The Importance of Insuring a Condominium to its Full Replacement Cost

There is an important reason why many Canadian provinces require condo corporations to have replacement insurance on their condominiums. This is to ensure owners are protected in the case of major peril where the property is deemed a total loss. The full replacement cost, known to appraisers as the Total Insurable Value, is to include the building structure, all common facilities and assets, and any insurable improvements. Many corporations who do not comply with their provincial codes can be left at significant risk of being underinsured and responsible for any shortfall in coverage.


Each Condominium Act/Code or Strata Property Act across Canada has a similar bylaw mandating that condo corporations insure their property adequately in the case of a total loss. The BC Strata Property Act specifies in section 149.1 that the strata corporation must obtain and maintain property insurance for the full replacement value.i In Ontario, the Condominium Act states that the corporation shall obtain and maintain insurance on behalf of the owners for damage caused by major peril, including fire, lightning, smoke and more, and the insurance shall cover the total replacement cost.ii In Alberta, the condo corporation is required to insure the common property and units (not including improvements made to the units by the owners) against loss resulting from destruction or damage caused by any peril, and that this insurance must be equal to the replacement cost of the condominium as described.iii In Quebec, the Civil Code of Quebec stipulates that the syndicate has an insurable interest in the condominium and shall take out insurance against ordinary risks in an amount that is equal to the replacement cost of the condominium.iv


It is equally important to obtain annual updates on the amount to be insured. As the cost of construction and materials are constantly fluctuating, it is important to keep an up-to-date value that reflects these changes. It is therefore recommended that the corporation reviews the adequacy of the insurance annually. This not only ensures that they are always sufficiently covered, but also saves them from paying too much in premiums should there be a dip in industry costs. It is particularly important to maintain annual updates for phased developments throughout the construction period. Ensuring Total Insurable Value is updated upon the completion of each phase is critical to protecting the development.


To emphasize the importance of an accurate and up-to-date insurance appraisal, here are two examples of properties that experienced a fire resulting in the total loss of the structure. In the first case, the condominium? was not adequately covered by their insurance benefit. In the second example, the business had secured sufficient insurance in the amount of the total replacement cost. The results were strikingly different.
Quebec Condominium Fire 
In 2008, a condominium was deemed a total loss after a fire destroyed the building. The condo board filed a claim for the common property and the condo owners filed for their personal portions. For the common property, there was a $454,938 shortfall. The cost of the rebuild was not completely covered due to the condo corporation’s insufficient insurance coverage and the owners were responsible for the difference, at a cost of $6,119 per unit. While many of the owners had additional insurance in the case of a short fall, two owners did not. As a result, these owners were responsible for paying the special assessment themselves. These owners submitted a claim against the condo board and condo management, faulting them for not securing sufficient replacement cost insurance for the building. They maintained that, according to the declaration of co-ownership and section 1073 of the Civil Code of Quebec, it was the responsibility of the condo board to provide insurance coverage for an amount equal to the building’s replacement cost. As it was the condo manager’s decision to not insure the building in an amount equal to the replacement value, he was held personally liable for a portion of the deficit. It was determined in court that it was the obligation of the condo board to ensure the building in an amount equal to the full replacement cost, including demolition, taxes, and other professional fees. In addition, the condo manager was found liable for the harm suffered by the condo owners as he had set the amount of replacement cost when he purchased the insurance coverage on behalf of the condo board.
Alberta Manufacturer Fire
In 2007, a massive fire destroyed one of the main buildings of a manufacturing plant in Alberta. A year prior to the fire, the owners of the plant had obtained an insurance appraisal from Normac for the first time. Before requesting the appraisal, the company had been estimating their replacement costs, but had not been updating them on a regular basis. Previously the property was insured for $13,000,000 less than the Normac estimate. Due to our updated appraisal, the client was able to completely replace their structure, which was a total loss. Despite this major interruption to their business, they were able to make it through and are currently thriving because their coverage was sufficient. Our appraisal meant they were properly insured for the full value and saved their business.


When considering these Quebec and Alberta examples, the value of obtaining a proper insurance appraisal is evident. A correctly performed insurance appraisal can save owners millions of dollars in repair and replacement costs and ensures a business can continue to operate after a total loss. Furthermore, working with an experienced appraiser can save owners and boards from significant conflict and protect a condo board from being held liable for a portion of replacement costs. The most secure way to protect owners and corporations is to obtain an accurate replacement cost for the property annually. Only a professional appraiser can effectively determine the replacement value, which must include demolition and removal expenses, current building practices and technological improvements, local and national bylaw requirements, construction labour and material fluctuations, and necessary taxes. These true-life case studies underline the importance of always obtaining a current insurance appraisal from a company that specializes in this profession. Disasters do happen, so make sure that your assets are properly appraised. Our clients rely on us to provide the most accurate and reliable replacement cost reports. For a no-obligation proposal, please request a quote.  To download this article, click here.



Determining Total Insurable Value and Understanding Fluctuations

There are many practical ways to measure the value of a condominium property in Canada, some being more useful than others in specific circumstances. 

For insurance purposes, the value of a condominium asset is defined by its full replacement cost, known to appraisers as the Total  Insurable Value. This total insurable value (TIV) is the single most important figure in determining the cost to fully  replace the property in the event  of a total loss and includes items such as the cost of materials, labour, bylaw and building code  revisions, as well as changes to standard materials deemed no longer appropriate. 

TIV Explained

Total insurable value is different than other common forms of property valuations such as Actual Market Value or the Income capitalization Approach. Unlike  appraising a property based on TIV, these alternative forms of valuation usually include additional considerations that would not affected the cost to construct a replicate of the property, such as the land value, which can impact the valuation drastically. The process of establishing an accurate and reliable TIV starts with a professional insurance appraisal from an experienced third party. An appraisal is the procedure of identifying, assessing, analysing, and reporting on the cost of an asset. For more information on this process,  revert to our recent publication – Insuring Your Property to Value. 

As mentioned, there  are a multitude of components that must be evaluated: building structure and systems, all common assets, applicable bylaw and building codes, landscaping, and even the cost of demolition. Once all factors have been accurately accounted for, the accredited appraiser can provide the condominium with the TIV, which enables  the owners or manager to insure the property sufficiently. If appraised too high, the condominium corporation will be paying excess amounts of money in premiums for insurance. 

If appraised too low, the asset is at high risk in the unfortunate event  of a total loss. This issue is more complex when considering the many external factors that can cause fluctuations of the TIV of an asset after its appraisal. 



Normac relies on local cost guides  as well as in-house databases and algorithms to assist our Professionals in determining the replacement cost for a given  property. These guides, along with our collection of data, give us accurate estimations of current construction costs, which are comprised of structural, material, and labour costs  within a given region. As economic conditions fluctuate, so do these variables. Changes  to supply and demand, workforce composition, even international trade can all contribute to a rapid, profound TIV fluctuation. 


While  the TIV has nothing to do with the cost of the land or market value, location can have a substantial impact on the replacement cost. Many contractors charge more  for their services in rural areas than in cities. As demand is typically lower in rural areas, transportation cost is factored into contractor pricing to send material and labour to these areas. Demolition is another significant contributor to the total replacement value. 

Demolitions  in urban  areas will cost more  due to space limitations, traffic considerations, and permits that may be required. Although many  condo units in downtown apartments are smaller  than what you would find elsewhere, smaller square  footage does not necessarily entail small price per square  foot. A small apartment still requires all the same amenities (plumbing, utilities, etc.). In larger units, those  expenses are stretched across more space, thus the price per square foot can be lower.


Bylaws and building codes are an important consideration when  appraising condominium assets. Due to variations between municipalities and provinces, bylaws and building codes  must be assessed in detail on a case-by-case basis as discrepancies between current standards and older  structures can reflect large portions of a Building’s full replacement value. Experienced Normac appraisers have seen cases wherein new building codes  and bylaws represented up to 30% of an asset’s TIV. Examples include updates to fire protection standards, elevator codes,  and parking requirements that would entail large amounts of capital to rebuild to current day requirements. 


The aggregate of all Previous factors results in total insurable value fluctuations which, when  shifting above the insured value of a condominium property, pose a serious  concern for owners and managers. During Normac’s 20-year involvement in industry, we have had vast amounts of experience in monitoring, analyzing, and sharing our understanding of these major  fluctuations with our clients to keep them updated and protected. Currently, certain economic conditions have had a great impact on TIV, including: 


Supply and demand of materials such as steel, concrete, and softwood lumber has been transitioning through a period of major imbalance, causing extreme price  increases (1).  With an overall decline in steel production, global increases  in demand for steel have drastically affected pricing. According to the World Steel Association, the cost of steel has been increasing since July 2017 and is expected to rise again by 8% through 2018 (2).  Canadian softwood lumber production has been stifled by recent, record- level forest fires, beetle infestations, and by climate change (3).  In 2017 alone, building and construction costs  saw an increase of 10% – 40% due to BC’s wildfires. This reduction in supply has lead to sawmill closures in Canada, further contributing to record level pricing (4). 


Trade relations between Canada  and the USA has further affected increases  in material costs. NAFTA is a key issue with an impact on trade relations between both countries which,  if it fails, may lead to a 5% overall decrease in the Canadian Dollar (5). Tariffs on raw materials are another main  consideration regarding fluctuating prices. It is expected that steel tariffs alone could raise condominium prices by $10,000 CAD (6). 


Lack of skilled  labour equates to higher charges by contractors and construction companies as wage  increases are made to attract workers. As of December 2017, Canada was reported to have a national shortage of 38,000 construction jobs, third on the list of industries experiencing labour shortages (7). By March of 2018, the construction industry had jumped to the number two spot (8). This year, overall labor  costs are expected to raise an additional 2-3%, influencing overall construction costs as well as expenses such as demolition and debris removal, both major components of a condominium’s TIV. 

As insurance appraisal experts, Normac is always  aware of current events that may have bearing on a property’s Total  Insurable Value.

Our professional team consistently monitors construction costs  and we are attuned to industry developments and trends. As a result, we ensure that your  insurance Appraisals are accurate, and that your  properties are protected and appropriately insured to full replacement value. 

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