Property Insurance & the Condominium

By Karen Reynolds, ACCI, FCCI, R.C.M., A.I.H.M.
From the WB Condo Connection – Volume 1, Issue 2
Simply put, any individual owning or living in a condominium must carry liability and property insurance. Liability coverage is quite straight forward however property insurance is probably one of the most confusing subjects regarding condominium lifestyle. What does the corporation insure, what does the owner insure, what does the tenant insure and what happens when a claim is filed? The intent of this summary is to discuss property insurance only and the following should provide basic answers to these questions and hopefully clarify the insurance responsibilities.
A standard condominium corporation is comprised of the units, common elements and exclusive use common elements the boundaries of which are provided in each corporation’s documents and in every standard condominium it is the corporation’s duty to insure all three components for the full replacement value. Exclusive use common elements are those areas of the corporation of which unit owners have sole use such as a driveway, or rear yard in a townhouse or a balcony in a high-rise building. If the unit boundaries extend to the curb at the front of your unit and the fence line at the rear of your unit and have no vertical boundaries, then everything in between is considered “unit” and therefore insured by the corporation’s policy excluding improvements.
In that same scenario it is unlikely there would be any “exclusive use” common elements as the remainder of the corporation would be common elements so all would be covered under the corporation’s policy for major perils such as fire, lightning, smoke, windstorm, hailstorm, explosion, water escape, vandalism or malicious acts, to name a few.
With respect to property, the owner is responsible for insuring any betterments to the unit, including those installed by a previous owner, and any personal belongings. If the developer has not turned over a standard unit definition at the turnover meeting, the Act includes a provision which allows the corporation, with majority consent of the unit owners, to modify the standard unit by passing a “Standard Unit By-law”. Betterments or improvements are defined within the “Standard Unit By-law” which can eliminate specific aspects such as floor coverings or counter tops or can limit the standard of those features to, for example, builder’s grade. It is important to familiarize yourself with the corporation’s standard unit bylaw and provide a copy to your insurance broker to eliminate the possibility of any gaps in your coverage.
If you are not an owner but reside in a condominium unit, a tenant’s package is sufficient as you are responsible for carrying coverage on your personal belongings and public liability. As an absentee owner, if you have made improvements to your unit and lease your unit you are still required to insure those betterments.
To determine what the “full replacement value” of the property might be, it is necessary to enlist the services of a reputable insurance appraiser and have an appraisal conducted. Many declarations include a provision to this extent spelling out the frequency with which the appraisals should be undertaken. It is when damage occurs that the water seems to get muddied and many managers, boards and owners have difficulty understanding whose insurance will respond and who will pay the deductible. The easiest way to remember how insurance works in a condominium is that it does
not matter what caused the damage or where the cause originated but who is paying for the insurance coverage on the damaged property. If the unit or common elements are damaged, then the corporation’s insurance will respond however if it is personal property or an improvement to the unit then a claim against the homeowner’s policy will be made.
Deductibles also present some confusion because if damage is a result of an act of negligence or omission on the part of the owner and contained within their unit, the corporation can charge back an amount up to an amount equivalent to the deductible. Owners may obtain insurance to cover the amount of the deductible through their homeowners policy. With the majority consent of the owners, these circumstances can be expanded by passing a by-law which would make the owner of damaged unit responsible for the deductible for damage that neither they nor the corporation  caused to their unit, another owner’s unit or the common elements. Otherwise, if a damage claim is processed, the condominium corporation is responsible for the deductible.
This summary addresses property insurance only in a very basic and brief manner and in no way is intended to provide a comprehensive review. It is also important to note that we have addressed only standard condominiums. If you own a vacant land or common elements condominium unit, the obligation to insure any structure on the unit is the owners. Your assigned property manager will be able to provide additional, more detailed information with respect to other insurance coverage owners and corporations require, the Standard Unit By-Law and also with interpreting your Declaration, and Description to determine unit boundaries and common elements.

Insurance Appraisal

As noted above, in a standard condominium corporation the corporation must insure the units and common elements for their full replacement value. How do you, as members of the Board, know what that value might be? Many rely on the increases implemented by their insurance carriers each year when the policy renews. This is not a recommended practice. If a major catastrophe occurs where property is substantially damaged and the insurance coverage is inadequate, where do the funds come from to repair and/or replace the damage? That’s right, the owners. It is well worth the fees charged by a reputable company to have an appraisal undertaken and values adjusted accordingly. Many condominium declarations include a provision which stipulates the frequency with which the appraisals must be done, for example, prior to each renewal of the insurance policy.

Insurance Trustee

Many condominium declarations provide that the corporation shall retain an insurance trustee. The purpose for this provision is primarily to protect the interests of mortgage lenders as well as the owners. In the event of a large claim (typically in excess of $25,000.00), the cheque is issued to the insurance trustee to prevent the funds from being deposited in the corporation’s bank account where, at the discretion of the Board, it may be used for other purposes rather than repairing any damage or worse yet, becoming a temptation for fraud.
Set-up fees and annual costs to a trust company can be expensive and therefore unattractive to a corporation who is trying to keep maintenance fees as low as possible but corporations may find that potential purchasers may experience difficulty obtaining mortgage funds for properties where an insurance trust agreement is not in place. As a more reasonable alternative, many professional firms such as lawyers and/or accountants will provide the corporation with written confirmation that, in the event a trustee is required, they will act in that capacity. This documentation is kept on file for the corporation and provided either with the status certificate or upon request.

What About Volunteers/Committees?

We are often asked about the liability exposure to a corporation that utilizes volunteers or committees to tackle projects within the corporation in an effort to keep costs down. Depending on the level of risk involved with the tasks they undertake, it can be as simple as providing your insurance broker with confirmation of the committee and their anticipated role. Providing the volunteers are not endangering themselves or other residents it is not a problem and they can be covered under the corporation’s policy for a nominal, if any, amount.
We have even arranged for coverage in a corporation where one owner agreed to use his snow blower to remove the snow from all interior walkways. Contact your insurance provider for specific details to determine whether your situation qualifies for additions to your coverage and/or premium to cover the volunteers within your community.

What Does Management Do in the Event of Insured Property Damage?

When water escape or penetration is causing damage to a unit the obvious first action is to locate the cause and shut the water off or have the problem repaired. The manager will then arrange to have a reputable contractor visit the unit to extract any surface water and take all necessary steps to avoid any contamination of the area as a result of grey water or the possibility of mould. The manager will work with the corporation, the owner, service providers and insurance adjuster to ensure the unit is restored as quickly as possible.
Assuming that emergency personnel have already been contacted, in the event of a fire, smoke, windstorm or explosion the first concern of the manager is the safety of all occupants of the unit and any neighboring units. It is not the manager’s responsibility to provide lodging for unit owners who may be displaced. Unit owners and tenants should ensure they have sufficient coverage within their condominium package or tenant’s package to cover the costs should they be forced to lodge outside of their home for an extended period of time. Again, once the cause of the damage has been ascertained, the manager will work with the Board, the owners, service providers and insurance adjuster to ensure the unit is returned to a livable condition as quickly as possible.