By Mario D. Deo -
Has your corporation’s insurance premium deductible increased dramatically recently? You are not alone. Many corporations have seen their insurance deductibles increase from as low as $5,000 to $100,000, $200,000 and even $500,000 per loss.
Based on information we have received from insurance brokers, fires in Alberta, other natural disasters and climate change have contributed to increasing insurance costs. In 2018, insurers in Canada paid out approximately $2 billion as a result of severe weather losses. This is up from an average of around $400 million just five years ago.
We have also been advised that many insurance companies have abandoned the condominium industry altogether as a result of the number and quantum of losses claimed by condominium corporations. As a result, the remaining insurers are charging higher premiums, presumably to cover their risk exposure.
The nature of condominiums also makes them a greater risk to insure. While a water escape in a detached home may result in a relatively minor insurance claim, a water escape in a high-rise condominium can have disastrous consequences. For instance, a toilet or sink overflowing in a 15th floor unit could potentially damage units all the way down to the bottom floor, resulting in a significant insurance loss.
The fiscal impact of these increased insurance deductibles is significant, and condominium corporations must take action mitigate future insurance premium and deductible increases. One such action is to reduce the amount of property that is covered by the corporation’s policy of insurance, by introducing a standard unit by-law (or amending any existing standard unit definition).
Managing the Corporation’s Insurance Risk – The Standard Unit By-law
In accordance with the Condominium Act, 1998 (the ”Act”), condominium corporations are obligated to obtain and maintain insurance against major perils for the common elements and the units, except for “improvements” to the units. By removing items from the “standard unit” that are typically subject to insurance claims (for example flooring, drywall, countertops, and in some cases everything falling within the boundaries of the unit, etc.), and deeming them to be improvements to the units, the dollar value of the property at risk under the corporation’s policy will be significantly reduced. Owners will then be responsible for insuring and repairing the improvements to their units.
The proposed standard unit by-law must be approved by the majority of unit owners. Why would an owner vote in favour of a by-law requiring them to insure more of their own property?
Each owner must remember that they pay toward two policies of insurance. The insurance policy secured by the condominium corporation is for the benefit of the owners and is paid for by the owners, in accordance with the percentages set out in the corporation’s declaration. Each unit’s insurance policy is also an owners’ policy. It can benefit the individual owners to increase unit-specific coverage because the individual owner will be paying at an individual pricing level for smaller scale coverage. Typically, premiums and deductibles are more cost effective for owners’ policies. The average unit owner insurance deductible is generally around $1,000.00. A condominium corporation’s premiums and deductibles will generally be higher than a unit-specific policy, because the rate is based on the potential for a much more significant damage payout in the case of a water event. Again, each individual unit owner has to pay a proportionate share of those larger premiums and deductibles;The advice of brokers has consistently been that the removal of at least floors from the standard unit will mitigate future increases of the deductible; and,The total amount of deductibles charged to the corporation over time will likely be substantially less. A simple example can illustrate this concept:
Water is leaked onto a unit owner’s floor, which causes a $20,000 loss. As is usually the case, no act or omission on the part of the owner/resident can be proven. Without a standard unit provision, the condominium corporation must pay the $20,000, assuming that the corporation’s insurance deductible is over $20,000. With a standard unit provision that removes flooring from the standard unit description, the condominium corporation will save $20,000 and the owner’s deductible will likely be $1,000. Considering the interest of the entire community, a standard unit by-law, removing at least flooring, is a win-win proposition over time. When deductibles are $100,000, $200,000, or more, the benefit to unit owners is multiplied.
Other Steps to Consider
Condominium corporations facing large insurance deductible increases should also notify owners to contact their insurance brokers to ensure that they have proper insurance in place. The Act allows condominium corporations, in certain circumstances, to add the insurance deductible to an owner’s common expenses. If an owner fails to pay, a lien may be placed on title to the unit and the lien may be enforced in the same manner as a mortgage. While owners are advised of insurance deductible increases with the issuance of an Information Certificate Update, many times they do not fully comprehend the devastating effect that the increased deductible may have in the event of a loss.
Condominium corporations should also take steps to militate against water damage losses. This may include installing water detection and shut-off systems and ensuring that aging plumbing, window and roof systems are kept in good repair.