VCAT determines that monies paid by an insurer to an OC for a lot owner’s claim are held “on trust”

A VCAT decision released last month confirmed the position that any lot owner in a building may file a claim against the owners’ corporation’s (OC’s) policy of insurance.

Furthermore, if the insurer accepts the claim, the money must be paid to the OC’s account, but must not be withheld by the OC or be subjected to arbitrary pre-conditions before payment is made.

In the decision of Powell v Owners’ Corporation 537738Y, Ms Powell brought a claim for flooding of her lot which the insurer eventually accepted after a protracted complaint to the Australian Financial Complaints Authority (AFCA)  and paid the OC the sum of $240,000.

However, the OC refused to transfer the funds to Ms Powell, until she took steps to prove she was imminently about to repair her lot first.

The VCAT disagreed with the OC’s conduct, and made orders that Ms Powell be paid straight away.

The OC is however, entitled to deduct the policy excess before transferring the funds to the relevant lot owner by virtue of the new Section 23A of the Owners’ Corporation Act 2006 amendments passed in 2021.

In some towers in metropolitan Melbourne, burst water pipe claims can carry a policy excess of $10,000 and sometimes $20,000 per claim.

Policies of insurance such as the one under which the Insurance Monies were paid out are arranged by an OC to cover both its common property and the property of the lot owners. Such policies are paid for by the lot owners and are for their benefit. In arranging them to cover the lot owners’ properties, the OC acts as the agent of the lot owners. Since the OC is the contracting party, it is to the OC that the insurer should make payment after a successful claim by a lot owner.

Accordingly, the insurance monies were received and are held by the OC as the agent of the lot owner.

It is well-established that an agent, who holds funds paid to it for the benefit of a principal, holds those funds as a fiduciary and that the funds will be held in trust on behalf of the principal and paid out at the principal’s request. •