B.C. Really is Different

“But B.C. is different.”

It’s a phrase we here on the Left Coast are accustomed to saying. And we’re used to people rolling their eyes as we insist, “No, really, it is different here.”

So at the risk that you have heard it before, I’ll start by saying B.C. is different, especially when it comes to our strata properties and their insurance ramifications. This becomes evident as the consequences of urban density, high housing costs, the leaky condo crisis, jurisprudence, water damage claims and earthquake predictive modeling affect this residential sector. I’ll deal with each of these to provide a general overview of where we are today.

There are about 28,000 strata corporations and 1 million strata units in B.C. Most of these are located in the major urban centres of Victoria, Kelowna and Metro Vancouver. The latter city now has the dubious distinction of being the most expensive place to live in North America. Strata-titled apartments and townhouses, sold with promises of “affordable luxury” and “carefree living,” represent the home ownership dream for many urban British Columbians, especially first-time buyers. Local news reports about a new condo project selling out in two hours are common. These stories usually include footage of eager buyers (usually in their 20s and 30s) lined up to sign high-ratio mortgages at low interest rates to become homeowners. It is estimated that one-quarter of B.C.’s 4.5 million people live in strata properties.

Between 1982 and 1999, California-style stucco applications became popular in B.C. But in the rush to take advantage of the lower construction costs associated with stucco, people forgot this is a coastal rainforest region. About 160,000 units were built during this period. The estimated number of units that suffered water ingress due to faulty “leaky condo” construction ranges from 65,000 (government’s estimate) to 87,500 (high end of independent consultants’ estimates).

The legacies of the leaky condo crisis are:

• Mandatory builders’ licensing and mandatory third-party warranties provided by the private insurer market, both managed by the Homeowner Protection Office;

• Building code changes making proper rain screen technology mandatory;

• Fifteen years worth of court decisions (one of the more recent ones being Progressive Homes v. Lombard in 2010, in which the Supreme Court of Canada ruled that the insurer had a duty to defend legal actions for claims of water damage to suites in four Vancouver-area housing co-ops completed in 2004 and 2005); and

• Mandatory reserve fund studies to encourage owners to make long-range plans for major repairs (so far, only about 30,000 “leaky condo” units have been remediated).

The provincial government recognizes the looming problem related to the large number of strata properties that still face moisture-barrier retrofits — estimated at 40,000 units facing assessments anywhere from $30,000 to $120,000 each — and major maintenance upgrades. The issue is that strata corporations may have cash-starved contingency funds, because when it comes to their primary residences, people tend to buy up to their approved limit and then vote at strata annual general meetings to keep strata fees as low as possible.

The government’s regulation calling for reserve fund studies is in effect now, but strata corporations have until the end of 2013 to comply with the new requirements. After that, they must undertake reserve-fund studies every three years. The Condominium Home Owners Association of B.C. estimates 22,000 strata corporations will require these studies. By regulation, the “qualified persons” who prepare them must disclose the existence of E&O coverage.

When B.C.’s Strata Property Act (SPA) was substantially revised in 2000, it introduced insurance provisions that required strata corporations to obtain liability insurance – that is, a commercial policy for the building structure and common areas – and to review and report on insurance coverage annually. The act establishes building insurance deductibles as a common expense, but allows the strata to recover the deductible portion of a claim if the owner was “responsible.” A couple of landmark court decisions provided an interpretation for “responsible” that was lacking in the act, clarifying that the unit owner would have the same level of responsibility as he or she would have in a single-family detached home.

Although the act allows the strata to recover the deductible from owners, a strata bylaw or rule is required. Many stratas have adopted bylaws that stipulate recovery of the deductible is on a “strictly liable” basis: this removes the onus for the strata to prove the owner’s negligence. This transfer of the deductible costs to owners has led owners to seek deductible coverage in their unit policies.

Strata units built in the past 20 years usually have two bathrooms, laminate floors and five appliances. The shared laundry rooms of yesteryear with floors that slope to a drain are passé. These are prime ingredients for frequent interior water-damage claims that are expensive to remediate, especially when the water has spread to common areas and other units. Broken hoses and overflowing bathtubs happening in units is one thing. But when claims become frequent for damage arising from the piping in the walls, the consequence of owners collectively putting off needed upgrades, insurers send a message to the strata corporation by increasing the water damage deductible. Either way, you’re going to pay, so get busy on those upgrades. As these deductibles mount for some buildings (in some rare cases, they are hitting the six-figure mark), brokers have sometimes had difficulties finding a market for the building deductible protection owners need on their unit policies.

Given the downloading of deductible costs onto unit owners, you would think all condo owners would have their own policies with building deductible protection. But brokers who specialize in the strata market report that in the major building losses they’ve handled, only about half of the owners have had unit coverage.

The earthquakes of the past few years in Chile, New Zealand and Japan, which have building codes similar to Canada’s, have brought B.C.’s strata coverage risk into sharper focus. B.C.’s coastline is part of the so-called ‘Pacific Ring of Fire.’ In 2009, RMS, which provides predictive modeling statistics to the insurance industry, increased its estimates of Vancouver’s probable maximum loss from an earthquake. The density of multi-family buildings in southwest B.C. means that when — it’s no longer a case of if — the area suffers major seismic activity, the damage will be on a large scale.

Strata building policies are usually for full replacement cost. Earthquake deductibles are at least 10% of the value of the building. Assuming a building has an appraised value of $2 million, and that half of its owners don’t have unit coverage or deductible coverage, restoration would not be able to start until those owners came up with their share of the deductible.

Clearly strata owners need to be made more aware of the need for unit coverage and deductible coverage. Also, they need to be mindful of other considerations related to protecting their condo and contents. To that end, the Insurance Bureau of Canada has formed a working group chaired by Graham Haigh, vice-president for B.C., Wawanesa Mutual Insurance Company, and the Insurance Brokers Association of B.C. (IBABC). We at the IBABC have been pleased to be included in this consultative role.

Mike Valiquette, president of HUB International Coastal Insurance, which specializes in strata insurance, will be moderating the Readiness, Response & Recovery S ymposium on May 11 at the IBABC Conference & Trade Show in Kelowna. At that event and beyond, we look forward to some productive dialogue on these strata issues.