Managing Costs and Risks in Condominium Insurance
From the Volume 28 issue of the CCI Eastern Ontario Condo Contact Magazine
Insurance and insurance costs have been a live issue in recent years, with some insurers exiting the condominium market, and that, plus market conditions, has led to a rise in premiums and deductibles. Condominium Corporations being unable to get insurance has made the national news cycle.
As a defensive play, insurance costs and risks can be managed through a properly drafted standard unit, insurance, and maintenance by-law made under the Condominium Act, 1998 (the “Act“). This type of by-law puts these related items into a single by-law and can be the single reference point for managers, boards, contractors, residents, and insurance adjusters every time there is an “event of damage“. It can prevent conflicts about costs, repairs, and responsibility (saving time and money) and it provides certainty for all parties, including the condominium’s insurer, where uncertainty will drive up costs.
A well-drafted by-law could have prevented the lengthy (and no doubt costly) litigation in the recent Lozano v. TSCC 1765 case. This case is a great illustration of the risks and costs related to insurance, damage, and maintenance in condominiums.
Lozano v. TSCC 1765 (2021 ONSC 983): The Divisional Court decision in Lozano was released in February 2021. It was an appeal of a lower court ruling by the unit owners’ insurance company that “subrogated” the claim and funded the litigation. The insurance company originally sued the condominium over a $10,022.33 repair charge-back related to a leak.
Briefly, Lozano reviewed the following questions:
- Did the unit owners' act or omission cause a toilet to leak and what does “act or omission” mean? and
- If yes, can the condo charge back the costs of repair/insurance deductible under TSCC 1765’s section 105 by-law?
A year prior to the leak that caused the damage, the unit owners replaced toilet parts themselves. In November 2018, the owners left the unit for five months and only had someone inspect it every two weeks. Most importantly, they didn't shut off the water to the toilet when they left.
The Divisional Court found that the "omission" was that the unit owners did not shut off the water during an extended absence (no water, no leak) and that leaving the unit uninspected and unoccupied for 13 of every 14 days was "an obvious act or omission". TSCC 1765 was able to recover the costs.
The Lozano case (and costs) could likely have been avoided if TSCC 1765 had had a by-law that contained a waiver of subrogation, rigorously defined “act or omission” for a section 105 chargeback, and set maintenance standards about fixing toilets, turning off water, and inspecting empty units.
Let’s explore the components of a standard unit, insurance, and maintenance by-law:
Standard Unit: Where a condominium must repair a unit, repair costs and insurance premiums can be controlled through a well-defined “standard unit” which classifies high wear, frequently upgraded, and high-cost items as “improvements” which a unit owner is responsible to repair and insure. This usually includes defining items like floor coverings, cabinets, counter tops, equipment, and appliances as “improvements” to a unit. It also sets the standards for replacement materials and can restrict these to “builders’ grade” in order to further control costs.
Insurance Deductible and Requirements: There are four main components to a good insurance by-law, as this writer sees it, all of which lower the costs for a condominium:
- Expand insurance deductible recovery (Section 105 of the Act);
- Set the insurance deductible recovery standard closer to that of “strict liability” and rigorously defining what the words “act or omission” mean;
- Waiving rights of subrogation; and
- Setting insurance requirements for unit owners and tenants.
Without a Section 105 by-law, a condominium can only recover costs related to damage to a single unit that is caused by a person’s act or omission, the costs being the lower of the repair costs or the insurance deductible. Section 105 does not allow cost recovery where other unit(s) or the common elements are damaged unless a condominium passes a by-law!
With high deductibles and damage events (especially floods) easily spreading to other units and the common elements, a Section 105 by-law is very important for cost recovery and insurance cost control.
A Section 105 by-law expands on the Act and allows a condominium to recover the lower of the insurance deductible or repair costs when there is an event of damage to any unit(s) or the common elements which is caused by an “act or omission” of a unit owner or a person they are responsible for (like their tenant or tradesperson), whether the damage starts in their unit or somewhere else. The by-law can also define what “act or omission” means and move the standard closer to “strict liability”, which means being liable simply because an event occurred. This helps to prevent legal battles about what someone did or did not do, as in Lozano.
“Subrogation” is the ability of an insurance company to sue in the name of the party they insure. A “waiver of subrogation” in a by-law is important to control costs by removing an insurance company’s ability to sue a condominium over a $10,000 insurance deductible where the insurance company disputes a condominium’s charge-back decision (like Lozano). Litigation is costly and complicated for a condominium.
Finally, a by-law can help lower costs and premiums by setting standards requiring that all unit owners and tenants have proper insurance coverage in place for the unit’s improvements, their personal property, and their living/business expenses.
Maintenance Standards: The Act allows a condominium to set maintenance standards through a by-law, and having a clear and strong set of maintenance standards for unit owners to follow for their unit, their fixtures, and appliances is another tool in preventing damage, establishing liability, and being clear about what a unit owner must do.
A maintenance standards provision can require regular inspections of the unit when an owner is absent and routine inspection or replacement of items that wear out and fail, to help detect and prevent issues before they cause catastrophic damage. A maintenance standard provision can also resolve repair disputes where a lack of maintenance is the cause of the damage and could have been very helpful in the Lozano case.
Hopefully, this information can assist you and your condominium(s) to control insurance costs and minimize insurance and damage-related risks.
[Editor’s Note: The proposed changes to the Condominium Act, 1998 remove the ability of a condominium corporation to pass Insurance Deductibles By-laws. This means that to extend the circumstances where an owner is responsible for the deductible, there will need to be an amendment to the Declaration. Existing By-laws might be grandfathered but we do not have guidance on this yet. Some Condominium Corporations may have insurance deductible provisions, maintenance standards and waiver of subrogation in the Declaration or multiple by-laws. This article highlights the need for condominium corporations to review its governing documents to ensure that it is minimizing insurance risks.]
Gareth is a lawyer with Common Ground Condo Law and serves clients across Ontario, is active in numerous CCI chapters, ACMO, and he frequently writes and speaks on condominium topics. He has called small-town Ontario (the Ottawa Valley and the near “north”), Kingston, Halifax, and Toronto “home”.
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