Strata insurance rates are rising. Here’s why and what strata councils and unit owners can do
What has changed?
Over the course of 2019, strata corporations across Canada either received notice of a premium and/or deductible increase on renewal of their building insurance policies, or were advised that they should budget for increases on their next renewal.
In B.C.’s Lower Mainland region, where an estimated half of its total 2.7 million residents live in strata-titled property, these increases are having a widespread impact. One real estate insurance brokerage advised its Vancouver strata corporation clients that they should budget for a 25%+ increase in insurance costs for 2019, possibly higher if the property had suffered losses. Some renewals have reportedly increased anywhere from 50% to 300% and the deductibles to cover claims have also increased substantially, from $25,000 per claim to as high as $250,000 and $500,000; at least one building has had its deductible increased to $750,000.
What do strata insurance policies typically cover?
The owners of individual units in the strata building all own a proportionate share of the common property. To help ensure that all owners’ equity is protected, the Strata Property Act requires strata buildings to be insured for full replacement value of all common property, common assets, and fixtures. This includes the original construction, including finishing attached to the building. The insurance valuations must be based on recent appraisals.
Because of the ownership structure of stratas and their commercial-grade systems (plumbing, boilers, electrical, heating and ventilation), strata buildings are insured with a commercial property insurance policy, which is typically used for businesses but modified for strata property.
Strata unit owners insure their contents, plus upgrades made to the unit, under a “condo” homeowners’ policy. These policies include two crucial coverages: 1) liability insurance to cover damages from losses that originate in the unit and extend to the common area or other units, and 2) coverage for a portion of the strata building’s deductible in the event of a major claim.
Why are strata building insurance premiums increasing, and why is the increase so high?
For any business, when cost increases threaten to cause deficits, remedial action is needed. That is especially true for insurance: insurance companies must maintain reserves to meet the demands of future claims, and they must disclose financial information to the federal regulator, the Office of the Superintendent of Financial Institutions, to demonstrate that they are meeting its requirements.
Like other financial instruments – interest rates, for example – insurance rates are constantly being revised in reaction to market forces and emerging trends. Such is the case now with 2 January 17, 2020 V2
commercial insurance in general and strata building insurance in particular. The past years of growth in B.C.’s strata-housing market created a protracted and highly competitive market where normal-level premiums were unduly suppressed. Along with housing prices and financial products, insurance rates tend to follow market cycles.
Other factors leading to strata insurance premium increases include:
The number of claims has increased. When a water failure or fire occurs in multi-unit buildings, multiple units are often affected. The result is a higher likelihood that the cost of repair will be substantial. The increasing growth in the number of strata developments, the aging of strata buildings (many date back to the 1970s and ’80s) and the natural reluctance of strata owners to undertake major system upgrades until problems occur with more frequency all add up to increased insurance claims and repair costs.
If your building has a history of claims relating to water escape from system failures and/or resident activities, or it has an aging building system with a poor record of maintenance, its increased risk profile will also add pressure to the costs and levels of deductibles.
The cost of rebuilding has increased. B.C. saw real estate property values increase a few years ago. Even though government has imposed measures to cool the market down, property values remain high and construction costs in the Metro Vancouver region have risen between 7 and 15% in the past year.
The local market is affected by global losses, which are increasing. The increase in frequency and severity of fires, floods, severe storms, and earthquakes elsewhere in the world reminds us that we face a similar escalation of risks here at home.
Recent advances in technology and computer modelling are making more information available about areas that may be at higher risk of fire, flood and earthquake. This modelling technology, plus the actual insured costs of recent major Canadian losses, has allowed insurance companies (also referred to as insurers) to make more accurate evaluations of how much insurance should cost in a given area.
To keep the cost of insurance as low as possible, insurers are allowed to transfer the need to maintain reserves for catastrophic losses (those over $25 million) to other insurance companies known as reinsurance companies. While this has the benefit of keeping premiums lower, it also makes local insurance rates vulnerable to losses that occur elsewhere in the world.
Catastrophic losses from weather-related incidents are a leading reason for current premium increases. As reported by the world’s largest reinsurance company, Munich Re, 2018 was the fourth-costliest year since 1980 for insured losses. And 2017, with hurricanes Harvey, Irma and Maria, was the costliest. With major weather-related payouts occurring annually, companies are incorporating that risk into pricing because it’s now the new norm.
Increasingly, smaller, regional insurers are leaving the strata-building market to the larger, national insurers, which is reducing the competitive options for strata corporations.
How does this impact owners of strata units in B.C.?
Strata unit owners should be aware of impact on the building policy and their unit policy:
If your strata corporation is faced with a substantial increase in insurance rates, the cost will 3 January 17, 2020 V2
be reflected in your annual budget that determines your annual strata fees. If the deductible is dramatically increased to $100,000, for example, it means any claims under $100,000 are not covered by insurance and, subject to your bylaws, each owner is likely responsible for damages to their strata lot with the strata corporation responsible for the cost to repair common property.
The result is many of the repair and replacement costs that have been covered by the policy of insurance taken out by the strata corporation will now be downloaded onto the affected owners in the event of a claim.
Coverage for owner liability more important than ever. The Strata Property Act establishes building insurance deductibles as a common expense, but also allows the strata to sue an owner to recover the cost of repair or the deductible portion of a claim if the owner was responsible for the loss.
To save the potential legal costs of suing an owner to prove their negligence caused the loss, many stratas have passed bylaws making owners “strictly liable” for any losses that originated from their units. Review your strata bylaws: How does your strata approach this issue?
Condo policies can include coverage for this transfer of the deductible costs to owners.
If an owner is responsible for a claim (for example, their washing machine hose fails, and escaping water causes damage to other units and common areas), the owner could be responsible for the $100,000 deductible or the full cost of repair if it is less than the deductible. Now, more than ever, unit owners will want condo homeowner insurance that covers their liability in the event of a claim for damages to their unit, as well as the cost of a deductible or the risk of being sued by other owners if they cause a claim.
What can your strata do to limit the risk?
1. Be aware that being able to demonstrate long-term stability and a proactive approach to building maintenance will put your building in the best light and the best position for risk assessment. In these current market conditions, switching insurance brokerages or insurers may not be in your strata’s long-term best interests.
2. Review your strata’s depreciation report to ensure your strata is meeting regulatory requirements, and that the report’s recommendations are reflected in the building’s maintenance and repair plan for items that pose a risk such as roofing, water lines, and drainage systems.
3. If the strata corporation is faced with a change in insurance, dramatic increases in cost and deductibles, or the possibility of no coverage, immediately give notice to all owners regarding the changes. Early disclosure will help owners understand the situation, work together toward a solution. Provide the new summary of insurance as soon as it has been renewed so that owners can amend their unit coverage accordingly in a timely manner.
4. If your building fails to obtain insurance, contact a lawyer to identify determine the potential liabilities and risks for owners and council members and what next steps you should consider.
5. Repair access or building issues that may risk an injury. Address broken sidewalks, or security issues.
6. Work with owners to manage risks:
a) Ensure that all owners have access to the water shut-off to their units so they can quickly shut the water off themselves in the event of a leak.
b) Verify that all units with washing machines have upgraded their hoses to braided steel. Failed rubber hoses in cramped closets and spaces are a chronic cause of water damages.
c) Remind owners that thanks to the soft water in the Lower Mainland they can reduce the amount of soap they use in dishwashers or washers. For later model appliances, use the high-efficiency soap that is recommended. Excess soap suds can build up and temporarily block pipes.
d) Owner activities, such as smoking, barbeques on balconies, balcony gas heaters, in-suite hot water tanks, and storage of flammable materials increase the risk of a fire or flood.
7. Update your bylaws: Bylaws that present a risk of human rights complaints also increase your risk. Comply with the Strata Property Act and enforce your bylaws. Failure to properly enforce bylaws or comply with any enactments of law can result in claims with the Civil Resolution Tribunal, the B.C. Supreme Court, or the B.C. Human Rights Tribunal. All of these increase your risk and ultimately the cost. Past decisions relating to stratas are available online (see links below.)
1. The strata council and all owners should work closely with your insurance broker. Brokers are working tirelessly to place coverage for all strata corporations, but in some circumstances because of values and claims history, there may also be a limit to coverage. Invite your insurance broker to attend your annual general meeting to explain the changes to the building’s insurance.
2. It is imperative that you as a unit owner have proper condo insurance for your unit. Your strata corporation is required to provide all owners with details of all building insurance policies and warranties in effect. Be sure you understand your strata building’s coverage, limits, and deductibles, and how the strata council and/or your strata bylaws may apportion or assign responsibility for deductible or under-the-deductible losses. Relay those conditions to your insurance broker, who will explain your coverages and options.