Managing Costs and Risks in Condominium Insurance
From the September 2021 issue of the CCI London CCI Review
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. Condominiums unable to get insurance have been in the news.
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 like this could have prevented the lengthy (and no doubt costly) litigation in the recent Lozano v. TSCC 1765 case and the 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, 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 asked "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?"
The unit owners replaced toilet parts and later other parts of the toilet failed and leaked. The leak was noticed when they left the unit 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 feed to the toilet (no water, no leak) and that 13 days between unit inspections is "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 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:
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 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);
- Setting 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 which 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 (where the unit at issue sustains no damage) 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 is being liable simply because an event occurred. This prevents a legal battle 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 insurance standards, 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.
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.
This can include regular inspections and replacement of items that wear out and fail, to detect and prevent issues before they cause catastrophic damage. Maintenance standards can also resolve repair disputes where a lack of maintenance is the cause of the damage and could have been very helpful in the following case.
Hopefully this information can assist you and your condominium(s) to control insurance costs and minimize insurance and damage-related risks. -GS
Gareth Stackhouse, LL.B., 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”.
This article appeared in Volume 28 of the CCI Eastern Ontario Chapter’s quarterly newsletter, Condo Contact Magazine
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