How long will it take for the strata insurance crisis to be resolved? That’s the burning question on the lips of thousands of Canadians living in British Columbia, who are currently getting to grips with some serious strata (also known as condominium) insurance headaches. Many consumers are facing significant premium and deductible increases, much stricter policy terms and conditions upon renewal, and some are not even able to get full coverage.
The insurance challenges felt by strata and condominium corporations, as well as individual condo unit owners, have been well documented in recent months. Some factors driving the insurance crisis include: an increase in the frequency and severity of strata claims, a rise in repair costs, property maintenance and rebuilding bills, as well as general hard market trends like general capital issues and an increase in global reinsurance costs.
In acknowledgement of the severe impact on consumers of recent increases to strata insurance deductibles and premium, the Insurance Brokers Association of B.C. (IBABC) has called for a consultation with key stakeholders – including insurance companies, government regulators, legislators, consumers, consumer groups, and strata councils and corporations - to discuss owner liability in strata corporations. The association has suggested two key reforms to the Strata Property Act: a $50,000 cap on loss assessments (which may not apply in cases involving negligence), and the addition of a standard definition of a strata unit.
“These specific asks are tip of the iceberg foundational pieces that are definitely within our grasp,” said C.J. (Chuck) Byrne, executive director & COO at the IBABC. “We believe it’s important to establish a standard definition of a strata unit, as that will bring clarity to all parties and it will help insurers gain some confidence in what they’re pricing their policies for. There are two policies at play – the strata building insurance and the unit owner’s insurance – and there’s often a bit of a moving target as to what’s covered by which policy. Both of those coverages are in a state of flux in terms of how they’re interpreted by [different stakeholders].
According to the IBABC, having a legislated standard unit definition would clarify the responsibilities of strata building insurers via their offered insurance policies versus the responsibilities of strata unit owners and their insurance responsibilities.
“We need to ramp up awareness around who is responsible for what when it comes to strata insurance,” Byrne told Insurance Business. “Unfortunately, many strata councils have been quasi-depending on insurance policies to be their maintenance contracts, which of course is untenable. It's just not what the policy is designed for. On top of that, there’s a lack of clear responsibility under the current legislation as to how building maintenance and repair should be handled.
“The legislation in B.C. calls for strata corporations and councils to prepare a depreciation report, which points to a long-term plan of maintenance and repair and replacement for the building 20, 30, 40-years into the future. This is intended to make condo corporations realistically plan for building repairs through either regular monthly fees that build a contingency fund or a capital repair fund, or both, or it should at least give them a clear indication as to when they're obligated to pay a retrofit or repair assessment.
“However, that same piece of legislation allows condo corporations to defer that depreciation report, meaning if a certain percentage of everyone in the building decides they're not going to update that report, then it doesn't have to be done. That's a dangerous situation because it's basically putting your head in the sand and ignoring the reality of the repair costs that are mounting significantly for each one of these buildings. And that’s what leads to claims, losses, and this bad situation that we find ourselves in now.”
There’s also a lack of clarity and awareness among condo unit owners about their individual responsibility as a unit owner and their collective responsibility as part of the condo strata membership within that community. Byrne described the issue as a “fundamental disconnect” in which many unit owners shed their individual responsibilities and assume problems to be communal in nature.
This ties into the IBABC’s second legislative recommendation to introduce a $50,000 cap on loss assessment coverage. The association estimates that only approximately 50% of strata unit owners purchase their own individual insurance coverage. This ‘go without a safety net’ approach is deemed irresponsible by the IBABC, which argues there needs to be a greater spread of risk among unit owners.
“There’s a problem we’re seeing come to fruition quite rapidly in B.C., which is where individual unit owners are being assessed the full deductible for an insured loss,” Byrne added. “When that loss deductible was $5,000 or $10,000, that was a scary prospect, but it was insurable through normal unit owner loss assessment coverage. But when those deductibles jump to $100,000 or $250,000, or in some cases $500,000 or $750,000, which is increasingly happening in our market, it’s a whole different story.
“Imagine coming home from vacation to a letter from your strata corporation, saying a dishwasher leak that occurred while you were away caused flooding in 10 units below you. It’s a million-dollar loss and the insurance company is only going to pay $250,000, but because our legislation doesn’t require negligence proven in court, and because we have the approval of everyone in the building, we’re sending you the entire bill. You can't buy insurance for that. It basically means taking a financial loss that could affect the viability of maintaining your residence and beyond.”
The IBABC argues that $50,000 is a reasonable limit for loss assessment coverage. Byrne gave the example of a $200,000 building loss in a 10-unit condo, with a deductible of $100,000. In this case, if all individual unit owners agree to contribute to a claim, and all 10 unit owners have insurance cover with a loss assessment extension limit of $50,000, then their individual insurance companies will only need to contribute $10,000 each, and the loss is funded fully. If they decide to name one unit owner as solely responsible, the maximum liability for that unit owner would be $50,000, which hopefully they're insured for, so they’ll be able to pass it onto their insurer. The remaining $50,000 deductible would be shared by the other nine unit owners, which, again, could be insurable. Byrne described this cap solution as “a way to still have a punitive approach, assuming the loss and deductible is within proportion, but it also limits the liability so that people can actually buy insurance to that end.”
The two recommendations that the IBABC proposes addressing in the consultation will not change the immediate, top-of-mind issue of premium increases. However, the association argues that if these legislative changes are implemented, they will build a stronger foundation to bring stability to this highly unstable market.
