Insurance and the Condominium Act, 1998

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1 The Condo Act What Works, What Needs Work Insurance and the Condominium Act, 1998 By Craig Robson, LLB, and Michael H. Clifton, LLB The Condominium Act, 1998 ( Act ) imposes various requirements with respect to the insurance of condominiums. A vacant land condominium corporation is not required to insure its units, whereas every other type of condominium must, except common element condominiums, which have none. Property Insurance Subject to those exceptions, section 99 of the Act requires the condominium corporation to insure both the units and the common elements against major perils and such other perils as may be defined in the declaration or bylaws. Major perils are defined as,...fire, lightning, smoke, windstorm, hail, explosion, water escape, strikes, riots or civil commotion, impact by aircraft and vehicles, vandalism or malicious acts. Standard Units and Improvements Section 99(1) of the Act states: The corporation shall obtain and maintain insurance...for damage to the units and common elements that is caused by major perils or the other perils that the declaration or the bylaws specify. However, section 99(4) restricts the scope of this duty as follows: The obligation to insure under subsection (1) does not include insurance for damage to improvements made to a unit. Based on these sections of the Act, the condominium corporation is not required to insure improvements made to units. The unit owner must insure the improvements made to the owner s unit. Establishing what is an improvement is not a matter of listing the betterments that are made to the unit by the unit owner. Rather, it is achieved by reference to a defined standard unit. Section 99(5) of the Act states: 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. The standard unit definition is required for the purpose of determining the responsibility for insuring improvements and, as set out elsewhere in the Act, also has the effect of limiting the scope of the duty to repair the unit after damage. Declarants of new condominiums are to provide a schedule setting out what constitutes a standard unit for each class of unit that the declarant specifies is part of the condominium. Alternatively, and in our view preferably, the declarant can set out the definition in the initial proposed bylaws of the corporation. Condominiums that existed prior to the coming into force of the Act (and some created thereafter by declarants who have failed to fulfill the above referenced obligation) should pass bylaws to establish what constitutes a standard unit for each class of unit in the condominium. Until standard units are defined, there is no reference point to determine what is an improvement to a unit. Again, it is not a matter of listing actual betterments that might have been made by a unit owner. Under the Act, improvements are solely determined by reference to the defined standard unit for the condominium, which might include components of the units that are unit owners betterments. C M C o n d o m i n i u m M a n a g e r M a g a z i n e, W i n t e r

2 Improvements to units constitute part of the unit. Until it is possible to define what is an improvement by reference to a defined standard unit all components of the unit will be the responsibility of the condominium to insure. Pursuant to section 99(1) the condominium has no option in this regard. Therefore, in our view, every condominium should have a bylaw establishing standard unit definitions. For new condominiums, it is strongly recommended that developers include in the initial bylaws of the condominium a standard unit definition. If this is not done by the declarant, for new condominiums, or as early as possible for existing condominiums, the condominium insurance would have to cover all components of the units, including all unit owners betterments. Therefore, there is a risk that where there is no definition, there could be insufficient coverage under the condominium s policies of insurance for everything that exists in all of the units in the condominium. Defining Standard Units We have written elsewhere about the reasoning that should be applied to the creation of a standard unit definition, as well as the ongoing debate in our industry as to the preference for either a bare bones standard unit definition (one that excludes most unit components from the standard unit) or status quo or builder s standard definitions (which each include a greater variety of unit components in the standard unit). The declarant or board of directors should consider carefully the options and impacts associated with these concepts and not carelessly put its standard unit definition together. Obtaining counsel from the condominium s lawyer and insurer would be appropriate. It is important to keep in mind that the condominium does not have to define the standard unit as the basic unit created by the condominium developer. There is no requirement that the condominium try to figure out what the condominium developer provided as a basic unit as there was under the previous legislation. Reviewing the developer s spec sheet, for example, may allow the existing condominium to get a list of items to consider in establishing the standard unit for their condominium and might assist in showing wording to use in defining specifications; however, caution must be exercised: first, to be sure that the specifications in such current project are understood; and second, to understand that such specifications should not simply be adopted. It is suggested these specifications be reviewed for the purpose of an example only and as a checklist for consideration. The condominium is free to establish its own definition of standard units. Note that as there can be different classes of units in a condominium, so there can be two or more definitions of standard units within one condominium. Often developers and condominium boards forget that a standard unit definition is needed for more than just the residential units. Replacement Cost Section 99(7) requires the insurance to cover the replacement cost 2 8 C M C o n d o m i n i u m M a n a g e r M a g a z i n e, W i n t e r

3 MT_Condo Manager_v3.qxp 7/19/2007 4:58 PM Page 1 of the insured property. How does a Board go about determining replacement cost? It is dangerous just to assume that cost increases for construction will be consistent with inflation. While that may be a reasonable rough guideline, it does not reflect the fact that costs in construction can vary significantly from the average consumer price index. In times of high demand, construction costs can skyrocket. The cost to replace a structure can really only be determined by construction experts. The condominium corporation s insurance policy must therefore be periodically reviewed to ensure that coverage is afforded as is necessary to be able to replace a damaged structure. The corporation should also consider whether the policy provides coverage for the costs of: engineering and other professional fees; demolition costs; tippage charges of the building materials at the municipality s garbage dump; costs of disposal of what may be considered hazardous materials; replacing an older building with a building that complies with all current codes, many of which are significantly more stringent (expensive) than those in place at the time of original construction; Goods and Services Tax; municipal demolition fees and other municipal charges; building permit fees; and insurance trustee fees (if applicable). The cost of replacement should be reviewed every two or three years. Engineering firms who provide technical audit assistance could be looked to for this expertise. Where there is a group of related condominiums, where all the units are basically of the same design and vintage, costs might be lessened if all the condominium corporations coordinate their engineering and reserve fund studies. It serves to minimize duplication and also should result in lower per unit costs for these studies. If a building is not insured to LOOKING AT LAW FROM YOUR PERSPECTIVE ONTARIO S LEADING CONDOMINIUM PRACTICE GROUP Your lawyers should be part of your team and not an obstacle to it. At Miller Thomson, our goal is to help your team reach its goals by offering experience, insight, creative and practical thinking and maximum value. This is how we have become Ontario s leading condominium practice group. FOR PRACTICAL SOLUTIONS Tel: Toll Free: Fax: Parking Garage - Balconies & Railings Quality Engineering John A. (Sandy) Kilgour skilgour@millerthomson.com Audrey M. Loeb aloeb@millerthomson.com Warren D. Kleiner wkleiner@millerthomson.com Patricia M. Conway (Litigation) pconway@millerthomson.com David Ertl (Litigation) dertl@millerthomson.com Sandra Gareau (Liens) sgareau@millerthomson.com Windows - Reserve Fund Plans/ Tech Audits - Thermography/ Elect/Mech/Walls/Roofs - Mould - Water Penetration - Energy Retrofit Tony Aspro M.A.Sc., B.Tech., ARCH. Direct Line: Office: taspro@davroc.com C M C o n d o m i n i u m M a n a g e r M a g a z i n e, W i n t e r

4 replacement cost and is damaged or destroyed, there could be personal liability on the directors. This liability might not be covered by the Directors Errors and Omissions insurance. Section 99(3) When section 99(3) of the Act came into effect, it introduced a new concept. It states: An exclusion in the insurance required by this section is not effective with respect to damage resulting from faulty or improper material, workmanship or design that would be insured but for the exclusion. Concern was expressed at the time that this clause might require the condominium to insure against construction defects, which coverage, for practical purposes, is not available. Presumably, though, this section is intended to cover damage that occurs as a result of faulty construction or poor workmanship but not to cover the cost of repairing the defective work itself. For example, if ceiling drywall was improperly secured and the drywall fell, the cost of replacing the drywall including the cost of materials and installation would not be covered; however, if the drywall damaged some part of the unit when it fell, the cost of repairing what it damaged would be covered by the policy. It is unclear what gave rise to this rather ambiguous section of the Act. Insurance Trust Agreements Under previous legislation in Ontario there was no requirement that a condominium corporation maintain an insurance trust agreement, although the majority did. Such agreements are typically somewhat onerous in the opinion of condominium corporations who have had them, who rarely see the benefit of paying the annual fee of maintaining an agreement that is only utilized in the event of a major insurance claim. Despite the contents of their agreements, many insurance trustees refuse to deal with any claim that is less than $20,000. Insurance trust agreements have become increasingly uncommon. Section 100 of the Act provides that despite anything contained in an insurance trust agreement, insurance proceeds of less than 15 per cent of the value of the insured property are to be paid directly to the condominium. Also, condominium corporations may terminate an insurance trust agreement upon giving sixty (60) days notice in writing, even where the declaration requires that there be an insurance trust agreement in place. Caution has been advised in the past, however, as some mortgagees would refuse to lend to a purchaser of a condominium unit unless an insurance trust agreement was in place. This does not appear to be the usual case today. General Comments on the Use of Insurance Proceeds Unless the condominium has voted to terminate its status as condominium, the proceeds of insurance are to be used promptly to repair and replace damaged units and common elements (section 100(2)). Likewise, payments from the 3 0 C M C o n d o m i n i u m M a n a g e r M a g a z i n e, W i n t e r

5 Tarion Warranty Corporation on account of common elements are to be used promptly for the remedial work that gave rise to the claim unless the condominium has voted to terminate its status as a condominium or already paid for the remedial work (section 100(3)). Note that lenders (mortgagees) cannot require that insurance proceeds (or payments provided under Tarion warranties) be paid to them (section 100(4)). This is the case despite contrary provisions in the mortgage agreement, which are declared void if contrary to this section of the Act. Deductibles The Act permits a reasonable deductible. What constitutes a reasonable deductible will be determined by the industry and the specific claims history of the particular condominium. A deductible as high as $10,000 may be reasonable in a condominium with a history of significant claims. Such a deductible may not be reasonable in a building with a good claims history. Section 105(1) of the Act states that the deductible portion of a claim is a common expense. Section 105(2) provides various useful clauses relating the responsibility to pay deductibles, but is considered a dismal failure in regard to what was wanted prior to the coming into force of the Act. Section 105(2) and (3) state: (2) If an owner, a lessee of an owner or a person residing in the owner s unit with the permission or knowledge of the owner through an act or omission causes damage to the owner s unit, the amount that is the lesser of the cost of repairing the damage and the deductible limit of the insurance policy obtained by the corporation shall be added to the common expenses payable for the owner s unit. (3) The corporation may pass a bylaw to extend the circumstances in subsection (2) under which an amount shall be added to the common expenses payable for an owner s unit if the damage to the unit was not caused by an act or omission of the corporation or its directors, officers, agents or employees. It is important to note that these sections only apply to damage with respect to damage to the owner s own unit. Section 105(2) also limits its application to just those cases where damage is caused by a unit owner or a lessee, or a person residing in the owner s unit with the permission or knowledge of the owner. What happens if the damage is caused by someone who the owner does not know is residing in the unit? There is no guarantee a landlord knows who is residing in or visiting the unit or has given specific permission for such resident or guest. Even more problematic: what happens where the damage is not caused to the owner s unit, but to some other unit? Or, what happens when the damage is caused to the common elements? While section 105(3) gives the condominium the ability to expand the circumstances in which a unit owner will pay the deductible to any damage for which the condominium is not responsible (whether or not caused by the owner or an- Michael Kalisperas, R.C.M. would like to announce the formation of his NEW Management company 73 Richmond Street West Suite Lower Unit 9 Toronto Ontario M5H 4E8 Tel: Fax C M C o n d o m i n i u m M a n a g e r M a g a z i n e, W i n t e r

6 other permitted resident or guest in the unit), neither section expressly permits recovery of the deductible in regard to damage to other units and the common elements. There is case law (older and more recent) that suggests there can be authority for collecting a deductible against a negligent owner in situations where damage occurs to other units and/or common elements, it remains to be seen how broadly useful or effective such law will be. It would have been better if the Act had addressed these matters expressly. Note that if a condominium does not have an obligation to repair a unit it will not have to pay any deductible if it does not involve itself in the repairs of the damaged unit. It should leave the repair (and the consequent liability for the deductible) to the unit owner. Other Insurance Coverage In addition to the basic property insurance, which is the subject of the majority of insurance related provisions in the Act, the condominium must also obtain: (a) insurance against its liability resulting from a breach of duty as occupier of the common elements or land that the corporation holds as an asset (section 102(a)); (b) insurance on account of the ownership, use or operation of boilers, machinery, pressure vessels and motor vehicles (section 102(b)); and (c) directors and officers errors and omissions coverage, if it is reasonably available (section 39). ELECTRICITY SMART METERS c o n d o m i n i u m s c o n d o m i n i u m s c o The really smart ones last a lifetime. CARMA submeters protect your investment with technology that is engineered to last the lifetime of your building eliminating the risk of costly upgrades and replacements. With CARMA, you invest once. We perform for life. Guaranteed. To find out more about what CARMA can do for you, call us today. Submetering and Billing Solutions Risk free. Hassle free. For Life CARMA Industries Inc Although every effort has been made to ensure accuracy, errors and omissions are excepted. Termination of Insurance Contracts As a side note, no insurance policy can be terminated by the insurer except on 60 days notice given by registered mail. Do It Now Section 181 of the Act grandfathered existing insurance policies of condominiums that were in place at the time the Act came into force until they come up for renewal. The section states that the insurance provisions of the Act did not apply to a condominium that has an existing insurance policy in place when it came into force, but that upon the renewal of such policy, the provisions of the Act would apply. Presuming annual (or sooner) renewals for most if not all policies of insurance, it is presumed that the Act now applies to all policies of insurance for all condominiums in Ontario. Therefore, the time for thinking about complying with the Act (for example, enacting a standard unit definition and ensuring all required coverages are in place) is long past. If it has not been done, you are well overdue and should take the matter in hand immediately. Craig Robson, partner, Robson Carpenter LLP and Michael H. Clifton, partner, Clifton Kok LLP. The original text of this article was written by Craig Robson at the time the Condominium Act, 1998, was drafted and before it came into effect. It was recently revised and updated by Michael Clifton for the purposes of this publication. 3 2 C M C o n d o m i n i u m M a n a g e r M a g a z i n e, W i n t e r