Review Your Insurance Annually
From the Volume 28 issue of the CCI Eastern Ontario Condo Contact Magazine
One of the largest expenses your condominium will face on an annual basis is your insurance premium, especially given the hard market we are in. Unfortunately, we also expect to see higher- than-normal increases in construction costs for 2021, with Eastern Ontario facing some of the largest increases nationwide. In fact, compared to the year-over-year national average, Ottawa has experienced the highest increases, with construction costs rising between 4% and 10% for both residential and non-residential properties.
Your condominium’s insurance premium reflects a dollar figure that appraisers refer to as the Total Insurable Value (“TIV”). This value is defined as the full replacement cost of a property and should include the cost of materials, labour, and professional fees, by-law and building code revisions, demolition and removal expenses, taxes, and inflation.
Here’s the catch: These costs fluctuate, so it’s important to review the adequacy of your coverage on an annual basis. An insurance appraisal ensures that you are not only paying accurate premiums, but also delivers peace of mind that your condo is sufficiently insured in the event of a total loss.
Historically, we have seen both increases and decreases in construction costs. An extreme example of this is the stock market crash in 2008, where the lending market was overextended on junk bonds fueled by the frenzied real estate market. When the housing market bubble burst, it caused a domino effect on the stock market due to massive real estate investments that companies had tied their money to.
As a result of the crash, demand for housing and new construction dried up, and construction, including ongoing jobs, came to a screeching halt. This caused a significant disruption in building costs, leading to double-digit fluctuations first down and then exponentially back up in the years that followed.
In today’s construction market, we are seeing big increases largely due to soaring lumber costs, high demand for housing, shortage of labour, and ongoing COVID-19 implications, along with an already robust real estate market. Ontario, in comparison to other provinces, is seeing the highest increases and this can be attributed to the sheer number of new developments and the pent-up demand this has created.
It is important to note that changes in construction costs may not be as drastic as the examples mentioned above. The construction industry is a free market, and materials to rebuild and labour costs are subject to the fluctuations caused by supply and demand. The cost of your condo’s insurance premium directly correlates with these ebbs and flows, which is why it is essential to have your appraiser review the adequacy of your coverage annually.
Having an annual appraisal done has additional benefits to your corporation. First and foremost, you are fulfilling your fiduciary duty to property owners as per the Condominium Act, 1998 to have insurance equal to the replacement cost of the property. Having sufficient insurance coverage reduces your liability and financial risk and ensures your premiums are consistent with market conditions.
A recent case from British Columbia provides an example of why it is important to have sufficient coverage. In August 2019, a condominium in BC experienced a total loss due to fire. During the rebuild, the owners learned that they were underinsured by $3.2 million. As a result of this insufficient coverage, each unit owner faced special assessments ranging from $36,000-$57,000 to make up for the deficit.
On the other hand, an up-to-date appraisal takes into account the potential downswings of the costs to rebuild. The fluctuation may be a result of changes in building price indices or changes to by-laws and building codes, among other things. We have seen cases where condominium corporations were carrying excessive replacement costs and as a result overpaying on their insurance premiums.
Some condominiums may also be subject to a co-insurance clause when they do not have an up-to-date replacement cost. The corporation would be responsible for self-insuring a percentage of the property, having to pay out of pocket for a partial or total loss. This is typically in addition to their deductible and can put a substantial amount of financial burden on owners if there was destruction of property. To put this in perspective, a high-rise building insured for $100 million with 500 owners collectively at 10% coinsurance, equates to $20,000 per owner in the event of a total loss. These figures assume the condo was sufficiently insured to begin with; if not, the deficit per owner could be higher.
While we hope that we are never faced with a major disaster, the results of being underinsured can be devastating. Avoid the gamble of exposing your condominium to unnecessary risk by having an insurance appraisal done on an annual basis.
William is the Business Development Associate for Normac, specializing in insurance appraisals. He has a Bachelor of Arts in Economics. An active member of the condominium community in Ontario, William is involved in the Canadian Condominium Institute (CCI) Golden Horseshoe, Grand River, Toronto, and Eastern Ontario chapters. He strives to deliver a high level of service by ensuring the appraisal needs of his clients are met with the utmost satisfaction.
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