not just for arranging the renewal, but for managing claims throughout the year. That includes dealing with owners, contractors and all the associated issues. The managing agent will probably just forward the Committee any phone calls and emails they receive. Is the Committee happy to do this? Do the individuals have the time? Do they have the expertise and the knowledge? If the answer is yes, then you can probably make a saving by going it alone, but this is mostly because the time of the Committee has been valued at zero whereas body corporate managers and brokers value their time more highly. And, as an individual committee member, you might want to consider what the net benefit to you is for doing the work on behalf of others. Consider it this way  – if you have a 10 lot scheme and the Committee saves $1000 by arranging its own insurance, that sounds good. But as an individual you have saved just one tenth of that amount – $100 – and if you have done ten hours of work to achieve that saving your rate of pay is, effectively, $10.00 per hour. Are you happy with that? It’s worth thinking about.

If the Committee don’t want to do it all by themselves, they could get an independent broker to assist, but then you have to pay a fee to this broker. Are their rates better than the fees charged by the body corporate manager and their broker? I’ve seen some cases where they are better and others where they are worse. Shop around and see what you can find. To help determine the total you are currently paying, you might need to look at your contract with your manager to see what the total of the commission is and what is included with it. Do the managers only arrange the insurance renewal for that fee, or do they help file claims and manage owners and contractors as well? Will the broker do this for you and would they charge a fee for it? To get a feel for this, ask your managing agent about the commission system, what payments they get and what you get in return. If they are transparent and comfortable having that conversation with you, that’s probably a good thing. If not, then it might be a warning sign.

Next, you might need to consider any additional service fees that could be applied by your body corporate if you go it alone but still need help with insurance matters through the year – even if the body corporate manager tries to stay out of insurance affairs, it is not always that easy. Consider this year where there have been a number of severe weather events. If you have flooding at your building, would you be happy if you called up the manager on the day of a disaster and they said that, as it sounds like an insurance event, they don’t handle that for your scheme so contact your broker but that they wish you good luck in arranging the repairs. Well, most managers wouldn’t do that, but they will bill you for the time it takes to help resolve the issues. The costs of this can rise quickly in some circumstances. Hopefully your scheme can avoid major issues but it is hard to extricate body corporate managers completely from the process so you need to be aware of the possible costs and evaluate the risk and reward accordingly.

Lastly, you also need to consider whether there is a penalty clause in your agreement with the managing agent if you don’t arrange insurance through them. Some agreements have this clause, some don’t. Even if your agreement has the clause, would the managing agents apply it? Typically the clause allows the body corporate managers to apply a fee equivalent to the lost revenue they were anticipating from receiving the commission, so the amount can be high. Management agencies tend to be reluctant to apply this section of the contract because if they do, the likelihood is that the customer will look to end the relationship at the next opportunity. On the other hand, if they think your scheme will leave regardless or if they lose money on your scheme because they are not getting the commission, they might choose to apply it. Check your contract and ask your managers so you know where things stand.

William Marquand
Tower Body Corporate
E: willmarquand@towerbodycorporate.com.au
P: 07 5609 4924

This post appears in Strata News #622.

Have a question about QLD strata insurance commission or something to add to the article? Leave a comment below.

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Read next:

• VIC: Q&A Insurance Commissions Within the Strata Industry
• NSW: Q&A Strata Manager Insurance Commissions

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