BEHIND THE VEIL OF INSURANCE BY-LAWS

The Condominium Act of Ontario; 2001 introduced the ability for condominium corporations to create an insurance deductible by-law and/or a standard unit by-law. Let’s look at the standard unit by-law first.

Section 56h of the condominium act conveys the authority for condos to pass a standard unit by-law which basically would establish what constitutes a standard unit for the purpose of determining the responsibility for repairs after damage.

The purpose of this by-law is to establish clarity with regard to who is responsible for costs incurred caused by an insurable loss. An insurable loss is an occurrence that is out of the control of the individual or entity. Insurable loss is not lack on maintenance. So for example, if your roof shingles are beyond its useful life and nothing is done about it and then a roof leak occurs; it is unlikely that any insurance company will cover the cost to repair the damages caused by the roof leak. Another fallacy is that the item that failed would be repaired or replaced by the insurance company. This is not so. The insurance company will only replace the damage/s that was caused. It will not repair or replace the failed component. So the shingles that has passed its useful life would not be covered. Furthermore, there is also the possibility that the insurance may not even cover the resulting damage because there was a failure to maintain that caused the problem to start with.

As mentioned in our prior posting; the act requires the condominium corporation to carry basic coverage which means that anyone who has upgraded any of the unit’s components, those upgrades would not be covered but the cost to replace the component back to the original basic state would be covered.

The standard unit by-law allows the condominium corporation to go one step farther and remove a specific or add a specific component as part of the basic unit. So for example if the standard for kitchen counters is laminate, the condominium corporation could through the passage of the standard unit by-law declare that kitchen counters in its entirety are no longer part of the standard unit. Common areas that we have seen removed as part of the standard unit are, kitchen counters, kitchen cupboards and any kind of floor covering.

A few years ago, the court ruled that if the condominium corporation did not pass a standard unit by-law, the condominium corporation could not rely on the original standards set by the developer and held that the condominium corporation would then be liable for all damages. IMPORTANT: This ruling was in swift order over turned.

Now let’s move on to the second insurance option which is the insurance deductible by-law.

Section 105 (2) states that if an owner through act or omission causes damage to their unit, the amount that is the lesser of the cost of repairing  the damage and the deductible limit of the insurance policy obtained by the corporation shall be added to the common expenses payable for the owners unit.

Basically what this is saying is that if through negligence of an owner an insurable loss occurs, the corporation would have the authority to back charge to the unit owner that caused the insurable loss costs up to the limit of the insurance deductible only. Therefore, the higher the deductible the more of the cost to repair can be back charged to the unit. Concavely, the lower the deductible, the higher the cost would be to the condominium corporation.

Caution however must be taken by condominium corporations in passing this by-law because most declarations already have a clause that allows the condominium corporation to back charge all costs (not just up to the deductible) to the unit owner that has caused the loss.

For condominium corporations whose by-laws are open to interpretation, it is best practice that they pass the insurance deductible by-law, thereby clarifying exactly how much will be back charged to the unit by setting the deductible at an amount that they see fit. We have seen condominium corporations increase their insurance deductible to $10,000 or even $50,000. The caution here is to ensure that owners are then carrying proper insurance. The best place / time  to do this is in the status certificate so that not only new owners are informed in advance but also the mortgagee is notified of this in advance and usually the mortgagee will ensure that the owner has purchased proper insurance.

If an owner does not carry insurance to cover the insurance deductible back charge, they have put themselves at risk of losing their unit. This is because with the corporation having the right to back charge the deductible, if the deductible amount that his back charged is not paid by the owner, (because they do not have the cash or their mortgagee will not add it to their mortgage for one reason or another) then the corporation can lien the unit and eventually put the unit up for power of sale to recover the insurance deductible amount.

In today’s market with housing prices soaring, it is quite likely that there would be enough equity to be able to add the insurance deductible back charge to the unit. However, if this equity has been otherwise utilized or is just not there, the owner is at grave risk of losing their unit. However, it is best practice to ensure that as a condominium owner you are carrying the appropriate insurance!!

Want to read more about insurance in condominiums?  Check out our first article looking at the subject.