Condo Risks

In order to provide sound advice to owners of condominium units, homeowners’ insurance brokers need to understand the unique features of condominium ownership and condominium insurance in Canada.

Some insurance covers condominium corporations, while separate policies cover individual unit owners. However, condominium regulation in Canada varies by province and territory. Moreover, different condominium corporations have different bylaws stipulating what property must be insured by the corporation.

The condominium consumer group could be more informed about the actual physical assets purchased, the potential liabilities

assumed, their duties and obligations as property owners, and the duties and obligations the condominium corporation owes to them as shareholders and unit owners. Condominium ownership and condominium insurance have some unique features that are not present in the ownership or insurance of a detached home.

Some underwriters at insurance companies view condominium unit owners as a better risk class than owners of individual detached homes. Some condos have features – such as fire suppression sprinkler systems, 24/7 front desk security, corporate oversight, professional property management, maintenance and budgeting practices overseen by elected boards – that are not typically found in detached homes.

However, insurance coverage and options for condominium unit owners must be carefully considered to meet the unique needs of this consumer group.

VARIANCE BY JURISDICTION

Each province and territory in Canada has its own unique condominium act, which governs the condominium market and includes rules pertaining to condominium ownership, condominium legal structure, condominium members, and others.

Each condominium is set up as a legal entity with a Board of Directors. The board establishes bylaws, declarations, rules and regulations. A condominium board also manages and maintains the property, establishes maintenance fees, maintains a reserve fund, conducts regular condominium unit owners’ meetings, and ensures that condominium unit owners comply with the established rules.

The condominium corporation manages the operations, business affairs, and the common property on behalf of all condominium unit owners. In a condominium (as opposed to a co-operative or “co-op”) the tenants own substantially all of their unit space. The common property is owned by the condominium corporation itself.

Common property would normally include – though is not necessarily limited to – hallways, elevators, fitness centres, pools, parking garages, gardens and lobbies. Condominium unit owners share the expense of maintaining the common areas by paying a monthly maintenance fee proportionate to the shares they have in the corporation.

In some condominiums, there are cases of limited common property. An example would be balconies that are listed as common property, but each condominium unit owner has exclusive use of his or her balcony.

The entire condominium structure, except for betterments and improvements owners made to their units, must be insured by the condominium corporation. The condominium corporation’s insurance covers losses to the condominium building and common property, but does not cover a condominium unit owner’s personal contents, liability or the improvements made to the unit.

Condominium unit owner insurance covers two major types of perils: liability and property. Liability insurance protects the unit owner from legal and personal liability.

Property insurance covers the following:

• personal contents (e.g., items such as furniture, personal belongings, etc.);

• increased betterments and improvement coverage, which covers upgrades and alterations within that unit;

• additional living expense (ALE), which covers any living costs, over and above the normal cost of living, in the event of an insured loss while the unit is uninhabitable during repairs; and

• loss assessment coverage, which covers any assessments levied by the condominium corporation’s Board of Directors to make up for any shortfall in the condominium corporation’s property insurance coverage in the event of a property loss.

WHEN TWO UNITS ARE DAMAGED

An interesting example of the importance of the ALE coverage is highlighted by an unusual claim where a bolt of lightning struck the roof of a condominium and travelled between the walls of two separate units, causing major property damage to both units. One of the condominium unit owners had an insurance policy that provided for extensive ALE while the repairs were in progress. The other condominium unit owner had an insurance policy with a lower limit of ALE coverage.

While the two separate insurance companies battled over who was responsible for the lightning damage between the walls of the two units, commencement of the repairs for both units was delayed. One insured had sufficient ALE coverage and was insulated from the increased living costs arising from the delays, while the other unit owner did not have enough coverage and suffered from acute distress as a result of the delay in the commencement of the repairs.

Loss assessment coverage is particularly relevant for condominium unit owners in earthquake zones, such as British Columbia. In the event of property damage arising from an earthquake, insurance policies usually provide for increased deductibles and lower limits to coverage amounts than would apply to other causes of property damage. This means that the condominium corporation and the condominium unit owner will receive less insurance compensation in the event of an earthquake. As a result, the condominium corporation may run out of insurance coverage and its reserve fund to pay for the repairs.

To cover the shortfall, the condominium corporation could levy additional assessments or higher deductibles to unit owners, resulting in an unexpected obligation to unit owners. Loss assessment coverage may help condominium unit owners in this situation.

CUSTOMIZED BYLAWS

It is important for unit owners in earthquake zones to have a clear understanding of how insurance coverage for both themselves and the condominium corporation may change in the event of an earthquake, and how the bylaws, declarations, rules and regulations governing their specific condominium property may impact their obligations. Variations in condominium corporation bylaws, declarations, rules and regulations are not only a concern for condominium unit owners in earthquake zones. They can have a profound impact on the risk of financial loss to any condominium unit owner. While each Canadian jurisdiction has its own condominium act requiring all condominium-governing documents to conform to minimum requirements, individual condominium corporations can, and do, customize their bylaws, declarations, rules, and regulations. In practice, no two condominium corporations seem to have identical bylaws or declarations, though each conforms to the statute of its respective jurisdiction. These variations in governing documents are broad-based and insurance professionals must review the specific condominium corporation’s governing documents to reasonably advise clients or to adjudicate claims.

Here are some examples of nuances:

• condominium corporation, condominium unit owner and tenant insurance policies are all required to have mutual waiver of subrogation provisions. However, some bylaws completely bar tort recovery for any and all property damage against the condominium corporation, another shareholder of the condominium corporation, or their tenants.

• the declarations set out what building components, finishes, fixtures, and fittings are owned outright by the condominium unit owner and which are owned by the condominium corporation. For property owned by the unit owner, it is the sole responsibility of the unit owner to maintain and insure this pr operty. However, there is no standard form declaration mandated by statute. As a result, declarations have to be reviewed carefully to understand what condominium unit owners must insure themselves. In the event of a claim, the claims professional needs to review each declaration to determine what indemnities are owed to the condominium unit owner and what are owed to the condominium corporation.

• many condominium corporations came into existence before statutes required the inclusion of a Standard Unit Bylaw and were not obligated to adopt a bylaw of this type. A Standard Unit Bylaw sets out what condominium unit property must be insured by the condominium corporation, and which building finish, fixture, or fitting is deemed to be a condominium unit owner’s betterment and improvement. All betterment and improvements are the unit owner’s sole responsibility to insure. Similar to the declaration, there is no required form for the Standard Unit

Bylaw. Each condominium corporation’s bylaw is unique. Insurance professionals should review the bylaw terms for each client in order to offer proper coverage options.

OPTIONS TO CONSIDER

In addition to understanding what assets they are responsible for insuring, condominium unit owners also need to understand the insurance coverage they are purchasing. While this is true for everyone purchasing insurance, it is even more important for condominium unit owners because their policies may have unique terms. For example, the only water damage coverage provided in the standard condominium unit owner policy is for water damage due to escape of water from a plumbing system or water main. Individual condominium unit owners need to be aware that their property is not covered for water damage due to surface water, subsurface water, or water back-up from sewers or drains, unless optional coverage is purchased.

Similarly, if the condominium unit owner is using bicycle storage areas, private storage lockers or closets in the condominium building that are not integral to their unit (e.g., located in the basement of the building), then an endorsement should be added to the condominium unit owner’s policy to cover the possessions stored in these areas.

While the condominium lifestyle may offer convenience and affordability, the complex nature of the terms and conditions governing condominium ownership and common property may make it more challenging to obtain

appropriate insurance coverage. Condominium unit owners should seek the assistance of knowledgeable insurance professionals to ensure they obtain appropriate insurance coverage and that they understand the terms of the insurance policy. Insurance professionals need to review the bylaws, declarations, rules and regulations of the client’s condominium corporation to provide good advice for each circumstance.