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The Looming Condominium Insurance Crisis
How to Reduce the Risk Of Damage and Insurance Claims in Condominiums
As many in the condominium industry are aware, condominium insurance premiums and deductible limits are rising at an alarming rate. The frequency of floods, and the significant damages that can result, are one of the driving forces behind these steep increases.
While many continue to petition the government of Ontario to step in and address the looming condominium insurance crisis, there are practical solutions that condominium corporations can deploy to reduce the likelihood of major floods. It is important to remember that without a good insurance deductible provision in the corporation's bylaws, the deductible will, in most cases, be paid by the corporation and this can have a serious impact on the corporation's finances.
This article is intended to offer some suggestions on what a board of directors can do to reduce the risk of damage in the building.
Several companies are now supplying water detection systems that can detect leaks as they occur, alert corporation staff, and more importantly, shut off the water to minimize the damage. If water detectors were installed, major floods could be avoided and replaced with a simple clean-up effort at a cost well below the corporation's insurance deductible limit. While there can be a significant up-front cost for these systems, they can easily pay for themselves if they prevent even one major flood.
Corporations should be doing annual fire inspections for smoke alarms and carbon monoxide detectors. Combining these annual inspections with the inspection of "unit" components that most frequently cause flooding or fire, including washing machine hoses, HVAC's, dishwasher hoses and dryer lint traps, would give corporations an opportunity to prevent damage and costly claims, which may fall within the deductible amount. The corporation could also inspect the toilets and faucets in sinks and tubs to determine if there are any leaks, which could be causing higher than necessary water bills.
While these are generally unit components, for which the owner is responsible, a corporation can, if it follows the correct procedures and the governing documents do not prohibit same, choose to inspect them regularly to determine if they are in good repair.
Before beginning an inspection program, there are additional matters that should be considered with the corporation's legal counsel, including:
1. what form of notice of the inspection program will need to be given to the owners;
2. whether modifications to governing documents are required;
3. a determination as to who is qualified to perform the inspection (will the corporation need to hire a contractor for the purposes of inspection); and
4. if the corporation's inspection identifies that a unit component requires repair and/or maintenance, then a determination as to whether the corporation will perform the repair and/or maintenance and charge the cost back to the unit owners or instruct the owners to fix the problems and follow up to see that it is done.
Some corporations are cautious about undertaking any work in units, believing that it may shift liability for damage from the unit owner to the corporation. They fear that the owners will argue that, by undertaking inspections of certain parts of the unit, the corporation has assumed responsibility for those items if they fail sometime after the inspection. In our view this concern can be addressed.
While each situation must be reviewed in its unique context, taking additional pro-active steps to mitigate flood and fire risks is similar to the role that corporations fulfill when annually inspecting smoke detectors and fire alarm systems. With a properly worded insurance deductible bylaw provision and notice regarding an extended annual inspection program, there should be no shift in liability if a corporation annually inspects the unit components. Even if an extended maintenance program could result in an owner challenging liability for a deductible, this risk is outweighed by the benefit of not having a flood or fire in the first place.
It needs to be noted that the actions required to address insurance are really a subset of practices that should be in place in daily condominium management. Although it is important to give insurance particular attention at this time of crisis in pricing and availability, boards and managers can ensure their property is in good shape and is a low risk property for insurers by having programs in place, such as following an annual maintenance and inspection plan, developing and implementing an emergency preparedness plan, performing regular building inspections and reporting the results to the board of directors. These plans will work with a cohesive team of highly qualified, well trained contractors and site staff, and being attentive to technological and other innovations such as the water sensor technology noted above. Risk management is an inherent part of good condominium management.
It remains to be seen how insurers will respond to the insurance crisis. Some have speculated that insurers are going to start mandating active flood mitigation efforts, including water detectors and unit inspection, as a condition of insurance.
Even absent a mandate, to take these steps, in our view, would be wise for many corporations. Taking these simples steps can potentially reduce the frequency and magnitude of floods and fires which can assist corporations in keeping operating costs down– something we are sure unit owners would be happy to hear!