Damaged Glass Claims

Experience with insurance companies has highlighted the need to be cautious when dealing with claims involving glass and leased premises.

Standard lease clauses and damaged glass

Clause 3.2.3 of the Law Institute of Victoria (LIV) lease (Commercial Property) May 2021 Revision requires the tenant to immediately replace cracked or broken glass with glass of the same thickness and quality.

By comparison, clause 5(1) of the Real Estate Institute of Victoria (REIV) lease Code 143 (Commercial Lease) 2020 Revision excludes tenant liability for damage where the default or negligence of the tenant is not a factor, but, under Clause 5.5(f), the tenant must promptly replace broken or damaged glass, whether or not the tenant is responsible for the breakage or damage, notwithstanding the exemption in Clause 5(1).

Both the LIV and the REIV lease do not require the tenant to be insured for glass breakage.

Insurance claim issue

In circumstances where a property owner or an owners corporation (OC) lodges a claim for glass replacement, (e.g., of a damaged shop front), there is a recent trend amongst insurers to demand a copy of the lease between the shop owner and tenant to establish whether the tenant is obliged to insure, and/or to pay the cost of replacement.

The landlord might submit the lease is confidential, the landlord is the insured party, and the status of the tenant is irrelevant, especially if the tenant did not contribute to the damage.

To overcome these arguments, some insurers have modified their policies to explicitly deny payment if a tenant is obligated under a lease to pay for insurance or for glass replacement.

Exclusions in the policy provided by Strata Community Insurance, underwritten by Allianz Australia Insurance, includes the following:

 “1.      We will not pay for Loss or Damage

          ………

 (o)     to glass caused by artificial heat, during installation or removal, that has a crack or imperfection, or is required to be insured by any other party in terms of an occupancy agreement.”

Example of an insurance claim

In a recent matter, an OC manager lodged an insurance claim for damage to exterior glass panels.

The insurer advised that claims involving glass in commercial properties must include a copy of the lease. The purpose is to investigate whether the tenant is also required to take out cover, thus allowing the insurer to potentially share costs with another insurer.

After much time and debate, the lease was provided.

The insurer noted it was an REIV lease and denied the claim citing the tenant’s obligations under Clause 5.5(f) above.

ISSUES TO CONSIDER WHEN RESPONDING TO AN INSURER’S DENIAL

• Retail Leases Act 2003 (Vic) (“Act”)

Damaged glass has never been a retail lease consideration as it was always viewed as a tenant obligation to insure.

Under s 52(2) of the Act, the landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into —

(a)        the structure of, and fixtures in, the retail premises; and ….

It would appear that a landlord could argue:

• The LIV lease and REIV lease is a commercial lease covering both regulated and unregulated tenancies.

• Under s 94 of the Act, a provision of a retail premises lease is void to the extent that it is contrary to or inconsistent with anything in the Act.

• Accordingly, where the Act applies, Clause 3.2.3 of the LIV lease and Clause 5.5(f) of the REIV lease are not binding on retail tenants as glass replacement is the obligation of the landlord.

 • Competition and Consumer Act 2010 (Cth)

Outgoings under the LIV lease and REIV lease include the costs of insurance policies taken out by a landlord for breakage of glass and for excesses paid or payable on claims. If a tenant has contributed towards an insurance policy in the name of either a landlord or an OC that includes glass breakage, why should the tenant be obligated under Clause 3.2.3 or Clause 5.5(f) above?

Where a tenant has contributed towards insurance cover, should these clauses be negated?

Alternatively, if a tenant is bound by these clauses, should the tenant be released from any requirement to pay for glass breakage cover?

There appears to be tension with these requirements existing at the same time. Does this breach the obligations of the unfair contract terms under the Competition and Consumer Act 2010? If it does, the effect on the insurer depends on whether any part of the lease is declared void.

 Conclusion

 The writer considers there is insufficient awareness amongst legal practitioners, estate agents and OC managers of this form of claim denial and encourages greater scrutiny of product disclosure statements before accepting any insurance policy. If there is little choice because major insurers use similar wording, this requires vigilance in lease preparation and the possible exclusion of the above clauses.