Insurance

This chapter explains the principal insurance requirements for a strata corporation under the Strata Property Act. The chapter also describes some important features to consider when arranging insurance for a strata corporation. Of course, every strata corporation is different. Each strata corporation has insurance issues specific to that corporation. In addition, insurance policies are not all the same.

The insurance information in this chapter is general information of a practical nature. The author is a lawyer, not an insurance expert. Each strata corporation must consult its own insurance advisor to determine whether the corporation has particular coverage, and what coverage the corporation needs. In this manual, a reference to an insurance advisor means someone who is expert in insurance matters, especially insurance for strata corporations.

An owner should never assume that his or her strata corporation carries particular insurance coverage, or that the corporation’s policy covers any particular loss. For information about a strata corporation’s coverage, a strata council member or other owner should first check the corporation’s insurance policy. In addition, a strata council member should speak with the strata corporation’s insurance advisor.

Readers must assess each insurance situation on its own merits, bearing in mind that general information of the type in this book may not suit particular circumstances. For advice about a specific insurance problem, the reader should consult an insurance advisor. Neither the author nor the publisher, Strata Publishing Corp., assume any legal responsibility for the insurance information in this chapter.

The Strata Corporation’s Insurance

For guidance on a strata corporation’s insurance requirements, one must look to the Strata Property Act and regulations, and to a strata corporation’s bylaws. In many strata corporations, however, the bylaws barely mention insurance, except to say that an owner should receive a copy of the strata corporation’s policy on request.

According to section 149(1) of the Strata Property Act, a strata corporation must obtain and maintain property insurance on the common property, common assets, any buildings shown on the strata plan, and certain fixtures. For the purpose of insurance, the regulations define the term fixtures as follows: 1

In this chapter, every reference to a fixture or fixtures refers to a fixture as defined in the regulations, unless the context requires otherwise.

A strata corporation must also maintain insurance against liability to others for property damage and bodily injury. 2

Apart from the minimum insurance coverage required by the legislation, a strata corporation may also buy additional coverage and other forms of insurance. 3

Initially, a developer must ensure that the strata corporation carries the mandatory insurance. 4 It appears that the developer must ensure that the corporation carries insurance from the time the strata plan is deposited at a Land Title Office. The developer must ensure that the coverage continues for at least 30 days after the first annual general meeting (the “first AGM”). 5 If the developer is still engaged in substantive construction work when the strata plan is filed, the developer may have difficulty obtaining property insurance. If so, the developer may still be able to protect the strata corporation by adding the corporation as a named insured in the developer’s construction insurance.

After the first AGM, an elected strata council presides over the strata corporation. Every year, strata council must ensure that the strata corporation meets its insurance obligations.

The annual insurance premium for a strata corporation’s insurance is a common expense of the corporation. 6

Insurable Interest

In insurance law, as a general rule, an insured person (the “insured”) cannot enforce his or her insurance policy unless that person has an insurable interest in the subject matter insured. The definition of insurable interest in insurance law tends to be complex. Briefly, a person has an insurable interest in the subject matter insured if that person will benefit from the existence of the subject matter, and will suffer from its destruction. 7 The Strata Property Act provides that a strata corporation has an insurable interest in all property that it is required or permitted to insure under the Act. 8

Named Insured

A strata corporation’s insurance coverage also extends to each owner, tenant, or other person who normally occupies a strata lot, all of whom are considered named insureds under the policy. Section 155 of the Strata Property Act says,

A named insured is a person that the insurance policy designates as the insured, by contrast to someone who may be covered by the policy but who is not explicitly named.

When a strata corporation arranges insurance coverage, the strata council should carefully review the policy with the corporation’s insurance advisor. Apart from the strata corporation’s coverage, the strata council should ensure that the wording adequately protects every owner, tenant and other occupant.

For example, in Economical Mutual Insurance Co. v. Aviva Insurance Co. of Canada, a strata corporation’s policy failed to adequately insure an owner. 9 Aviva Insurance Co. of Canada (“Aviva”) insured the strata corporation. Aviva’s policy said, in part:

While driving away from a party at an owner’s strata lot, a party guest’s vehicle collided with another vehicle, allegedly injuring several passengers. The passengers sued the strata lot owner, alleging that at his party he served alcoholic beverages to the guest, and that the owner negligently failed to take steps to prevent the departing guest from operating a motor vehicle.

Economical Mutual Insurance Co (“Economical”) insured the strata lot owner under a homeowner’s policy of insurance. Evidently, the strata lot owner notified Economical about the three lawsuits. Economical, however, wanted the strata corporation’s insurer to participate in these claims. Economical reasoned that the strata corporation’s insurance must also cover the strata lot owner because every owner is a named insured under the corporation’s policy. 10 Economical sued the strata corporation’s insurer, Aviva, for an order requiring Aviva to participate in defending these claims.

Even though the strata corporation’s insurance policy covered the owner, that policy only provided the coverage that the insurer agreed to provide. The wording in the Aviva policy only covered an individual, “… with respect to the conduct of a business of which you are the sole owner.” There was no evidence that the lawsuits against the owner were in any way connected with a business of which the strata lot owner was the sole owner. The court dismissed Economical’s suit against the strata corporation’s insurer.

The court also pointed out that the strata council’s apparent omission to provide adequate insurance for the benefit of the owner may give rise to the owner’s claim against the council members and the strata corporation.

Retaining Insurance Records

At the first AGM, a developer must give various records to the strata corporation, including all contracts entered into by or on behalf of the strata corporation to date. An insurance policy is a contract between the insurer and an insured. When the developer delivers the strata corporation’s contract documents, the delivery must include all of the corporation’s insurance policies. 11

After the first AGM, a strata corporation must continue to retain each insurance policy obtained from the developer for at least six years after the termination or expiration of the policy. 12

Access To Insurance Records

Upon request by an owner, by a tenant with access rights, or by a delegate authorized in writing, a strata corporation must make its insurance policy(s) available for inspection and provide a copy. 13 Following a request, the strata corporation has 15 days to make available the policy for viewing or copying. 14 For more information about access to a strata corporation’s records, including an insurance policy, see Chapter 13, Record Keeping.

Property Insurance

Every strata corporation must carry property insurance against direct loss to common property, common assets, and buildings shown on the strata plan. In addition, in a stratified building, the strata corporation must insure fixtures built or installed on each strata lot if the developer built or installed the fixtures as part of the original construction of the strata lot. 15 Section 149(1) of the Strata Property Act says:

Recall that for this purpose fixtures means, “items attached to a building, including floor and wall coverings and electrical and plumbing fixtures…”. The definition of fixtures specifically excludes “refrigerators, stoves, dishwashers, microwaves, washers, dryers or other items” if they can be removed without damage to the building. 16 For example, in one case, a coupling on a pipe burst inside the bathroom wall of an owner’s strata lot. The developer apparently installed the pipe coupling as part of the original construction on the strata lot. Water escaped and damaged the strata lot. In the circumstances, the pipe was a fixture as defined in the regulations. The strata corporation’s insurance covered the failed pipe coupling and the resulting damage, subject to the deductible under the policy. 17

This requirement to insure certain fixtures does not apply to a strata corporation in the case of a bare land strata plan. 18

A strata corporation’s property insurance must cover full replacement value for all major perils set out in the regulations and in the corporation’s bylaws. The regulations define major perils as, “fire, lightning, smoke, windstorm, hail, explosion, water escape, strikes, riots or civil commotion, impact by aircraft and vehicles, vandalism and malicious acts.”  19

In addition to the specific property and perils that must be insured, a strata corporation may also purchase insurance against other perils or liabilities, including earthquake, flood or sewer backup. A strata corporation may wish to amend its bylaws to require the corporation to always carry insurance for specific additional perils, such as earthquake, flood, or sewer backup. A strata corporation could also insure certain fixtures on a strata lot that were not built or installed by the developer as part of the original construction of the strata lot. 20

In British Columbia, certain risks such as earthquake, and in some areas flood, are well known. For this reason, most strata corporations purchase earthquake coverage, whether required by their bylaws or not. Similarly, if there is a reasonable risk of flood, a strata corporation should insure against this peril too, even if the bylaws do not call for flood coverage.

When a strata corporation receives insurance proceeds from an insurer for damaged property, the corporation must promptly use the money to repair or replace the property in question, with one exception. The exception occurs where the strata corporation, within 61 days of receipt of the insurance money, decides at a general meeting by resolution passed by a 3/4 vote to not repair or replace the damaged property. 21 If the strata corporation decides not to repair or replace the damaged property, the corporation, or an insurance trustee holding the money, must distribute the money to each person according to his or her interest in the funds. Payment must also include any accrued interest on the money. 22

Bare Land Strata Plan

In a bare land strata plan, a strata corporation is not required to insure any building, unless the building is shown on the strata plan. In a bare land strata plan, the strata corporation is also exempt from the obligation to insure fixtures built, or installed, on a bare land strata lot by the developer as part of the original construction on the strata lot. 23

Covered

Although the Act does not specify coverage for individual strata lots, all strata corporation insurance policies include strata lots to some extent.

The coverage for a strata lot usually includes originally installed fixtures, fittings, appliances, floor and window coverings. Owners’ improvements are not normally insured by the strata corporation policy.

Not Covered

Excluded Perils

Most policies provide protection against all risks of direct physical loss or damage except as excluded. This is better than a named perils policy but is usually subject to a long list of exclusions.

Owners’ Improvements

Sometimes an owner improves his or her strata lot by adding things like marble finishes, hardwood flooring and mirrored walls. After a loss, the owner is surprised to learn that these improvements are not included in the strata corporation’s policy and that the cost to replace or repair them rests with the owner.

Section 161 of the Strata Property Act permits an owner to obtain additional insurance for these improvements. This should be done either through the strata corporation policy insurer, if available, or the owner’s own policy. Insurance for owners and tenants is briefly described later in this chapter.

Personal Property

A strata corporation policy does not include coverage for the contents of individual strata lots, including an owner’s or tenant’s personal property, such as furniture, clothing, jewellery and other personal items. A condominium dweller should purchase an owner’s or tenant’s policy for this purpose, as the case may be. It is helpful to buy the insurance from the same insurer that insures the strata corporation to avoid disputes between different insurers after a loss. Disputes between insurers can take time to resolve and, in the meantime, the owner or tenant is left to fend for him or herself.

Rentals

Protection against loss of rental income should be purchased by the strata corporation only if the corporation relies on income from property which is rented out. This is often not the case. Even when a strata corporation is in a position to rent building space, the rentals may be infrequent and insignificant. If rental income does not contribute to the strata corporation’s budget in any meaningful way, the corporation may not need rental insurance.

Replacement Value

A strata corporation must ensure that its property insurance covers the corporation for full replacement value. This means the full amount of the repair or replacement cost is insured up to the policy limits and subject to any deductible. Replacement value insurance eliminates the problem of determining the depreciated value of the property in question.

Valuation

Section 154(a) of the Strata Property Act requires a strata corporation to review the adequacy of its insurance each year. 24 The Act only requires a review, not an appraisal. To ensure adequate insurance coverage, a strata corporation should obtain a yearly appraisal of the full replacement value of the property the corporation must insure.

The appraisal should be an independent evaluation conducted by a qualified insurance appraiser. It is not appropriate for the strata council, or a strata manager, to estimate the insurable value. One of the most important reasons for using a qualified appraiser is the appraiser’s expertise. A qualified insurance appraiser may recommend additional coverage for insurance issues that the non-expert does not know about. For example, recent changes to the building code may make certain repairs more expensive. It is the expert’s job to know about these things. With this liability in mind, a qualified appraiser may recommend extra coverage to protect against these increased costs.

During low inflationary periods, a strata council may be tempted to cut costs by reducing the frequency of insurance appraisals. This practice is dangerous, because guessing can lead to uninsured losses.

Reporting at the Annual General Meeting

At every annual general meeting (“AGM”), a strata corporation must report on the corporation’s insurance coverage. 25 When reporting on insurance at the AGM, a strata corporation is wise to highlight any major limitations in the corporation’s coverage and to warn owners and tenants, as the case may be, to carry their own insurance. Insurance for owners and tenants is briefly described later in this chapter.

Co-Insurance Clauses

A strata council that does not obtain a proper appraisal should be aware that many strata corporation insurance policies contain co-insurance clauses that effectively reduce the insurer’s contribution to a loss. If a strata corporation fails to obtain regular insurance appraisals, the corporation may be underinsured.

Under a co-insurance clause, an insured must carry a specific percentage of insurance in relation to the value of the property insured. For instance, a co-insurance clause may require the property to be insured for at least 80 per cent (80%) of its value. If the insured strata corporation carries less than the stipulated percentage of insurance to value, the insured becomes a co-insurer of the property in question. When this occurs and a claim arises, the insurer is only bound to pay the portion of the loss equal to the ratio of actual coverage to appraised value. 26

For example, suppose a strata corporation’s insurance policy contains a co-insurance clause that requires the corporation to insure its buildings for at least 80 per cent (80%) of their replacement value. Imagine also that the appraised value of the buildings is $6 million. To comply with its insurance policy, the strata corporation must insure the buildings for at least $4.8 million, representing 80 per cent (80%) of the buildings’ $6-million value. In this illustration, however, the strata corporation carries only $3 million insurance on the buildings (the insured value). Since the insured value of the buildings under the policy is only $3 million, the buildings are underinsured. Next, suppose the strata corporation’s buildings then suffer a $2 million major loss and the corporation makes a claim under the policy.

The co-insurance clause is triggered when the insured strata corporation fails to carry the required minimum coverage based on the value of the property in question. The insurer first checks to see if the co-insurance clause applies by comparing the insured value in relation to the value of the buildings:

TCM-chapter-16-coinsurance-graphic1.png

The co-insurance clause is triggered because the buildings are insured for only 50 per cent (50%) of their value, instead of at least 80 per cent (80%), as required by the policy. The co-insurance clause limits the insurer’s pay out this way:

50% x $2,000,000 major loss = $1,000,000 payout

As a result of the co-insurance clause, the insurer will pay out only $1 million, despite having insured the buildings for $3 million. In this example, since the major loss is $2 million, there will be a $1 million shortfall after the insurance pay out. The shortfall is a co-insurance penalty. The insured, the strata corporation, is responsible for the shortfall, which becomes a common expense of the corporation. The owners must pay the shortfall, most likely from the CRF or by a special levy.

In effect, an 80 per cent (80%) co-insurance clause permits under-insurance of up to 20 per cent (20%) without penalty. Similarly, a 90 per cent (90%) co-insurance clause allows underinsurance of up to ten per cent (10%) without penalty. In effect, a co-insurance clause provides a cushion in periods when values are rapidly increasing.

Co-insurance clauses are rarely sought by insurers who insist on regular insurance appraisals and, provided appraisals are obtained, whose policies contain “stated amount” co-insurance clauses. A stated amount clause sets the required amount of insurance. If there is a stated amount clause, the insurer does not need a co-insurance clause. A stated amount clause removes the need, in a claim, to prove the ratio of insurance coverage to the property’s replacement value at the time of the loss. This makes the replacement cost easier to calculate and the policy clearer. So long as the insured carries the stated amount of coverage, the insurer cannot reduce the amount paid in a claim because the strata corporation was under-insured.

Loss Payees

The insurable interests of mortgage and other financial lenders may be protected by a “loss payee” clause or endorsement. Essentially, a loss payee provision makes the lender a beneficiary of the proceeds of the insurance, to the extent of their interest in the property, in the event of a loss.

In some cases, a policy may give the mortgagee the right to be notified if the policy is about to lapse.

Exclusions

An insurance policy covers various losses, but not a loss that is specifically excluded from the coverage.

Temperature Extremes, Leaks, Explosions and Faults

A strata corporation policy usually excludes loss or damage caused by dampness or dryness of atmosphere and extremes of temperature or by leakage, corrosion, rot, normal settling, explosion, collapse, faulty material, workmanship or design, and by pollution, except where these things occur as a result of an insured peril, such as fire. Since the regulations define major perils to include explosion and water escape, a strata council should check the strata corporation’s policy to ensure that these perils are covered. 27

Below the Basement

A strata corporation’s insurance policy may also exclude anything below the basement. Since many strata corporations have facilities, equipment and other items on levels that may or may not be considered to be part of the basement, a strata corporation should confirm that these are in the basement, not below the basement, and are covered. If there is any doubt about this, the strata council should obtain a “foundations, footings and below-ground coverage” endorsement.

Motor Vehicles

Some strata corporations, especially those situated near bodies of water, are subject to minor flooding from time to time. Cars and other vehicles parked in or below the basement may be insured under the Insurance Corporation of British Columbia’s (“ICBC”) comprehensive general liability policy. If ICBC pays for vehicle losses caused by water in a parkade, ICBC may claim against the strata corporation to recover its loss. If the parkade is below basement level, the strata corporation’s insurance policy may not cover the loss. Where a strata corporation’s parkade is located below basement level, the strata council should discuss this issue with the corporation’s insurance advisor.

Similarly, an owner is responsible for loss and damage caused to the owner’s vehicle by theft and vandalism. While many strata corporations engage security services, the Strata Property Act does not require them to do so.

Deductibles

A deductible is the portion of the loss that the insured must pay. 28 If an insurance policy has a $5,000 deductible, it means that the insured must pay the first $5,000 of the insured loss. After the first $5,000, the insurer must pay the loss up to the limit of the policy.

Insurers use deductibles to reduce their administration costs and obtain premium savings for policyholders. Deductibles should be set high enough to eliminate numerous small losses while protecting the strata corporation from catastrophic loss. In any event, a strata corporation that buys small deductibles and then relies on the insurance to constantly fix minor problems is quickly forced to take a higher deductible or look elsewhere for coverage.

Commonly occurring deductibles are $500 to $1,000 generally; $1,000 to $5,000 for water damage; $2,500 to $10,000 for flood; $500 for glass; and, five per cent (5%) for earthquake.

Earthquake Deductible

At the time of this writing, earthquake deductibles of five per cent (5%) are typical on policies with lower insured values. In a policy with a high insured value, however, a five per cent (5%) earthquake deductible may be onerous. This could be especially so in a strata corporation with a number of separate buildings whose combined insured value is very high. For instance, someone recently told the author about an insurance review for a strata corporation with five buildings. The buildings were insured for a total value of $60 million. Strata council members were horrified to learn that the five per cent (5%) earthquake deductible meant the owners must contribute the first $3 million on each earthquake loss to any one building (5% of $60 million = $3 million).

In the case of earthquake coverage, especially where two or more buildings are insured, a strata council should seek a reduced deductible. Alternatively, a strata council may ask the insurer to agree to separate valuations and deductibles for each building, with one maximum aggregate deductible if there is earthquake damage to more than one building simultaneously.

Aggregate

Although insurers cannot apply more than one deductible to a single loss, each loss will trigger separate deductibles. To limit the total number of deductibles payable when multiple losses occur at the same time, a strata council should ensure that the corporation’s policy contains a maximum aggregate deductible amount per policy period, or an endorsement to this effect.

Who Ultimately Pays the Deductible?

If a strata corporation has to pay the deductible portion of an insurance claim, the deductible is a common expense to which the owners must contribute through their strata fees. 29

If a strata corporation needs a special levy or a CRF expenditure to pay an insurance deductible to repair or replace damaged property, the corporation does not have to first obtain approval from the eligible voters, with one exception. 30 Prior approval is necessary where a strata corporation has previously decided, in accordance with the Strata Property Act, to not repair or replace th