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Three Steps to Mitigate Risk from Rising Premiums and Deductibles
By Jason Rivait | Other articles by Jason Rivait
It is safe to say that condo insurance is becoming a sore spot for condo corporations not only in Ontario but across Canada. Condo corporations have seen soaring premiums and deductibles. In some jurisdictions, it has been reported that premiums have risen 780%.
The reason for the increase seems to be multi-faceted including, but not limited to, higher property values, reduced number of insurers, rising costs for insurers and drastic weather patterns.
The issue is so pressing that the Insurance Bureau of Canada is engaging a risk manager to make recommendations to condo corporations to reduce risks. The problem, however, is that the Insurance Board of Canada has no cap on condo premiums and the government does not require insurers to apply for rate increases.
So, what can a condo corporation do to mitigate this risk?
1. Standard Unit By-law
One of the key features of a Standard Unit By-law is defining the components of the units that the condo corporation is responsible to insure and defining the components that the owners are responsible to insure. Condo corporations should be passing Standard Unit By-laws and removing items such as flooring and countertops from the items that are the Corporation's responsibility.
For condo corporations that have Standard Unit By-laws or Standard Unit Schedules (which are prepared by Declarants), boards should be reviewing these documents to determine if other items should be removed.
The purpose of removing items from the condo corporations' insurance responsibility is not to merely pass the buck to unit owners. Rather, it mitigates the collective risk of unit owners and common expense increases.
Unit owners sometimes forget that the condo corporations' insurance premiums and deductibles (when paid) form part of their common expenses. They also sometimes forget that if an insurance claim is made by the condo corporation pertaining to damage to a unit, the condo corporation will be required to pay the deductible. In this scenario, one unit owner may have his/her flooring replaced (the cost of which could be $15,000) but all unit owners will be required to contribute towards the cost of the deductible.
2. Insurance Deductible By-law
Speaking of deductibles, condo corporations may pass by-laws which extend the circumstances in which unit owners may be responsible for the lesser of the cost of repair and deductible.
Under the existing Condominium Act, 1998 (the "Act") the deductible may only be charged back to the unit owner if the damage was caused by the unit owner's act or omission and only for damage to that owner's unit. The Act, however, allows bylaws to be created which makes unit owners responsible for these costs in the event the damage is from their unit irrespective of any act or omission and for damage to other units and the common elements.
There are two key considerations to keep in mind. First, the charge back must pertain to insurable events such as floods or fires. Second, the charge back is limited to the lesser of the cost of repair and deductible. For example, if the cost of repair is $50,000 and the deductible is $10,000, the condo corporation is only authorized to charge back up to the deductible irrespective of whether a claim is made by the condo corporation.
Amendments to the Act will be coming into effect which will make unit owners responsible for the lesser of the cost of repair and deductible for damage to other units and the common elements in the event the damage resulted from an act or omission of the unit owner and the damage did not result from an act or omission of the Corporation or any of its staff. To be clear, the Corporation (once these provisions come into force) will no longer need to pass a by-law to extend the circumstances to address damage to other units and common elements.
The one catch to the amendments of the Act is that the ability to pass no fault charge back by-laws appears to have been removed. As noted above, this scenario deals with insurable events where the source of the damage is the unit but the owner's acts/omissions were not the cause. However, it appears that condo corporations will be permitted to amend their declarations to address these no fault scenarios. The threshold to amend the declaration for this purpose is quite high and requires 80% consent of the unit owners.
We should note that it is questionable how existing Insurance Deductible By-laws with no fault provisions will be treated once the amendments to the Act come into force, but it is our opinion that there is still value in passing these by-laws.
3. Water Escape Detection Devices
Devices are available which detect water escape and immediately shut down the water line. These devices should mitigate damages and provide comfort to insurers when ascertaining risk and in turn, calculating premiums and deductibles.
Prior to installing water escape detection devices in the units, boards are encouraged to review the legalities of such installations in the unit with management or counsel.
The above list is in no way exhaustive, but if these steps are taken, condo corporations should be able to mitigate their risk pertaining to rising premiums and deductibles.