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CONDOMINIUM INSURANCE – Prudent
Seniors Dictate
Insurance companies started the slogan,
“Freedom 55”, but few people will ever achieve it. Legislative changes
prohibiting mandatory retirement at age 65 have allowed us to
recalibrate and now aim for “Freedom 75”. More and more people, even
though they are financially set, are choosing to work way beyond age
65. I know some who are working well into their 80’s and who still
climb the stairs two at a time.
With this changing trend, the market is cleverly responding with all
sorts of products and services to take the enormous amount of loose
change from the seniors’ pockets. For those without a lot of spare
cash and who painstakingly worked to pay off their mortgages, there’s
now the “reverse mortgage” with the jingle, “Wouldn’t it be nice”!
The condominium market has been burgeoning for years
and there are many new developments catering especially to seniors.
With them, our demographics are producing condominium boards populated
by seniors, the majority of whom bring a lot of business experience
and more importantly, the four cardinal virtues – Temperance,
Fortitude, Prudence and Justice. I need not dilate on them.
After 33 years managing condominiums – townhouses,
conversions, hi-rises with multi towers and elaborate recreation
facilities, industrial, office, mixed use, vacant land and freeholds –
I retired from it. I did notice the emerging trend toward the
dominance of senior governance quite some time ago. It was always
those seniors who kept me on my toes with two key characteristics –
prudence and diligence.
For today’s condominium and strata property managers,
be aware that there is a rapidly increasing cadre of senior board
members who live by those four cardinal virtues and who have a great
deal of spare time. If you’re lucky enough to be taken under the wing
by one of them, count your blessings.
The big benefit for condominium corporations is with
this progressive focus on prudence and due diligence, younger property
managers are likely to encounter many board members who can
“out-expert” them on virtually everything – Roberts Rules of Order,
personnel management, budgets, roofing, HVAC, landscaping and even
property management itself.
Many seniors know their Declarations, By-laws, Rules
and Regulations cold, because they’ve read and pondered them. While
the average property manager has from 8-10 sets of governance
documents to administer, the prudent and diligent senior board member
has and knows only one – usually inside out.
As senior board members exert more and more prudence
and diligence in the governance of their condominium corporations,
property managers and the whole host of enterprises serving the
condominium market will be forced to fall in line. One subject that
receives annual attention is the corporation’s insurance policies.
Another that is monitored on a hit and miss basis, and which will come
under ever increasingly closer scrutiny is ensuring that contractors
and trades working in and around the condominium community have
adequate liability insurance and certificates of good standing with
the Workplace Safety and Insurance Board in Ontario (formerly the
Workman’s Compensation Board). A counterpart to this body exists in
pretty well every province in Canada. Good managers know that they
should get these certificates annually from their contractors, but the
exercise often gets put on the back burner.
Beyond that, the new breed of senior board members will
be demanding copies of the property management company’s certificate
of insurance for errors and omissions and the same from their reserve
fund planners. But these are topics for other articles.
Let’s take one insurance subject – property insurance –
and examine it. There are four types of insurance for condominium or
strata corporations: (1) property, which covers the building
structures, improvements and assets of the corporation, (2) liability,
(3) boiler and machinery (B & M), if there is common area machinery,
and directors and officers (D & O). Each one warrants an article in
itself, but because the largest premiums are paid out for the property
portion of the insurance policy, it’s the best one to look at first.
Fortunately in Ontario, there isn’t a large claims loss
history with condominium property policies and nothing that really
would grab headlines. In fact, if you Google the internet for
condominium property insurance or condominium insurance (Canada), you
won’t find out much in the first several pages because they are full
of web sites from brokers and agents selling “unit owner” packages.
In Ontario, the basics of what is required under the
Condominium Act, SO 1998, Chapter 19 on property insurance appears
below (right from the Act).
Insurance
Property insurance
99. (1) The corporation shall obtain and maintain insurance, on
its own behalf and on behalf of the owners, for damage to the units
and common elements that is caused by major perils or the other perils
that the declaration or the by-laws specify. 1998, c. 19, s. 99 (1).
(2) In subsection (1),
“major
perils” means the perils of fire, lightning, smoke, windstorm, hail,
explosion, water escape, strikes, riots or civil commotion, impact by
aircraft or vehicles, vandalism or malicious acts.
1998,
c. 19, s. 99 (2).
Improvements not included
(4) The obligation to insure under subsection (1) does not
include insurance for damage to improvements made to a unit. 1998,
c. 19, s. 99 (4).
Amount
of recovery
(7) Subject to a reasonable deductible, the insurance required
under this section shall cover the replacement cost of the property
damaged by the perils to which the insurance applies. 1998, c. 19,
s. 99 (7).
Other
insurance
102. The corporation shall obtain and maintain,
(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; and
(b)
insurance against its liability arising from the ownership, use or
operation, by or on its behalf, of boilers, machinery, pressure
vessels and motor vehicles. 1998, c. 19, s. 102.
The first thing to know is that the corporation must
have insurance for damage to the units and common elements caused by
major perils or the other perils that the declaration or the by-laws
specify. The Act then lists what are viewed to be “major perils”. In
the property insurance industry, there are two types of coverage – (1)
named perils, in which each and every peril is listed and only
they are covered, and (2) all risks, in which everything is
covered except what is specifically listed in the “exclusions”
section. Standard exclusions include Acts of God, Riot, War,
Earthquakes and Floods (in certain high risk zones). You can get
the coverage for some typical exclusions, but usually have to pay
extremely high premiums for them.
The second thing to know is that corporations must
insure their units and common elements for replacement cost.
Many Declarations even add the adjective “full” to “replacement
cost”. Now full replacement cost doesn’t just include the labour and
materials for replacing whatever has been destroyed. It also includes
all applicable taxes, and disposal and, in some cases, demolition
costs related to the restoration. A good insurance appraiser knows
these costs, which are indexed to your postal code. Costs vary across
the country, within each province and they even vary between such
places as Oakville and Hamilton Mountain. This shouldn’t be a concern
unless, of course, one is vastly under insured. If that’s the case,
then your corporation runs the risk of being assessed the lion’s share
of the difference between what your insured value should be vs. what
you have listed. This would be a horribly crippling financial blow in
addition to the personal tragedies that would likely result from a
catastrophic loss to the corporation. That’s where an insurance
appraisal comes into play.
The
Insurance Appraisal
An insurance appraisal is a replacement cost analysis
providing an accurate estimate of the insurance amount required to
replace each structure and/or amenity, exactly as it stands on the day
the report was prepared.
Most Declarations require that the corporation
regularly have an appraisal done by a qualified and independent
appraiser in order to determine the full replacement cost. Yet not
all corporations follow this specific directive in their own
governance documentation.
A professional appraisal calculates the building’s
reproduction cost on a component by component basis, using a
combination of specialized software and various cost data specific to
your area. It involves a comprehensive inspection to obtain field
measurements and finishes. Gone are the days of “drive by”
appraisals. Today they are quite complicated when done diligently.
Why
Obtain an Insurance Appraisal?
Quite apart from complying with the corporation’s own
Declaration, there are several other reasons to obtain an insurance
appraisal. The first is that it demonstrates due diligence on the
part of the board members, property manager and/or the insurance
agent. You have the peace of mind of knowing that the corporation is
properly appraised. Second, it assists your agent in placing the
proper coverage with a carrier, by providing documentation that
underwriters need.
Third, it prevents under-insuring, which puts the
corporation at risk of not having funds to rebuild in the event of a
catastrophic loss, or over-insuring, which results in needlessly
paying extra premiums.
Finally, it provides a third party with an unbiased
evaluation of the property’s replacement cost. If a loss occurs, an
appraisal, together with all data acquired during the appraisal, will
be available to the corporation and insurer.
Recently, the cost of certain materials has increased
dramatically. Stainless steel and other metals, as well as many
products that are petroleum based, have been subject to very large
inflationary pressure.
For a building, the Consumer Price Index should not be
applied to the annual insurance premiums. This process is known as
“trending up” and is not reliable at all. Buildings do not buy the
items that make up the typical “bundle of goods” used to determine the
CPI. The same principles apply to the inflation factor used in
calculating your reserve fund requirements by your reserve fund
planner.
Only a qualified and trained appraiser, who stays
abreast of these changing material and labour costs, can ensure that
your condominium or Strata Corporation’s building and amenities are
properly valued for their replacement cost in today’s dollars.
More and more diligent property managers and boards are
calling for independent insurance appraisals on a regular basis in all
likelihood due to the growing numbers of seniors populating
condominium and strata boards. They’re reading their Declarations and
seeing the section that calls for appraisals by independent and
qualified appraisers.
As a former condominium manager, I was guilty of
“trending up” for years, until I was called to task by a senior board
member who knew the dangers inherent in that process. “An insurance
appraisal”, he told me, “is much like zero based budgeting. You have
to start fresh from the ground up, each time”.
Being truly diligent is being prudent and I was
fortunate to have this “old dog” take me under his wing and teach me
this valuable lesson. He embodied those four cardinal virtues -
Temperance, Fortitude, Prudence and Justice. I wish that for every
young property manager looking after condominiums or strata
corporations today – to find such a mentor.
John J. Molnar, BA, FRI, CPM®, CRP,
President of JJ Molnar Realty Advisors Inc. in Hamilton,
performs condominium reserve fund studies and
insurance appraisals in the Golden Horseshoe area.
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