Is the Condominium Industry ready for $500,000 Deductibles?
Is this even possible? The answer is yes, it is possible and it is happening before our very eyes. Although this is certainly not the norm at this time, this writer is aware of no less than six Condominium Corporations with just such a deductible and there are many others with $100,000 and over. To be clear, I do not work in the insurance industry and so my insights cannot take the place of an experienced insurance broker, however I have been involved in managing condominiums and their insurable losses for close to 30 years.
The question to ask is why, and there are a few answers to this question.
Insurance companies are in business to make a profit. If their loss ratios exceed the margins required to make a profit, then the company has to make up that loss in the following year(s). Over the last 3 decades, insurance premiums have risen or declined every year based on this simple principle.
Over the last few years, property losses in general, as a result of extreme weather events have wreaked havoc on insurance companies’ profits and losses across the globe. According to the Insurance Bureau of Canada, there was $1.9 billion in losses due to severe weather in Canada in 2018. Overall losses have more than quadrupled in the last 9 years.
All properties will see increases in their premiums when property damages in general exceed the loss ratios.
Condominiums are also becoming a much higher risk due to water losses and the severity of these claims.
The total insured value of some very large condominiums in the market means that multiple insurance companies must share the risk, which is also leading to increased premiums.
Resulting impact on the Corporation, its Owners and Mortgagees
As a result of the above, insurance companies are being more cautious when applying premiums. To combat significant increases, they are taking a careful look at their risks. There are also several insurance companies that are withdrawing from the market altogether, meaning less choice for insurance brokers attempting to place coverage for the client. As a result, insurance companies are increasing their premiums and water loss deductibles, which is forcing Condominiums to self-insure up to the deductible.
What is the impact on a Condominium and its unit owners when their deductible is increased to $250,000 or $500,000? It can have a significant impact on maintenance fees if the Condominium Corporation experiences a loss and may have an adverse effect on sales. Most insurers will offer homeowners coverage, if a deductible is charged back to the unit owner. However not all policies are created equal and most policies cover $100,000 or less. Owners need to review their coverages to protect themselves against such losses.
If a Corporation suffers a loss greater than the deductible then you can bet that it will surely impact the maintenance fees and therefore a note should be added to section 12 of the status certificate. If your Corporation has a clause in its bylaw that allows the deductible to be charged back to a unit owner in case of damage to other units or the common elements, then this should also be mentioned in clause 12 as a warning to the unit owners. It would be wise to contact the Corporation’s Solicitor for the status certificate wording to protect the Corporation and Management.
Are mortgagees impacted? Yes. If the value of a unit is close to the deductible amount, then a mortgagee may decide to not place a mortgage. An example here may help. Let’s say a unit is worth $500,000 and the owner has an owner’s insurance policy that pays up to $100,000. If the loss exceeded $500,000 and the unit owner is charged the full deductible amount, the owners insurance would pay the $100,000 and the unit owner would be responsible for the remaining $400,000. If the owner already had a mortgage of 90% of the property value ($450,000), and they were being asked to pay an additional $400,000, they might just walk away from their investment. The mortgagee may then find itself in possession of the unit, where the equity remaining is not enough to adequately cover the loss. The Condominium Act in many cases, allows the Corporation to add the deductible to the owner’s maintenance fee account, and if the owner fails to pay, a lien may be placed against title to the unit. How soon before the mortgage companies start seeing this type of risk and then potentially refusing to provide a mortgage?
There are several Condominiums out there that have large claims histories that are impacting their ability to obtain coverage, never mind a reasonable deductible. What is going to happen if these large deductibles start to become more common? Will there be something called Facility Coverage similar to auto coverage for owners that have nowhere else to turn? As mentioned earlier, these large deductibles are just starting to appear. Perhaps once the government starts seeing more of these deductibles and the impact on unit owners, they will take steps to intervene.
What can and should a Condominium Corporation do to manage their insurance risks?
To begin with, management should invite the insurance broker to a board meeting to help explain why the deductible has been increased and to put a plan in place to manage future risks.
The Corporation should notify all unit owners and recommend they consult with their personal insurance broker/company to ensure they have the best protection possible. Relying on the wording in a Periodic Information Certificate or an Information Certificate Update to convey such an extreme deductible is simply not enough.
An information package should be prepared explaining how Condominium insurance works, how chargebacks for water losses work, and the steps owners can take to try and minimize losses occurring in their units. An information meeting should also be held for the Owners, who must learn to be vigilant and proactive when it comes to maintaining their units.
The Corporation must take their maintenance requirements to the next level to try and protect against losses. This may mean more frequent inspections by the mechanical contractor and enhanced record keeping.
The standard unit bylaw should be reviewed and if this bylaw does not exist then the Corporation should take immediate steps to implement one. Most Corporations begin with removing flooring from the standard unit which has a significant impact on the cost of most insurance losses.
Increase the communication with your insurance broker. They need to know what is being done on a regular basis to reduce risk at the property. The broker is on your side and will be the one fighting with the insurance company to lower the deductibles.