Shared Facilities Agreements: Recent Changes to the Ontario Condo Act

History of Shared Facilities Agreements

When the Ontario Condominium Act was first registered in 1968, it served one main purpose – to provide a set of rules and guidelines for owners of a single condominium to live harmoniouslyHowever, when more than one condominium corporation share assets, this creates a need for different condominiums to get along with each other and can prove to be quite challenging. The recent amendments to the Condominium Act (1998) are meant to provide clarity for these shared assets.

As written:

21.1 Subject to the regulations, if any of the following persons or any combination of them share or are proposed to share in the provision, use, maintenance, repair, insurance, operation or administration of any land, any part of a property or proposed property, any assets of a corporation or any facilities or services, they shall enter into an agreement that meets the prescribed requirements and shall ensure that it is registered in accordance with the regulations. 

This means that for any group of condominiums that share assets, a Shared Facilities Agreement (SFA) must be created. These agreements are designed to provide a framework for determining cost sharing for the assets. 

What is the Root Cause Behind this Recent Change?

Unfair cost allocations have been front and center around what once was a vague iteration of how to split the costs of shared facilities. Previously, under section 113 and 135 of the Act: 

  1. Under Section 113, which states that where a corporation has entered into a SFA prior to the turn-over meeting, then within 12 months following the election of a new board at such turn-over meeting, any party to the SFA may make an application to the courts to amend or terminate the agreement if (a) disclosure of the terms of the SFA was inadequate or (b) the agreement produces a result that is oppressive or unconscionably prejudicial to the corporation or any of the owners;

     

  2. The more general provision, Section 135, which permits an application for the oppression remedy by an owner, corporation, declarant, or mortgagee of a unit. 

Toronto Standard Condominium Corp No 2130 v York Bremner Developments Ltd, 2016 ONSC 5393[1] (“York Bremner”) brought to the forefront some of the frustrations that many condominium corporations faced when it came to Shared Facilities Agreements.

 

In this case, the Court found that York Bremner’s conduct rose to the level of oppression due to unclear disclosure of the terms of the Shared Facilities Agreement. It was determined that the declarant had used unfair terms that was self-favouring and that it was not clearly stated who the Common Facilities Manager was – who would have been solely responsible for managing and allocating the costs for the shared facilities. It is interesting to note that prior to this case, there had been no jurisprudence on the interpretation of Section 113, therefore the case had gone on the basis of first principles. The case has been appealed to the Court of Appeal by the declarant since then. 

Determining Replacement Cost for Shared Facilities

Due to the recent change in the Condo Act, we have received many requests to appraise shared facilities and we expect many more as more condominiums realize that their shared assets must have such an agreement. As insurance appraisers, we are called upon to determine a replacement cost estimate for the shared assets because insurance of those assets is one of the requirements.   

 

We have witnessed a huge variety in the scope and complexity of these Shared Facility Agreements. We have seen simple agreements where two condominiums share a recreational building and the proportionate share of maintenance, repair and so forth is determined by a simple percentage split. We have also completed appraisals on very complex shared facilities where the proportion of responsibility for specific assets such as HVAC systems, pools, amenity rooms, and elevators vary between the corporations but also vary for each asset. As appraisers this means we are tasked with relatively simple jobs in some cases but very complicated jobs in other cases, requiring specific line-item valuations for each asset. 

We have witnessed a huge variety in the scope and complexity of these Shared Facility Agreements.  In some cases, very complicated jobs require specific line-item valuations for each asset. 

The appraiser skill and experience required to do a good job therefore is quite unique for these shared facilities. Before we quote on these jobs, a thorough review of the agreements and other documents must be done to estimate the number of days that will be required. Upon approval, a property inspection takes place and an inventory along with photographs are obtained. Following that, the research into reasonable replacement costs for the assets are done and an appraisal report is created and sent to the client. 

 

Hiring a qualified insurance appraiser can help you check the insurance requirement off your list. An appraisal will help provide clarity of coverage to the different corporations and will help reduce conflicts that may arise.  

Understanding Total Insurable Value

There are two types of appraisals that measure the value of a property in Canada: a market value appraisal and a replacement cost appraisal. A market value appraisal is useful when applying for a mortgage or selling your home, and it uses a specific valuation approach. A replacement cost appraisal on the other hand, also known as an insurance appraisal, is used for insurance purposes.

 

With an insurance appraisal, the value of a property is defined as its full replacement cost, known to appraisers and brokers as the Total Insurable Value.

TIV Explained

The Total Insurable Value (TIV) is the single most important figure in expressing the cost to fully replace a property in the event of a total loss and includes the cost of materials, labour and professional fees, bylaw and building code revisions, demolition and removal expenses, taxes, and inflation.

 

The process of establishing an accurate TIV starts with hiring a professional insurance appraiser from an experienced, third party firm. The appraiser will inspect and assess the property, identify all the physical elements, materials, and systems, review the architectural blueprints, bylaws, declarations, other relevant legal documents, and determine accurate square footage of various sections of the property. After a comprehensive analysis of all available data, an estimate is made, and a report detailing the property and its TIV is created. Insurance appraisers use a valuation method called the Cost Approach to estimate TIV, which determines the cost to reproduce the property or replace it with an equal substitute.

 

Conversely, market value appraisals use different valuation methods, typically the Income Approach or the Direct Comparison Approach. These market valuation methods consider different things, such as the land value or future income that a property is capable of producing. Using an incorrect valuation method when determining TIV would drastically and negatively impact the estimate for placement of property insurance.

 

The insurance appraisal is used to place property insurance and ensure sufficient coverage. If appraised too high, a condominium corporation or property owner might find themselves paying excess amounts of insurance premiums. If appraised too low, the asset is at high risk of being underinsured in the unfortunate event of a total loss. An experienced appraiser who specializes in replacement costs will consider many factors to achieve an accurate and reliable TIV for their clients.

Considerations to TIV

When determining TIV, there are many physical components that must be evaluated: the entire building structure and mechanical systems, both the hard and soft landscaping, all common elements such as amenity rooms or swimming pools, and the typical finishes of units. 

 

In addition to this, there are other critical considerations that will impact the TIV such as type and quality of materials, location, building code and bylaw review, and the cost of demolition.

Structural, Material, and Labour Considerations

Normac relies on our proprietary costing database and local cost guides to assist our team in determining accurate replacement costs. Our costing algorithms are routinely updated to account for material and labour variances from multiple regions across Canada to produce our estimates and valuation updates. As economic conditions fluctuate, so do these variables. Changes to supply and demand, workforce composition, even international trade can all contribute to significant annual construction cost fluctuations.

Our costing algorithms account for material and labour variances from multiple regions across Canada
Location

While land or market value are not considered for TIV, the location of a property can have a substantial impact on the replacement cost.  Many contractors charge more for their services in remote areas than in cities. As access to materials and labour is typically challenging in remote areas, transportation costs are factored into contractor pricing to account for this.

Demolition and Removal

This is another significant contributor to the total insurable value. Not all appraisers include this in their assessment, but it necessary to remove the existing structure before a rebuild can begin. Demolition and removal in urban areas will cost more due to space limitations, traffic restrictions, and permits that may be required. Furthermore, the type of property and frame type has a major impact on demolition costs. As an example, a concrete high-rise would be significantly more expensive on a square foot basis to demolish than a wood-frame low-rise building.

Size of Unit

The size of the units can also impact costs. Although many condo units in downtown apartments are smaller than what you would find elsewhere, smaller apartments still require all the typical amenities and systems such as appliances, plumbing fixtures, electrical fixtures, and HVAC, etc. This compression of expensive components into a smaller space will increase the cost per foot compared to larger units.

Building Code and Bylaw Reviews

Building code and bylaw reviews are an important consideration in determining TIV and require special knowledge of provincial and municipal requirements for building codes. The national building code sets the bare minimum requirements for construction. However, additional requirements vary by each province and each municipality.

 

Due to these variations, bylaws and building codes must be assessed in detail (on a case-by-case basis or annually) as discrepancies between current standards and older structures can reflect large portions of a building’s full replacement value. In some instances, upgrades can account for up to 20% of the TIV. Major upgrades may include additional handicap access such as ramps or elevators, installation of superior fire protection, and extra parking spaces required for new constructions. The knowledge required to complete these reviews in a competent manner is considerable and should be a top of mind for anyone looking for an insurance appraisal company.

Ask Us

In order to determine a replacement cost that is justifiable, all these factors must be accounted for. Property Owners, Strata and Condominium Corporations, Property Managers, and Insurance Brokers have all come to trust Normac for our comprehensive and detailed replacement cost reports.

Normac’s 2020 Year in Review

This year has truly been an unprecedented time for all of us, calling for changes in the workplace and coping with the strain that COVID-19 has had on our day-to-day lives. The team at Normac remained resilient and continued to offer our clients and partners the same excellent service that our company has grown to be known for. As we countdown the last few days of 2020, here are some highlights from this year.  

Note, you can also view this content as an infographic here.

New Website

To kick off 2020, we launched a new website! The goal was to create something modern and user friendly, that easily communicated who we are and the value we provide. This included new graphics, a simplified layout, and smart forms. We are committed to growth and innovation and therefore are always tweaking the site to improve our client experience.

CCI - South Alberta Luncheon

We were a proud sponsor for the CCI-South Alberta Insurance Luncheon. The seminar covered the current landscape of Alberta’s condo insurance market and best practices for condo corporations to prepare for the hard market. We had been given a few minutes prior to the start of the event to share who we are, and had an amazing time mingling with all attendees!

CCI - Okanagan Evening Educational Seminar

We were a proud presenter for an educational seminar held in the Okanagan region. The seminar covered topics on replacement cost values and the strata property insurance market. As one of the keynote speakers, we had the privilege of speaking to the audience on replacement cost values and the importance of insuring to full replacement cost.

Sandwich Making Event

Our head office banded together to hand out 100 meals in Vancouver’s Downtown Eastside. We spent the day shopping, assembling, and distributing meals to people facing social health and proper housing challenges. It was an eye-opening experience for our team, where we were able to help out and connect with individuals who live with disproportionate levels of poverty and marginalization.

Sandwich Making Event

Our head office banded together to hand out 100 meals in Vancouver’s Downtown Eastside. We spent the day shopping, assembling, and distributing meals to people facing social health and proper housing challenges. It was an eye-opening experience for our team, where we were able to help out and connect with individuals who live with disproportionate levels of poverty and marginalization.

Real Estate Conference in the Sun

We were one of the proud sponsors for the biennial Real Estate Conference in The Sun, this year held in San José del Cabo. A joint PAMA and IREM excursion that hosts property managers and industry partners for educational events, networking, and social activities. A wonderful winter escape from 

the snow!

CCI - Golden Horseshoe Chapter Conference

We were one of the proud sponsors for the CCI-Golden Horseshoe Annual Chapter Conference. The event hosted educational seminars, motivational speakers, and ended with a post reception party at the Courtyard Marriot. We had a great time mingling with industry professionals and thank all those who had dropped by our booth.

CCI - Golden Horseshoe Chapter Conference

We were one of the proud sponsors for the CCI-Golden Horseshoe Annual Chapter Conference. The event hosted educational seminars, motivational speakers, and ended with a post reception party at the Courtyard Marriot. We had a great time mingling with industry professionals and thank all those who had dropped by our booth.

The COVID-19 Pandemic

When it was officially announced that we were in a global pandemic, Normac’s team responded quickly and effectively to ensure no interruption in service to our clients. We enforced strict health and safety protocols for site inspections, moved our teams to work remotely, and set up systems to continue operating business as usual. As an essential service, our biggest priority was maintaining the safety of our clients, staff, and their families, while continuing to deliver exceptional service and reliable valuations.

Virtual Social Events

Pictured here: the Normac team at a virtual murder mystery escape room. 

 

One thing that hasn’t looked the same is our team’s weekly social gatherings. While we are no longer meeting around the beer fridge, we now connect virtually bi-monthly for cocktails, catch ups, and competitions. Our team is made up of some fierce competitors; from trivia to escape rooms and murder mystery experiences, there is no shortage on smack talk.

Virtual Conferences

In September, we sponsored the CAI Virtual Conference followed by the ACR Virtual conference in November. Both were 2-day events hosting a virtual exhibit hall along with several educational seminars held by industry experts on insurance, communications, and property management. It was a great experience for the team given all in-person events are suspended at this time.

Virtual Seminars

With conferences shifting online, so too did educational seminars. We had sponsored a handful of virtual seminars including the “Riding the Insurance Wave” Seminar held by CCI-Golden Horseshoe, CCI – Vancouver’s seminar on Mental Health, as well an Associa-Vancouver seminar on Complicated Stratas. We had also participated in a virtual escape room with PAMA in November!

Holiday Food & Gift Hamper – Adopt A Family

Normac is proud to announce that this holiday season, a family of three will not be hungry. Through the Surrey Adopt a Family program, the Normac team came together to cover the cost of food for a family, along with holiday gifts for their two daughters. We had a delightful time picking out the gifts. In the famous words of Winston Churchill: “From what we get, we can make a living; what we give however, makes a life.”

Normac Christmas Party

With in-person social gatherings not permitted at this time, Normac had moved our annual Christmas Party online! We kicked off the party with a year-end celebratory message from our President, Cameron Carter, followed by an assortment of fun Christmas activities. The celebrations included a Christmas themed trivia & scavenger hunt along with a Secret Santa gift exchange amongst the staff.

Looking Ahead: Normac’s Vision for 2021

As insurance appraisal specialists, we are continuously improving our internal processes to ensure that no update is missed, and all valuations are delivered on time. Combined with the efforts of our dedicated client services team, we aim to pass on cost savings to our clients without compromising on the quality of our work.

Normac has been recognized as an essential service and will continue to provide our services with little to no disruption to our clients. We have adapted to the new norm – implementing new procedures and abiding by the guidelines set out by public health officials. The safety of our staff and clients is of utmost importance. Learn more about our COVID-19 Response.

We sincerely thank all our clients and partners for your trust in Normac and wish you all a happy holiday!

Do Not Be Underinsured

When people ask us why they need an insurance appraisal done every year, or why they need one at all, the number one thing we tell them is that a current appraisal ensures that they have enough insurance coverage in the case of a loss.

 

Do not gamble with the biggest asset in your life – your home.

The Consequences of Being Underinsured

In August of 2019, a three-alarm blaze tore through an apartment complex in Chilliwack. Investigations determined smoke materials started the fire on a fourth-floor balcony. The fire quickly breached the attic space and by the time fire crews arrived, there were flames as high as 30 feet shooting in the sky.

 

Fortunately, no one was injured but 60 families were displaced in the disaster. Over 16 months later, those families are not yet back in their homes, and to make matters worse, they are facing thousands of dollars in special levies. It turns out, the strata was underinsured by $3.2 million. Now, each unit owes between $36,000-$57,000 to make up for the shortfall in coverage.

 

Read more about this story here: https://www.cbc.ca/news/canada/british-columbia/condo-insurance-fire-1.5829511

How Property Insurance Works

When you live in a strata or condominium corporation, a portion of your monthly fees goes towards paying for annual insurance premiums. Insurance policies are valid for a one-year period and the adequacy of the insurance coverage must be reviewed annually. The board must also report on the insurance coverage at each annual general meeting. The strata or condo’s property insurance is intended to cover the structures, common property, landscaping and original standard unit finishes.

Standard unit fixtures and finishes include cabinets and countertops, lighting fixtures, plumbing, natural gas lines, floor, wall, and ceiling coverings among others.

In BC, Alberta, and Ontario it is not a requirement to carry your own personal homeowner’s insurance, only a recommendation. Some corporations may write into their bylaws that owners must carry personal insurance to cover things like high deductibles. Homeowner’s insurance would typically cover your personal, moveable assets and any improvements made to your unit. It is advisable to review your condo’s insurance policy with your insurance broker to determine if additional coverage is required to help protect yourself.

Derek Wubbs, one of the unit owners from the Chilliwack apartment complex, believed that he had sufficient coverage through the strata’s insurance and did not have personal home insurance for his few valuable possessions:

"I was under the belief that paying my strata fees would result in the appropriate building insurance being purchased."

Why You Need an Insurance Appraisal

An insurance appraisal provides an estimate of total replacement cost for a property in the event of a total loss. This is called the Total Insurable Value (TIV) and it is used for placing accurate and sufficient property insurance. All property owners should have an insurance appraisal completed on an annual basis and here are FOUR reasons why:

1. Sufficient Insurance Coverage

An annual insurance appraisal ensures that you have sufficient insurance covered in the case of a loss. The fire in Chilliwack is a worst-case example of what can happen when you are underinsured.

2. Avoid Overpayment on Premiums

We have seen cases of properties carrying excessive replacement costs, and as a result paying too much for insurance. An annual appraisal ensures you are only paying for the insurance you need, not more.

3. Avoid Co-Insurance

When a property does not have a current appraisal, it may be subject to a co-insurance clause that requires the owners to self insure a percentage of the replacement cost. Under this scenario, in addition to the deductible, the owners will be responsible for paying a portion of the reconstruction costs on a total loss or partial loss.

4. Fulfill Your Fiduciary Duty

Finally, an up-to-date appraisal ensures that council or board members are complying with their Strata or Condo Acts, which mandate that the board insure the property for a value equal to total replacement cost. Without an appraisal, the council or board can be found to have failed in their fiduciary duty to the property owners, as was the case in this 2008 Quebec apartment fire. Only an experienced, professional appraiser who specializes in replacement costs should determine the Total Insurable Value.

Hope for the Best, Prepare for the Worst

While we hope that we are never faced with a major disaster, the results of being underinsured can be devastating. There are liability concerns, major financial risk, and significant hardship that can endure for years.

 

Avoid any gamble: An insurance appraisal gives you peace of mind that you and your assets are protected.

Functional Obsolescence: Why Take it Into Account

If you’ve lost power in your condo, it’s hard to imagine doing anything other than walking over to your utility closet, opening up your electrical panel, and flipping a switch in your circuit breaker. But for others living in older buildings, it may not be so easy to get power back. Some residential buildings built 30+ years ago are still equipped with fuse boxes. Fuse boxes are usually located in a common area, such as a hallway or a meter room. And unlike a circuit, a fuse will blow when overheated and will need to be replaced. Time to get strata to call an electrician! On the other hand, the internal mechanism of a circuit breaker will trip and shut off the power when there is a surge of electricity. Nothing gets burnt, so there’s nothing to replace. To restore power, you can simply reset the circuit breaker by flipping the switch back on. This makes a circuit breaker the preferred choice between the two, as it can be used over and over again. A fuse box is an example of functional obsolescence.

What is Functional Obsolescence?

You may have never heard of the term functional obsolescence, but there is a pretty good chance you might have seen it. Ever been to an apartment unit that has three bedrooms but just one bathroom? The textbook definition of functional obsolescence according to the Dictionary of Real Estate Appraisal is “the impairment of functional capacity of a property according to market tastes and standards.” Another common (and outdated) feature found in older properties is single-paned windows. There’s a slim chance you’ll find these in newer buildings, as double-paned (or even triple-paned) windows are now the norm due to their energy-efficient, noise-cancelling, and long-term cost-savings qualities.

An apartment unit with 3 bedrooms but only 1 bathroom is considered functionally obsolete as it does not meet current market expectations.

Functional Obsolescence and Insurance Appraisals

At Normac, our accredited appraisers use a Cost Approach to determine our replacement costs. Estimates are based on replacing a property with an equally desirable substitute, as close as possible to where the property stands now. In other words, we generally assume a like-for-like replacement of all components of the property. However, we must also consider what has changed since the original property was built. There are some circumstances—such as in the case of fuse boxes—where it is safe to assume that existing components within the property will be replaced with a similar alternative, one that is up to current industry and technology standards. Fuse boxes were not designed to deal with today’s electrical loads—they are considered functionally obsolete—and so replacing them with modern circuit breakers in the case of a total loss is a reasonable assumption.

We take functional obsolescence into consideration in this process because in most cases, it will cause the cost per square footage of the property to go down. During an appraisal, we try to estimate how much it would cost to replace the utility in the building rather than how much it would cost to reproduce the exact property.

Copper vs. PEX Plumbing

Copper pipes are: rigid, fire-resistant, recyclable.
PEX pipes are: low cost, bendable, easy to cut.

To illustrate this point, let’s take a look at copper vs. PEX (plastic) piping. Technology often changes the choice of construction materials. Two decades ago, copper piping was the gold standard of plumbing. It is a time-tested water supply line material with its list of pros, but that doesn’t mean that it’s immune to trouble. For one, copper pipes are more likely to break if the water inside freezes. Copper is also a very rigid material, which means it has to be cut and soldered to size, requiring more connections and thus more installation labour. Then there’s the issue of cost. Copper pipes will cost 58 to 68 per cent more to install than PEX pipes.

 

Conversely, due to its plastic nature PEX pipes can be installed 30 to 40 per cent faster than copper pipes. PEX is also known for its durability. When adjusted for pressure and temperature ratings, it has a predicted life expectancy of 50 years. It is no surprise then why many prefer PEX over copper. Given the higher labour, material, and maintenance costs associated with copper, it is simply impractical not to go with PEX instead. This shows how vital it is for your appraiser to have insight on current standards of material and design in order to produce the most accurate Total Insurable Value (TIV) for your property.

 

Qualified appraisers will have the specialized skills and training to determine appropriate costing estimates that take into consideration additional factors such as functional obsolescence, current building practices, and technology improvements. For your peace of mind, leave insurance appraising up to the experts. At Normac, our appraisers keep up to date with construction methods, trends, costs, building codes, bylaw, demolition costs, and provincial Condominium and Property Acts to ensure you are paying for exactly what you need. No more, and no less.

COVID-19 and the Canadian Condo Market

Need More Space

Amidst the COVID-19 pandemic, even the experts could not have predicted the strength of the Canadian real estate market – of which includes record high prices and fierce bidding wars – all in the face of double-digit unemployment across the country. “Our views are changing,” says Robert Hogue, a senior economist with Royal Bank of Canada. “The strength in the summer was quite a bit stronger than we might have thought. Clearly, there was pent-up demand from March and April, but we didn’t think it would pop that much.”

Condo Market Trends Covid
Source: https://wowa.ca/reports/canada-housing-market

WHY ARE PRICES INCREASING?

Of course, a major factor in the overall increase in home sales reflects the record-low mortgage rates we are seeing currently. The prime rate this year has gone down to 2.45%, a sharp decline from 3.95% from last year.  Canadians have been able to purchase more expensive homes with the same monthly payments as in the past. Government support programs such as CERB and CEWS have also supported household incomes.

Source: https://wowa.ca/reports/canada-housing-market

DETACHED HOMES MORE DESIREABLE

In keeping with supply and demand, the single detached or low-rise market may continue to see price increases, however the big-city condo segment is expected to be most vulnerable to post-COVID volatility. As we see a shift from physical offices to virtual/home offices – the demand for larger spaces have increased. Additional factors such as declining immigration and a softer rental market have also played a role in this trend. In June, this year there were 19,000 permanent residencies granted, a decline from 34,000 from the same time last year.

In the beginning of 2020, we witnessed condo prices outpacing that of detached homes. The first quarter of 2020 showed new condo prices in the Greater Toronto Area (GTA) up 14.6% from last year, and resale prices up 8.5%, according to data from Statistics Canada. In Ottawa, the increase was 22.6% for new condos and 15% for resales. Vancouver however, had experienced slight decreases year-over-year. According to the Real Estate Board of Greater Vancouver, apartment home sales had increased year-over-year in August (1,332 versus 1,095), however the shift to detached homes were up 55.1% in comparison to apartments – a modest 19.4%.

THE TOLL ON THE CONDO + RENTAL MARKET

Although we are seeing overall increases in pricing and sales activity, the condo market segment has been trailing behind other home-types since March. “We were seeing stronger sales on the single-detached front,” says Jason Mercer, chief market analyst for the Toronto Regional Real Estate Board (TRREB), “and we’re also seeing more listings coming on for condo apartments, so that’s moving toward a more balanced market.” The shift to suburban locations and preference for more space has also taken a toll on the condo rental market. Rent prices have been declining due to higher vacancy rates and renters are seeing more favourable rent conditions.

 

The Canadian Mortgage and Housing Corporation (CMHC) has purchased $5.8 billion of insured mortgage pools this year in preparation for COVID-19 related mortgage claims. As of July 1, the CMHC has introduced stricter underwriting criteria – which includes more rigorous credit checks and tighter down payment requirements for insured mortgages. It is safe to say, that for the time being the condo market will continue to see short term uncertainty until a COVID-19 vaccine has been introduced with proven results. The long-term effects of this emerging trend are yet to be determined.

If you are buying into the Canadian condo market, it is imperative that you adequately insure your asset. In fact, most provincial condominium bylaws mandate that all condominiums are insured to their total replacement cost value. 

The only way to determine accurate replacement cost is by obtaining an insurance appraisal by a professional 3rd part firm, like Normac. Doing so means you will always be sufficiently insured in the case of a total loss, that you can receive better terms and insurance rates, and that you fulfill your fiduciary duty set by your provincial condominium bylaws. 

The Condo Insurance Crisis, Presented by CAI Canada

Normac was excited to participate in the recent CAI Canada‘s first virtual conference, V CON(DO) 2020. We enjoyed meeting people during the virtual tradeshow and we’re pleased to sponsor the panel session, The Condo Insurance Crisis: Where do we go from here?

Watch the full presentation here:

Key take-aways:

  1. Get a current replacement cost appraisal regularly to ensure you are paying the correct premiums and have sufficient insurance coverage.

  2. Get a reserve fund study and maintain your building. This can help to prevent incidents and claims, and make you more attractive to insurers.

  3. Use your insurance for emergencies and accidents, not maintenance.

  4. Upgrade elements after a loss instead of just replacing them. Example: Frequent hail damage? Get a hail resistant roof, such as rubber shingles.

An insurance appraisal by Normac ensures that you always have a current replacement cost value for your property. This means you will always be sufficiently insured in the case of a total loss, that you can receive better terms and insurance rates, and that you fulfill your fiduciary duty set by your provincial condominium bylaws . 

Understanding Condominium Insurance

CondoTalk: Riding the Rising Insurance Wave, Pt. 1

The other week, Normac was proud to sponsor CCI Golden Horseshoe’s popular CondoTalk webinar, Riding the Rising Insurance Wave.  With an impressive panel of speakers, this educational seminar covered all things related to condominium insurance. We’ve put together some of the key take-aways for condominium insurance and have included the full webinar recording below. Enjoy!

According to the Ontario Condominium ACT (the OCA), section 99-106, property insurance is required and should cover the common elements and standard unit. It excludes betterments and improvements made by individual owners. The purpose of the subsection above is to manage the risk for the Condo Corporation, Owners, and Mortgagees. Although owner’s insurance is not mandatory, it is encouraged and some corporations might consider writing it into their bylaws.

99 (1) The corporation shall obtain and maintain insurance, on its own behalf and on behalf of the owners, for damage to the units and comment elements that is caused by major perils or the other perils that the declaration or the by-laws specify. 1998, c. 19, s 99 (1).

When it comes to replacement cost, the condo corporation must insure the property to its full replacement cost. The only way to ensure an accurate replacement cost valuation is to have the property appraised by a professional, third party appraiser, like Normac.

99 (7) Subject to a reasonable deductible, the insurance required under this section shall cover the replacement cost of the property damaged by the perils to which the insurance applies. 1998, c. 19, s 99 (7).

In addition to the insurance policy, a Standard Unit Definition (SUD) is recommended and provides three main benefits:

  1. Equalization: All unit owners are governed by the same SUD and there are no discrepancies as to the standard finishing of the unit.

  2. Clarification: As older condominiums may have cycled through multiple owners, a SUD helps determine what is to be covered by the condominium’s insurance, versus what is a betterment that a previous owner may have installed and should be covered by the unit owner’s insurance.

  3. Opportunity: A good SUD will ensure that a unit will always be returned to a livable and sellable condition, regardless of what the owner’s policy is, or their level of care. It also prevents people from abusing the system.

A good SUD will clearly identify all the standard finishes and fixtures in a unit, providing a clear distinction between what is the unit owner’s responsibility and what is the condo corporation’s responsibility.

As compared to a barebones bylaw, which might offer corporations lower premiums in exchange for more risk, a clearly defined SUD can help prevent disputes between owners, the corporation, and insurance adjusters.

The OCA says the condo corporation can charge back a deductible if an owner damages their unit through an act or omission. However, the Act also allows corporations to pass their own bylaws that holds owners accountable for damage to other units or the common elements, irrespective of any act or omission within their own unit.  Having clearly defined deductible bylaws assists in determining what can be charged back to the owner and when. Here is a good explanation of why you need to have explicit bylaws regarding deductibles.

Insurers are now also offering deductible coverage as an option to owners under their personal policy to cover deductibles that the corporation might charge back to them. If you are living in a building where the deductible is very high, it is worth asking your broker if you are eligible for such coverage.

It is essential that unit owners and the condo board have a thorough understanding of the Certificate of Insurance and policies, the deductible/chargeback provisions, and the Standard Unit Definition. As a Property Manager, holding educational seminars or townhall meetings with the Insurance Broker is a great way to keep owners informed.

As condo boards turn over frequently, the Property Manager should review and explain the insurance documents annually. Board of Directors should also be encouraged to attend various education seminars (like this one!) so they can be knowledgeable about industry trends and best practices.

It is essential to share the SUD with all owners and help them understand what is covered within the condo’s insurance policy. Only when an owner is made aware of what is in fact a betterment and not a standard finishing, will they know what should be covered within their own policy.

With regards to the deductible,  the Act states that if a deductible increases or decreases upon renewal of the condo’s insurance policy it must be communicated to the owners in the form of an Information Certificate Update (ICU) and sent to them along with an updated copy of the Certificate of Insurance. It is suggested that a cover letter be attached to simplify what changes have been made to the policy.

When handling claims, it is important to take a proactive approach. Having an action plan in place before an incident happens will assist in dealing with and mitigating any loss. It is encouraged that Property Managers notify the Insurance Broker of an incident right away. This does not necessarily mean that a claim is being opened, but rather it ensures that the facts are recorded at the time of the incident in case a claim is opened later on.

The following is a list of common claims and best practices for handling them:

Water Loss

  • Determine the source of water and stop the leak, when possible (ex. shutting off a water valve versus a waiting for rain to stop when the roof is leaking)
  • Ask insurance provider for preferred contractors and immediately contact a restoration company
  • Notify Insurance Broker of the issue and have an adjuster assigned if you are opening a claim

Major Peril

  • Visit the affected site and determine the extent of damage, this can alleviate the stress that owners may be facing
  • Notify owners that restoration has been called
  • Give owners realistic expectations of a restoration timeline
  • Contact Insurance Broker and work with them to revert the unit back to the standard unit definition

Slip & Fall

  • Act immediately when incident occurs
  • When possible, head to site and take pictures and detailed notes (weather, what footwear the person was wearing, were there witnesses)
  • Contact the person injured and speak to them about the incident (never accept liability, just take notes)
  • Notify Insurance Broker as soon as incident takes place, again at least put it on record
  • Take detailed notes at the time of the incident, often these types of claims are made many months later and it can be difficult to recall the facts

There are a few compounding factors for today’s high insurance rates:

  • Market Competition – When condominiums first started gaining popularity in the 70s and 80s, lots of markets (insurers) came in thinking they could do better than everyone else and this drove rates down. Now, many insurers are pulling out of property insurance, driving rates up.
  • Aging Class of Business – 40-50 years ago, everything was brand new and the risk for insuring these condominium properties were low. Today, this is an aging class of business – the infrastructure is deteriorating and many properties have not been properly maintained.
  • More High-End Developments – New condominium development has been exploding across the country and the replacement cost values are going up as developers use premium materials to create an elevated living experience and lifestyle.
  • Catastrophic Events – Weather related events have caused significant damage around the world and the property insurance market has been hit especially hard. With the number of claims and their values rising exponentially, insurers have been operating at a loss.

All of this has helped create a Hardened Insurance Market. Insurance is all about money in (premiums) and money out (claims). After decades of low rates followed by substantial losses in the realty and the condominium business across the country and globally, we are now seeing a correction. Rates are going up so that insurers can recover money, deductibles are going up to help prevent smaller claims, and the market is shrinking meaning there is less competition.

Although the values of claims have gone up significantly, higher deductibles are deterring smaller claims from being made. As a result, it is expected that premiums and deductibles will continue to go up, however at a more moderate pace than the past few years.

We are in a day and age where “best in class” reflects the best possible rate in the circumstances, as opposed to the best rate. The number one way to improve your rates is to stay on top of maintenance to help mitigate any potential losses and reduce your risk.

Secondly, inform owners to maintain their own units; upgrade their fixtures, replace aging appliances, and take care of their unit. It’s important to have a community mindset that reinforces the idea that when an incident occurs, it affects everyone. Take responsibility and respect your shared asset.

Thank you to our panel of professionals for sharing their insights. Stay tuned for Part 2 of this webinar coming soon!

Maria Durdan
Partner, SimpsonWigle LAW LLP
Chair, Condominium Practice Group

Mark Shedden
CEO, Atrens-Counsel Insurance Brokers

Michelle Joy, RCM, BA 
Director, Condominium Management, Wilson Blanchard

Richard Elia, B.Comm., LL.B., LL.M. (ADR), A.C.C.I.
Sr. Lawyer, Elia Associations

An insurance appraisal by Normac ensures that you always have a current replacement cost value for your property. This means you will always be sufficiently insured in the case of a total loss, that you can receive better terms and insurance rates, and that you fulfill your fiduciary duty set by your provincial condominium bylaws.

Trend Watch: Mass Timber Construction

Brock Commons Mass timber construction
After becoming the first province to allow mass timber towers up to 12 storeys in 2019, BC is now pledging to support the forest industry by encouraging the use of mass timber building products in its capital construction programs. This includes the future development of St. Paul’s Hospital and the Royal BC Museum. Last month, BC Premier John Horgan appointed Ravi Kahlon, Parliamentary Secretary for Forests, Lands, Natural Resource Operations and Rural Development to lead the expansion of mass timber in BC buildings.

"As our economy bounces back from the COVID-19 crisis, we want to do everything we can to support forest workers. By focusing on mass timber, we have an opportunity to transition the forestry sector to high-value over high-volume production. This will mean opportunities for local workers, strong partnerships with First Nations and greater economic opportunity while making a significant contribution to advancing CleanBC."

John Horgan, BC Premier, https://news.gov.bc.ca/releases/2020PREM0033-001076

Benefits Of Mass Timber

Premier Horgan claims that the use of mass timber is cost-effective, sustainable, and generates jobs for BC’s forest communities and workers. The increased demand from both local and global markets will help to revitalize the industry, increasing production in forest communities and creating jobs.

The use of mass timber will also offer a cost-effective solution for the construction industry. Because mass timber products are custom-made off site and assembled on-site, construction time can be reduced by up to 25%. Using this method of building, constructions sites are also cleaner and safer due to fewer hot tools and machinery.

Tall wood buildings are considered sustainable for multiple reasons.

  1. Mass timber has a lower carbon footprint than concrete or steel as it is made of a natural resource. Additionally, as it is only one-fifth the weight, mass timber panels have reduced transportation emissions and decreased congestion to and around construction sites.
  2. Mass timber generates less waste since panels are manufactured custom for each application. Scraps may be re-used by the manufacturer.
  3. Mass timber is sourced from sustainably managed forests, of which Canada is a leader.  One BC company, Structure Craft, is even engineering mass timber products from beetle-kill wood which would otherwise be waste, or worse, kindle for catastrophic wild fires.
One other benefit, specifically important to British Columbians, is that buildings using mass timber are more earthquake resistant. Structurally, mass timber weighs less than concrete and steel, and is more pliable, therefore the impact on the building is reduced.

The provincial government in Ontario is also in support of mass timber and tall wood structures, having prepared a comprehensive technical resource for engineers, architects, designers, fire service, and building officials.  This guide focused on two important topics: architectural design and fire safety.

Building Codes + Safety

In Spring of 2019, BC updated its provincial Building Code to allow the construction of wood buildings up to 12 storeys tall, doubling the previous maximum height of six storeys.  At the same time, 13 BC communities signed up as early adopters of mass timber technologies. These communities represented 35% of the province’s housing starts in 2018. To be eligible, each community was required to have the following:

  • Support from their city council and the planning, building and fire departments;
  • Level 3 certified building officials; and
  • Land use bylaws for buildings higher than six storeys.
The National Building Code 2020 will soon see the same revisions and it’s believed that UBC’s Brock Commons helped pave the way for taller wood buildings across the country and around the world.

Until now, the biggest hindrance to the use of mass timber in construction was building codes, which deemed tall wooden structures a fire hazard. However, thanks to new mass timber building technologies and techniques, tall wood structures are as safe or safer than traditional steel or concrete structures.

Cross Laminated Timber (CLT), for example, holds a high level of fire resistance thanks to its cross-sectional thickness and air-tight construction, reducing a fire’s ability to spread. If a fire does ignite, the burn is slow and predictable, meeting fire resistance ratings. Fire resistance can and should be enhanced with fire-resistant lining to the flooring or walls.

For Brock Commons, Vancouver Fire and Rescue Services (VFRS) was involved in the project early on, overseeing the initial approval process and executing the fire and safety plan. The project required a site-specific regulation that included fire and seismic standards exceeding those for steel and concrete buildings. Check out VFRS video covering the specifics of Brock Commons’ fire safety measures, which included compartmentalized spaced to prevent a total loss, which is common with traditional wood structures.

Cause For Concern

The debate about safety is not a closed case, however. While building codes are changing, insurers and insurance brokers are still uncertain of the risks posed by tall wooden structures using mass timber. Canada’s condominium market is already under scrutiny in the face of a hard insurance market. New constructions using mass timber may see additional premium hikes due to existing concerns about wood structures.

A recent study conducted in the US by Boston College found builder’s risk insurance quotes for concrete buildings to be 22-72% less than quotes for wood frame buildings, and quotes for commercial property coverage was 14-65% less than wooden frame structures. It should be noted that this study was commissioned by the National Ready Mixed Concrete Association (NRMCA) and did not differentiate between dimensioned lumber and engineered lumber which has a higher fire resistance rating.

On the other hand, Vancouver based Globe Advisors conducted a similar study that suggested there were other factors for determining higher insurance costs in wooden structures than fire peril alone. This study indicated that wood buildings are less durable, cost more to maintain, and have shorter life spans, all leading to difficulty in obtaining insurance for wood frame structures.

In addition, wood structures can have major moisture management issues leading to mold. Prevalent in BC and Central Canada, mold not only creates structural issues for the building, but it can also pose significant health risks to occupants, including coughing, nasal congestion, eye, skin, and throat irritation, and can sometimes be fatal.

The study emphasizes the importance of minimizing factors that could lead to mold and water damage in wood structures and claims that much of the annual losses from lumber decay is preventable. There is no one-size-fits-all when it comes to wood structure construction across Canada – what works in Prairie provinces, may not work in the coastal region.

According to the Insurance Bureau in Canada, water damage costs insurers, on average as of 2016, more than $1.7 billion annually. This includes water damage caused by flooding, sewer back ups, and burst pipes which can all lead to expensive repair and clean up bills for insurers. Wood structures are more susceptible to excessive water damage caused by any of these man-made or natural disasters.

Time will tell if insurers will begin to favour the new technologies of mass timber over steel or concrete. Mass timber technologies will need to address all of these additional and important concerns: durability, fire safety, and moisture. For now, BC is committed to growing its mass timber industry and will continue to innovate and find long term, sustainable solutions for the construction industry.

Notable Mass Timber Projects

Check out this interactive map of mass timber projects being developed around the world.

The experts at Normac keep their finger to the pulse of the construction industry and are familiar with all construction types, materials, and techniques that might impact replacement cost.