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.
How does the developer recover the cost of the insurance premium?
The developer plays a crucial role in the early stages of an OC’s existence. They are responsible for ensuring that essential services, including insurance, are in place before the OC takes over management. The payment of the first year’s insurance premium by the developer ensures that the property is protected.
Although the developer pays the premium up front, they seek reimbursement via settlement adjustments.
This means that, at the time each lot is settled, the developer includes a proportion of the insurance cost in the settlement statement as a recoverable outgoing. The purchaser of the lot contributes their share of the insurance premium as part of their settlement amount — much like how council rates or land tax are adjusted.
This approach is standard practice and allows the developer to recover their outlay fairly, with each incoming Owner contributing to the cost of insurance for the period they will be occupying the property.
Why This Practice Benefits Everyone
• The OC starts with insurance in place. This ensures there’s no risk of an uninsured period between the end of construction and the start of formal OC operations.
• The developer isn’t left out of pocket. Through settlement adjustments, they can recover the cost proportionally from all Owners.
• Lot Owners pay only their fair share. Owners contribute their portion of the insurance cost in a clear and transparent way during settlement, rather than through unexpected levies later.
• The OC budget remains accurate and forward-looking. The first year’s premium isn’t an ongoing cost, so excluding it keeps the OC’s financials clean and focused on future obligations.
Am I paying insurance twice — at settlement and in the OC budget?
If you’re buying into a new development, you may notice a line item for insurance in your settlement adjustments. This is normal and reflects your share of the first year’s premium, which the developer has already paid to ensure the building is protected.
Going forward, the OC will assume responsibility for renewing the policy each year, and future premiums will be budgeted as part of your annual OC levies.
If you notice an insurance item in the budget, you may feel like you are paying for insurance twice – this is not the case. Instead, you are repaying your portion of the first year’s premium to the developer and putting aside your portion of the second year’s premium so it can be promptly paid come renewal time.
Conclusion.
The first year’s insurance premium is not included in the OC budget because the OC is not yet active or funded at the time the insurance needs to be in place. Instead, the developer pays this cost up front and then recovers it fairly through settlement adjustments. Understanding this process helps Owners see that while they do contribute to this important cost, it is handled in a structured and equitable way — ensuring the property is protected from day one.
Please note that the information provided in this text is for general informational purposes only and should not be construed as financial advice. Readers are encouraged to seek professional financial advice tailored to their specific circumstances before making any financial decisions.