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Navigating the Chargeback Matrix
Leaking Toilets, Fires, and Everything in Between
By Yulia Pesin | Other articles by Yulia Pesin
*Correction notice: Please note that due to a printing error on page 33, the full article "Navigating the Chargeback Matrix" will be available on our website and it will also be re-published in our Fall 2022 printed issue. Any questions or concerns may be directed to firstname.lastname@example.org.
Kai Zachary and Clara Rose from unit 5819 decided to get away for the weekend, leaving their condominium unit unattended for two days. Unbeknownst to them, the toilet valve in their ensuite bathroom was deteriorating for some time. As the laws of the universe will have it, the toilet valve broke down during Kai and Clara's weekend getaway. Water quickly filled the ensuite toilet and overflowed onto the unit's bathroom floor. Four hours later, Kai and Clara's unit was flooded with water, as were seven other units below and four units adjacent to theirs. The condominium's emergency remediation and repair costs for the water damage totalled over $100,000.00. Thankfully, the condominium had water escape insurance coverage, albeit it carries a $25,000.00 deductible. As is common in these circumstances, a dispute arose between Kai and Clara and their condominium, as to who was responsible for the cost to repair the flood damage and to what extent.
The condominium manager, Ms. Sophia Aubree, at the direction of the Board of Directors, issued a chargeback of the $25,000.00 deductible. Kai and Clara, however, were adamant that they cannot be held liable for the deductible amount. After all, they were not at fault! How were they to know that their toilet valve was deteriorating and would breakdown on their weekend away? The dispute between Kai and Clara and their condominium quickly escalated, with both parties retaining counsel.
Many of us in the condominium industry know the above scenario to be a "condo classic". Neither the factual circumstances nor the legal framework of chargebacks are new. Yet, the interpretation and application of chargebacks continues to cause much confusion for condominium managers, board members, and unit owners alike. Much of this has to do with the intricate and technical nuances of chargeback provisions and their broad interpretations depending on the precise wording of the provisions in the Condominium Act, 1998 (the "Act"), the declaration and by-laws of the corporation. Below, we breakdown some of these technical nuances and dispel much of the confusion surrounding chargebacks.
Section 105 of the Act governs insurance deductibles. Subsection 105(1) of the Act provides that if a condominium's insurance policy carries a deductible, the amount of the deductible shall be a common expense. This subsection applies to scenarios where the damage is either caused to a condominium's common elements and/or originates from the common elements (e.g. hallways, stairways, lobby, recreational facilities, parking garage etc.). In this circumstance, the condominium's insurance company will pay for the repair costs to the common elements and/or any affected units, however, the condominium will be responsible for the cost of the insurance deductible. The insurance deductible amount would be deemed a common element expense shared by all units.
Subsection 105(2) of the Act states that if an owner, a resident, or guest of a unit, causes damages to the owner's unit, through an act or omission, the amount that is lesser of the cost of repairing the damage to the unit and the deductible limit, shall be added to the owner's unit as a common expense. Thus, subsection 105(2) of the Act, has two qualifications:
(1) The chargeback can only be applied to the cost of repairing the unit from which the damage originated (the "Origin Unit") and cannot be applied to the cost of repairing any other units and/or common elements which were damaged; and,
(2) The chargeback can only be applied if the corporation can establish negligence on the part of the owner, resident, or guest of the Origin Unit by showing that an act or omission by the owner, resident or guest has caused and/or resulted in the damage.
In Kai and Clara's case, pursuant to the provisions of the Act, the corporation can issue a chargeback only for the cost of repairs made to Kai and Clara's unit (but not for the cost of repairs to any of the other 11 affected units or the affected common elements if there is no insurance deductible by-law). Furthermore, if there is no insurance deductible by-law, in order to issue the chargeback, the corporation will first need to establish that Kai and Clara either did something or failed to do something, which had caused and/ or resulted in the leak.
Condominium professionals and unit owners are often under the mistaken belief that a condominium can only issue a chargeback to the Origin Unit if the condominium submitted a claim to their insurer for coverage. Thus, there is a common industry misconception that if a condominium chooses to forego submitting the claim to its insurance company and instead pays for the repairs to the Origin Unit outright, the condominium is barred from issuing a chargeback to the Origin Unit. In fact, however, a condominium's right to chargeback the Origin Unit for damages sustained in the Origin Unit is not contingent on the condominium submitting the damages claim to its insurer. As long as the condominium paid for the damages to repair the Origin Unit and is able to establish an act or omission on the part of the Origin Unit owner, resident or guest that either caused or resulted in the damage, the condominium can chargeback the Origin Unit the cost of repairing it, up to the condominium's insurance deductible.
In Kai and Clara's case, subsections 105(1) and 105(2) of the Act do not assist the corporation much. After all, as a result of the flood that originated in unit 5819, eleven other units and the condominium's common elements were damaged. The repair costs to unit 5819 are negligible and well below the cost of the corporation's insurance deductible, compared to the repair costs to the other units and common elements that were damaged. In addition to that, the corporation has no evidence that Kai or Clara did anything or failed to do anything which caused their ensuite toilet valve to break and result in the flood.
Luckily for the corporation, subsection 105(3) of the Act provides that a condominium may pass a by-law to extend the circumstances listed in subsection 105(2), under which the condominium can issue a chargeback to the Origin Unit (from where the damage originated). Ms. Aubree, being the diligent condominium manager that she is, turns to the condominium's governing documents for a search of a deductible by-law.
In today's age, most condominiums have some form of a deductible by-law in their governing documents. Unfortunately, however, we often find that these by-laws are either poorly drafted or fail to fully extend the application of the deductible chargeback by removing all the qualifications listed in subsection 105(2) of the Act. Specifically, the wording of subsection 105(3) enables a condominium to pass a by-law that:
(1) Allows the condominium to chargeback the Origin Unit not only the cost of repairs to the Origin Unit but also the cost of repairs to any other affected units and/or common elements, up to the Corporation's insurance deductible amount (irrespective of whether the condominium submitted the claim to its insurer); and,
(2) Allows the condominium to chargeback the Origin Unit for the cost of repairs up to the cost of its insurance deductible irrespective of any act or omission on the part of the owner, resident, or guest of the Origin Unit.
Thus, with a properly drafted insurance deductible by-law, all that the corporation will have to establish to issue the chargeback to Clara and Kai is that the flood originated from their unit. The corporation will not have to limit the amount of the chargeback to the cost of repairing only Clara and Kai's unit, nor will it be required to prove any act or omission by Clara and Kai that either caused or resulted in the flood.
A properly drafted chargeback by-law that extends the application of a chargeback to the fullest limits permitted by subsection 105(3) of the Act will benefit a condominium corporation in a multitude of ways. For one, a properly drafted chargeback by-law will simplify Ms. Aubree's role in applying the chargebacks.
Ms. Aubree will know that anytime that damage occurs in the condominium that arises from a unit, she can chargeback the Origin Unit for the cost of the repairs to any portions of the building, up to the condominium's insurance deductible. A well drafted chargeback provision will also allow the condominium to recoup larger and more frequent chargebacks from unit owners and, therefore, protect the corporation's financial viability. Furthermore, a well-drafted chargeback by-law may also reduce the corporation's insurance premiums in the long run.
Corporations that choose to pass an insurance deductible by-law are also encouraged to inform and educate their unit owners on insurance deductible coverage. An insurance deductible coverage is a standard form insurance policy that is available to unit owners to cover the cost of the condominium's insurance deductible. In Kai and Clara's case, the corporation issued a chargeback on the basis of the condominium's well-drafted chargeback by-law, which allows the corporation to chargeback the cost of the $25,000 deductible to Clara and Kai irrespective of their negligence (i.e. an act or omission that either caused or resulted in the leak). Luckily, Kai and Clara have an insurance deductible policy, which will pay out the $25,000.00 deductible chargeback issued to them by Ms. Aubree, on behalf of the condominium. Customarily, the deductible amount of owner-purchased insurance deductible policies is $1,000.00 (versus the corporation's insurance policy which carries a significantly larger deductible). Accordingly, a properly drafted chargeback by-law will close the gap on uninsured losses and help the corporation and its owners save significant costs over time.
For condominiums that do not yet have a chargeback by-law, we encourage the boards of directors and condominium managers to consider amending their corporation's governing documents to include a chargeback by-law. For condominiums that have a chargeback bylaw already, we encourage the boards of directors and condominium managers to review the by-law and ensure that it extends the application of the chargeback to the fullest extent permitted by subsection 105(3) of the Act. A properly drafted insurance deductible by-law will quickly pay for its upfront investment by crystalizing the application of the chargeback, simplifying enforcement of the chargeback and maximizing the corporation's recovery of chargebacks in the long term.