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only 15 per cent of the building’s value. The condo corporation was unable to obtain any additional coverage due to its exposure to fires in the area and past claims. The owner paid $350,000 for the home several years ago but believed it was worth less than $200,000 in 2019 due to its insurability challenges. Typically, insurance companies will spread their risk by only insuring a portion of a building, with a policy being underwritten by as many as a dozen different insurance companies. With the number of insurance companies willing to insure condo buildings dwindling, this means that second quotes are near impossible to obtain. In cases where strata owners are responsible for the building damage, deductible costs can be assessed directly against the owner. Deductibles have now increased from typically about $10,000 to as much as $100,000, with some even hitting the $250,000 mark. This means many insurance claims will not be pursued by the strata/condo corporation as repair costs may fall below the deductible payment. For instance, a leaking toilet or a triggered fire sprinkler causing water damage to multiple units below might easily result in repair costs of $80,000. However, if the building’s insurance deductible is $100,000, the strata/condo corporation could elect not to make an insurance claim and might instead seek compensation from the responsible owner. If the cost of repair was $120,000, the strata/ condo corporation might opt to utilize the building’s insurance coverage and then assess the $100,000 deductible cost against the responsible condo unit. Condo owners are therefore being urged to ensure that they have their own insurance policy to cover either the cost of repairs incurred by their condo corporations or the insurance deductibles for instances where they may be found responsible. At this juncture though, it is not entirely clear whether owners are currently able to obtain such insurance coverage at an affordable cost. The same challenges in obtaining insurance coverage that condo buildings experience also apply to individuals. Without insurance coverage, being hit with a sizable insurance deductible or repair bill can readily zap an owner’s equity and undermine a lender’s security in its mortgage loan.
© ALEKSANDR LESIK / ADOBE STOCK
Unaffordable deductibles may weed out most claims, and not just those of a nuisance or fraudulent nature. Insurance policies might seldom be triggered and reserved for only the most catastrophic events, while the financial risk of lesser events is borne by the individual owner or owners.
Problems faced by condo corporations in obtaining building coverage challenge our current concepts of insurance. Insurance is intended to be a means of hedging against contingent, uncertain financial losses, while an insurance deductible generally has two purposes. One is to reduce the number of smaller claims, which keeps premiums affordable. A second purpose is to reduce instances of fraud or ‘moral hazard,’ which is where insureds fail to mitigate risks with the expectation of an easy insurance payout. However, when the insurance policy loads the risk of financial loss onto individual owners through exorbitant deductibles, these rationales no longer make sense. Unaffordable deductibles may weed out most claims, and not just those of a nuisance or fraudulent nature. Insurance policies might seldom be triggered and reserved for only the most catastrophic events, while the financial risk of lesser events is borne by the individual owner or owners – surely this is not a scenario intended by the authors of the various provincial condominium statutes that mandate insurance coverage for the full replacement value of buildings. What is the real purpose of statutory mandatory insurance requirements
CMB MAGAZINE cmba-achc.ca
WINTER 2020 I
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