Insurance Relationships between Condominium Corporations and Unit Owners

Introduction

With the ever increasing popularity of condominium investments and development it is becoming common for investors, stakeholders, developers and others to purchase “blocks” of condominium units with the purpose of generating rental income or a return on investment. Insurance on these blocks of units is often overlooked as the assumption is the condominium corporation is responsible for insurance. However, coverage legally required to be maintained by the condominium corporation is limited at best. This article explores the insurance coverage a condo corp is required to provide, what gaps exist, and the recent Bill 106 changes.

Instead of the traditional landlord-tenant relationship a condo revolves around the condominium corporation and condominium unit owner (and perhaps a tenant of the unit owner if the intended purpose of the unit is rental revenue). Regulations around condominiums govern each party’s responsibility for insurance and damage. In Ontario this legislation is the Condominium Act, 1998, S.O. 1998, c. 19 (herein referred to as the “Condo Act”). Notably recent legislation Bill 106 “Protecting Condominium Owners Act”, 2015 (herein referred to as “Bill 106”) was assented to law in December 2015 however to our knowledge the Bill 106 changes are not yet legally in force but are expected to be effected within 12-24 months. Bill 106 amends a number of material insurance-related definitions and language surrounding each party.

Property Insurance Considerations

Under the Condo Act not including Bill 106 changes, the Condominium Corporation is responsible for:

Property insurance

99. (1) The corporation shall obtain and maintain insurance, on its own behalf and on behalf of the owners, for damage to the units and common elements that is caused by major perils or the other perils that the declaration or the by-laws specify. 1998, c. 19, s. 99 (1)

However, the Condominium Corporation is not obligated to provide insurance for the “improvements” which is further defined to mean an improvement in reference (eg. in comparison) to the “standard unit”.

Improvements not included

99. (4) The obligation to insure under subsection (1) does not include insurance for damage to improvements made to a unit. 1998, c. 19, s. 99

Determination of improvements

99. (5) For the purpose of this section, the question of what constitutes an improvement to a unit shall be determined by reference to a standard unit for the class of unit to which the unit belongs. 1998, c. 19, s. 99 (5).

Standard unit

99. (6) A standard unit for the class of unit to which the unit belongs shall be,

(a) the standard unit described in a by-law made under clause 56 (1) (h), if the board has made a by-law under that clause;

(b) the standard unit described in the schedule mentioned in clause 43 (5) (h), if the board has not made a by-law under clause 56 (1) (h). 1998, c. 19, s. 99 (6).

In effect, under the Condo Act the Condo Corp is only obligated to insure up to the “standard unit”: “Standard unit” is either defined in the condominium by-laws, or if no by-law exists, only the property which constitutes a “standard unit for each class of units” as set forth by the condo board in the turnover meeting when the condominium corporation and board is formed.

Under the Condo Act including Bill 106 changes, the Condominium Corporation is responsible for insurance on the unit and similar to the current wording, is not liable for improvements:

Property insurance

99. (1) The corporation shall obtain and maintain insurance, on its own behalf and on behalf of the owners, for damage to the units and common elements that is caused by major perils or the other perils that the declaration or the by-laws specify. 1998, c. 19, s. 99 (1)

Improvements not included

99. (4) The obligation to insure under subsection (1) does not include insurance for damage to improvements made to a unit. 1998, c. 19, s. 99 (4)

The definition of “improvements” was amended with Bill 106 and is determined by condominium by-law or if no by-law exists it is the default definition written into the Condo Act.

“improvement” means, in relation to a unit,

(a) any part of a unit, where the part does not constitute a standard unit or part of a standard unit, or

(b) any repair or modification to a standard unit that is done using materials that are higher in quality, as determined in accordance with current construction standards; (“amélioration”)

Relevant definitions:

“standard unit” means, subject to the regulations, for the class of unit in a corporation to which the unit belongs,

(a) the standard unit described in a by-law made under clause 56 (1) (h), if the corporation has passed a by-law under that clause, or

(b) the standard unit that is prescribed, if the corporation has not passed a by-law under clause 56 (1) (h); (“partie privative normale”)

“prescribed” means prescribed by the regulations; (“prescrit”)

Therefore the Condominium Corporation is only liable to provide insurance for loss or damage to the “standard unit” which does not include any unit improvements completed by the unit-owners that are not included in the “standard unit”. The definitions go one step further to inform any modifications or improvements to any materials of higher quality than the original construction is considered an improvement. It is noted that for commercial or retail condominium units it is more common for the “standard unit” to be bare “four walls” as a lessee will typically renovate to suit their business purposes.

In addition each unit owner’s property insurance needs will differ from the Condominium Corporation’s needs. Most importantly, the Condo Corp is not obligated to provide coverage for the loss of revenue sustained by unit-owners resulting from damage or destruction of individual units (e.g. traditional business interruption insurance) nor would the Condo Corp insure the personal property / equipment owned by the unit owners(s) (e.g. traditional contents insurance). As an example, the Condominium Corporation’s property policy will not provide coverage for an individual unit owner’s loss of revenue if the unit is damaged/destroyed and tenant is no longer providing rent to the unit owner.

As a result of these legislated responsibilities, both the Condo Corp and the Unit Owner(s) are typically required to have their own dedicated insurance coverage as they have different intended purposes. The condominium unit owner’s policy is designed to protect the interests of the unit owner (or unit owners) and the condominium corporation’s policy is designed to cover the interests of the condominium corporation. However, due to an increasingly competitive insurance landscape, we have seen policies which cover the interest of both parties under one policy.

While we explore the standard requirements set forth in legislation, it is important to consider specific by-laws the condominium corporation has enacted, because the by-laws have the ability to amend the consideration of a “standard unit” and by extension modify the insurance required for each party to maintain.

Policy Requirements, Claims Handling, and Insurance Trust Agreements

The Condominium Corporation’s insurance policy minimum requirements and proceeds of insurance are outlined in the Condo Act. The Condo Corp is obligated to insure the property on a replacement cost basis against “major perils” which, as defined in the act, are equivalent to the traditional “named perils” coverage in insurance. Most condo corporations insure above this requirement to an “all risks” policy level where it is common to include the perils of flood, earthquake, and sewer back-up by extension.

Insurance proceeds are typically paid out in accordance with an insurance trust agreement entered into by the Condo Corp. Losses in amounts less than 15% of the replacement cost of the building can be paid out to a person or corporation whom the Condo Corp specifies. Insurance proceeds must be promptly used for “repair or replacement of damaged units”[1] and common elements unless the owners have voted to terminate because of substantial damage in accordance with the Condo Act explained below. In a repair or replacement scenario, and in accordance with Condo Act Section 100(4), Lenders/Mortgagees are not allowed to require insurance proceeds to be applied to a discharge of the mortgage.

The owners may vote to terminate the government of the property due to “substantial damage” which is defined as when the cost of repair is estimated to equal or exceed 25% of the replacement cost of all the buildings and structures located on the property. In this scenario, the vote to terminate the government of the property must be voted in favour by 80% or more of the unit owners. Lender/Mortgagee rights in the termination for substantial damage scenario are outlined in the Condo Act or in the Insurance Trust Agreement.

It is also important to point out that the insurer is typically only obligated to pay the “replacement cost” (cost of repairing, replacing, constructing or reconstructing the property) if the property is actually repaired or replaced. In the event the Condo Corp decides to terminate the condominium governance and choose not to rebuild the property, the insurance policy is only obligated to provide an “actual cash value” (or “ACV”) settlement which includes a reduction for depreciation. In all circumstances this ACV settlement would provide a lower amount of insurance proceeds to the Condo Corp than would be provided under a settlement on a replacement cost basis.

Special Assessments

Under the Condo Act, the Condo Corp has the ability to issue “Special Assessments” (in addition to regular monthly condo fees) to unit owners in the event reserve funds or limits of insurance are inadequate to cover costs incurred by the Condo Corp. In the event the Condo Corp’s liability insurance limit is inadequate to cover a third party loss they have the ability to recoup costs from all unit owners for the difference.

Unit owners have an option to purchase Condominium Loss Assessment coverage on both their property and liability insurance policies. This extension covers those special assessment amounts as long as the underlying cause of the assessment was an insurable first party or third party loss. For example, if the Condo Corp suffers a major property loss where the Condo Corp’s insurance was not enough to pay for the repair costs, the board of directors can issue a special assessment to make up the difference from all unit owners. In a primitive example where the Condo Corp required an additional $1,000,000 in a condominium with 20 equally sized units, each owner would be assessed $50,000. In the event a unit owner fails to pay the special assessment, the Condo Corp can file a lien on the unit.

Special assessment coverage is readily available in the marketplace. In the event multiple units are purchased, the exposure increases as each unit has its own liability to pay for these special assessments. Practically speaking, most of the time these special assessments are generated by way of shortfall or mishandling of money to pay for normal repairs, maintenance, and replacement of building infrastructure which are not insurable. For this reason special assessment coverage is inexpensive as it still only provides coverage for normally insured events.

Conclusion

Insurance on a condominium is more complex than one would believe. There are multiple parties involved in a condo complex, each with their own interests at play. Legislative requirements must be met and an ever-competitive condo insurance market is well-suited to fully protect stakeholders, but special attention must be paid for each unique condominium corporation.

[1] Bill 106 amends this part.  Instead of insurance proceeds must be promptly used for “repair or replacement of damaged units”, Bill 106 effectively removing the word replacement, instead substituting “the repair of the damage to the damaged units”.