I think JT is right. The OC would defend an action out of its own money. Insurance is unlikely to cover that. If the OC were found liable for something, the liability insurance is to cover what the OC might have to pay to another party.
Ideally, the OC would have some contingency funds up its sleeve. The committee could at least initially get some legal advice about the matter which might not cost so much.
In the ACT, which I am more familiar with, the committee can spend a certain amount on legal action before needing to put the matter to a general meeting.
In the ACT, Tribunal matters generally start with a directions hearing which can give consent orders or orders that the matter go to a hearing. Parties are advised to come to some mutually agreeable solution which can be made binding by the consent orders. Parties are warned that if the matter goes to a hearing the orders given there might not be to either party’s liking.
I recall the first time I was on our committee and an owner took us to the Tribunal it was quite scary and we didn’t really know what to expect. Now we have been to the Tribunal about half a dozen times over various matters over the last 6 years, we have found the process generally quite reasonable and almost straight-forward. We were legally represented in one matter that was too important to leave to amateurs such as myself but the rest were manageable by intelligent non-lawyers on the committee. A lot of work to get everything just right though!
The committee should advise the insurer if there is a risk that it might be found liable for something, even if it thinks the other party’s action is likely to fail.