Understanding Condominium Insurance

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.