How Strata Insurance Coverage Failures could Collapse your Purchase or Sale, or cause a Mortgage default
High value residential strata owners have recently been finding it very difficult to obtain strata insurance.
This leaves owners unable to meet the strata’s legal obligations. This exposes the owners to significant liabilities.
It can also put individual owners in default on their mortgages. Lastly, it means you may have trouble selling your place. Any new buyer will be unable to get a mortgage without proper coverage.
Requirement to have full replacement coverage
Under s.149 of the Strata Property Act, a strata corporation must “obtain and maintain” property insurance on:
- common property
- common assets
- buildings shown on the strata plan, and
- fixtures built or installed on a strata lot (if they are installed by the owner developer as part of the original construction)
This property insurance must be on the basis of full replacement value. It must insure against major perils, such as fire, lightning, smoke, flooding, or explosions.
Finding full replacement value insurance
A strata corporation must obtain “full replacement value” for its insurance.
For example, imagine your strata had a catastrophic fire that destroyed the buildings. Your buildings cost $500 million to replace. Therefore your full replacement insurance coverage would need to be for $500 million.
In some cases, the cost of this insurance has increased so significantly that owners simply can’t afford it. The monthly or annual premiums are so high that they make the strata fees unreasonable.
In other cases, strata corporations can’t find full replacement coverage for their buildings at all, no matter the cost. They may be able to obtain partial coverage, but the Strata Property Act requires full replacement coverage.
The increasing cost of insurance
Several things are causing significant increases in the cost of insurance.
Recently, the number of catastrophic property losses (over $25 million) has significantly increased. World-wide weather related incidents such as hurricanes, floods, earthquakes and fires are a primary culprit of these increases.
Many of these catastrophes occur in other parts of the world, but they impact our local BC insurance market because of the way insurance works.
Local insurers are required to keep reserves on hand to pay for claims. Local insurers might not be able to create a big enough reserve for larger buildings by themselves. They will ask other insurance companies across the world (called “reinsurers”) to help them cover these reserve amounts.
However, the number and extent of catastrophic claims has been increasing across the world. This makes it more difficult for local insurance companies to find reinsurers to help them build these reserves.
Strata buildings are also very valuable – often over $100 million. This alone makes any loss a catastrophic loss.
As well, insurance companies now use more sophisticated computer modelling systems. These systems help them more accurately determine the possible cost of a claim.
Also, insurers look at the number and type of claims made. If your building made a lot of insurance claims, that will negatively impact your ability to find coverage. It will also increase the cost of any insurance you are able to find.
As a result, local insurers have been finding quite a bit of difficulty finding coverage for the strata at all. In some cases, the cost of the coverage could be significantly increased.
The rising cost of deductibles
In addition to the cost of the insurance policy going up, deductibles are also rising.
Insurers don’t want policy-holders to submit requests for claim payments for just any old issue. So they impose a “deductible” – an amount the policy holder must pay when they want to file a claim.
For example, a deductible on flood insurance for a strata building might be $100,000 for the first claim. This means the owners would need to come up with $100,000 in order to start the claim process.
This deductible can be raised by any one or more of the following methods:
- special assessments or levies
- increased strata fees
- making the responsible owner pay the deductible (if the bylaws allow for this)
This can cause significant hardships for the owners, in whole or in part. Coming up with $100,000.00 when you have only 20 or 30 owners in the strata could be very difficult. Now imagine if you were the owner responsible for the damages. You might have to come up with that amount yourself personally.
Higher strata fees can also make the unit much less financially feasible for the current owner. They can also deter future buyers.
Individual owners should always ensure that their own insurance policy covers the deductibles for their strata. That way, they can pay the strata’s deductible from their own insurance if necessary.
Resulting problems for owners
Here are some other insurance issues that can result in financial hardship, or even collapsing deals.
Lenders require full replacement coverage to be in place as a condition of mortgage financing. Accordingly, if the strata doesn’t have proper coverage, you could be found in default of your mortgage. Your lender could call your mortgage, and you might not be able to refinance.
Any potential buyers who need a mortgage will be unable to obtain a mortgage without full replacement coverage. They will be unable to complete on the purchase, which could lead to damages being incurred for both parties.
If your building doesn’t have full replacement insurance, the owners could have to pay for any damages out of pocket. This could be even worse if your bylaws say that the responsible owner must pay for the repairs.
Could your strata owners pay for the replacement of a $500 million building? Could you pay the entire amount yourself if you fell asleep with a cigarette in your bed?
Tips for managing these risks
Here are a few tips for owners and potential owners:
- read the minutes, and your AGM packages so you can identify issues with insurance coverages as early as possible
- make sure your own individual insurance package has coverage for any strata deductibles
- ask your strata to make sure that it has upgraded all hoses and appliances to minimize the possibility of flooding
- minimize risky activities such as smoking, barbequing, using gas heaters on balconies, in order to reduce the likelihood of fires
- review the strata’s depreciation report regularly to familiarize yourself with the costs involved in replacing large equipment or items
- identify any issues with insurance coverage to your lender
- if you are selling your strata, make sure you identify the insurance issue to any potential buyers
- if you are buying, get a copy of the insurance policy for the strata, and review it carefully
- review insurance policies with your own insurer if you don’t understand it
- read through bylaws very carefully to determine whether or not individual owners would be responsible for paying deductibles
- review your bylaws for any human rights issues – these complaints can also increase a strata’s risk of claims
- if you are renting a unit you own, make sure the coverage covers your tenant’s faults
Call us. Call us sooner, rather than later, so we can help identify issues. It will cost far less money and stress to review these issues before you sign your contract.February 10, 2020 11:32 am