Does sectional title insurance cover legal defence costs in disputes with managing agents?

From time to time, a scheme may find itself in a legal dispute with a current or former managing agent. A common example is where a managing agent issues a summons against the scheme for non-payment of management fees or a dispute arising from the management agreement itself.

This often raises an important question:

Will the scheme’s insurance policy pay for legal defence costs?

In almost every case, and certainly in the case of policies we work with, the answer is no, and understanding why helps prevent unrealistic expectations and unpleasant surprises when disputes arise.

The essential point – No insured event, no cover

Sectional title policies, particularly the three main insurers we work with (whether from Insurer A, Insurer B, or Insurer C) respond only to insured events such as:

• Fire
• Storm, wind or hail
• Burst pipes
• Theft (with forcible entry)
• Impact damage
• Liability claims for injury or damage to third-party property

A contractual dispute, such as a disagreement about fees, performance obligations, or termination of mandate, does not fall under any insured peril.

Without an insured event, there is no trigger for the policy to respond.

Why the liability sections of the policy do not apply

Community scheme policies normally include liability cover (property owner’s liability and trustee indemnity), but these are often misunderstood.

Public liability

Covers claims for injury or loss, or damage to property, in relation to the buildings, caused by negligence on the part of the body corporate

A managing agent suing for unpaid fees is not an injury or damage claim; it is a debt recovery or breach of contract matter.

Trustees indemnity

This section protects the scheme against trustees’ wrongful acts (errors or omissions) in their capacity as trustees, but it contains a universal exclusion:

Contractual liability is excluded unless the liability would have existed in the absence of the contract.

A managing agent’s claim arises solely from the contract (the management agreement).

Therefore, it is excluded.

Legal defence costs follow the same principle

Where legal defence costs are included in the scheme’s policy, they are always:

Ancillary to a covered claim, and subject to the same exclusions as the underlying liability section.

This means legal defence costs will be paid in defending, for example:

• A slip-and-fall claim
• A third-party damaged vehicle claim
• A third-party injury arising from unsafe common property

But they are not covered when the body corporate is defending itself in a pure contractual dispute, even if the legal costs are significant.

We often hear: “But our scheme is being sued, surely that’s liability?”

It is liability in a general sense, but not insurable liability under the community scheme’s policy.

Insurable liability arises from:

• Negligence,
• Omissions, or
• Wrongful acts in the performance of statutory duties.

Contractual disputes arise from:

• Unpaid invoices,
• Disagreements over service levels,
• Termination clauses,
• Penalty provisions, or
• Disputed obligations in the written management agreement.

These are commercial risks, not insurance risks.

If the scheme wants this type of cover, is it available?

Yes, but not in the sectional title policy. Previously, within our annual written advice, we used to advise schemes to consider a product called Community Schemes Legal (CSL); however, this insurance policy product has been discontinued. As it is not a prescribed insurance requirement, and because of low previous take-up, we no longer promote such.

Cover for contractual defence costs might be available through:

A standalone Legal Expenses policy; or

A Management Liability or Directors & Officers policy with Entity Cover extensions (although these often still exclude contractual liability unless specifically added).

Schemes would need to purchase these policies separately and budget for them, as well as strictly speaking,  have been approved with a special resolution.

Practical advice for trustees and managing agents

• Always view the management agreement as a commercial contract, not an insurance matter.
• Ensure the scheme has adequate reserves or a legal budget for such disputes.
• Clarify expectations with owners; many assume their insurance will pay for anything involving lawyers.
• Seek early legal advice when a dispute emerges.
• Insurance is designed to protect schemes from unexpected events, not commercial disagreements.

In summary

A dispute with a managing agent over fees, termination, or performance is not generally and not with policies we work with, an insured event.

Trustees will need to treat the matter as a commercial dispute requiring separate legal recourse.

Understanding this distinction helps schemes avoid disappointment and ensures disputes are managed with clear expectations from the start.