Your strata insurance crisis, not a made in BC problem

Do you or someone you know live in a strata property in BC? (HINT: your answer is yes).


This is a blog that you will want to share.


There has been trouble brewing in the insurance world for some time related to strata properties (townhomes and condominiums), where we really began to notice some issues in late 2019.


In B.C.’s Lower Mainland region, where an estimated half of its total 2.7 million residents live in a strata-titled property, these increases are having a widespread impact.


It all began with insurance rates and deductibles climbing on certain properties in our area. Increases on rates anywhere between 50% to 300% (yes, I said 300%) on different types of strata properties. Imagine what that type of increase might do to some people’s fixed budgets. 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. 


It then moved on to properties having challenges getting full replacement insurance on the properties due to how expensive some large towers or developments can be. I have seen properties recently that only had 1/3 of their property insured. This is scary.


It is important to note. These problems can (and likely will) affect all strata properties in BC to varying degrees.


Then the government started paying attention. People were yelling from their rooftops (or balconies in this case) that something needed to be done immediately.


Enter COVID-19.


Full stop. Shut it down. Pause everything.


A very big problem in residential real estate got pushed aside when the collective world began dealing with an equally concerning problem, yet with COVID 19 being a problem that got the attention of everyone, rather then just those it effected.


Regrettably, we have seen little progress on this since our ‘new world’ started in BC, back in mid-March.


So you may be asking yourself, what was the problem in the first place? Why did the rates all go up? Why can’t some stratas get full replacement insurance? And lastly, why should I even care?


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 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.  


There are a few other factors leading to strata insurance premium increases as well. They 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 ageing 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 ageing 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 the 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 the owners of strata units in B.C.? 


Strata unit owners should be aware of the 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 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. 


My two biggest tips for you if you live in a strata?



1. Check that your strata has FULL replacement insurance on the appraised value of the development. If a development does not have this, it creates significant issues for all owners including


    • The inability to sell your unit to a buyer that requires a mortgage (all lenders require full replacement insurance upon lending of funds)
    • Owners may be on the hook for the shortfall of insurance on any catastrophic event. (I had one recently appraised at 72 million dollars, and only had insurance for 29 million, a shortfall of approx 43 million).
    • Putting you and your entire strata corporation in violation of the strata property act, with potential for litigation against all the owners.
    • Running the risk of having your own personal mortgage recalled by your bank or lender (for violating your mortgage agreement)


2. Check your own personal insurance policy to ensure you have the appropriate deductible coverage in place. I had a client recently who I recommended checking her strata’s new policy. The deductible went up from $25,000 to $250,000, leaving her underinsured if there was an issue by $225,000.




While the government is aware of the problem, we need to encourage them to get back to work on trying to solve this insurance crisis happening right now. I encourage everyone to write to their local MLAs about the issue. You can find your local MLA information at this link below.


https://www.leg.bc.ca/learn-about-us/members


Wishing everyone a safe, healthy and sunny weekend.


Until next time,


 Darin


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