HERE’S WHY AND WHAT STRATA COUNCILS AND UNIT OWNERS CAN DO.
ANSWERS TO FREQUENTLY ASKED QUESTIONS.

WHAT HAS CHANGED?

Over the course of 2019, strata corporations across Canada either received notice of a premium and/or deductible increase on renewal of their building insurance policies, or were advised that they should budget for increases on their next renewal.

In B.C.’s Lower Mainland region, where an estimated half of its total 2.7 million residents live in strata-titled property, these increases are having a widespread impact. One real estate insurance brokerage advised its Vancouver strata corporation clients that they should budget for a 25%+ increase in insurance costs for 2019, possibly higher if the property had suffered losses. Some renewals have reportedly increased anywhere from 50% to 300% and 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.

WHAT DO STRATA INSURANCE POLICIES TYPICALLY COVER?

The owners of individual units in the strata building all own a proportionate share of the common property. To help ensure that all owners’ equity is protected, the Strata Property Act requires strata buildings to be insured for full replacement value of all common property, common assets, and fixtures. This includes the original construction, including finishing attached to the building. The insurance valuations must be based on recent appraisals.

Because of the ownership structure of stratas and their commercial- grade systems (plumbing, boilers, electrical, heating and ventilation), strata buildings are insured with a commercial property insurance policy, which is typically used for businesses but modified for strata property.

Strata unit owners insure their contents, plus upgrades made to the unit, under a “condo” homeowners’ policy. These policies include two crucial coverages: 1) liability insurance to cover damages from losses that originate in the unit and extend to the common area or other units, and coverage for a portion of the strata building’s deductible in the event of a major claim.

WHY ARE STRATA BUILDING INSURANCE PREMIUMS INCREASING, AND WHY IS THE INCREASE SO HIGH? 

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.

Other factors leading to strata insurance premium increases 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 aging 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 aging 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 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 OWNERS OF STRATA UNITS IN B.C.?

Strata unit owners should be aware of 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.