Alert to Condo Owners!
Insuring an investment townhouse or condominium unit can be complicated because of the fact that there are three parties involved-the owner of the unit, the tenant, and the strata/condo corporation. As a result, some condo owners mistakenly do not obtain coverage for their unit.
This could be an extremely costly mistake. A condo insurance policy fills the many gaps in coverage that exist when relying exclusively on the Condo/Strata Corporation’s Master Insurance policy. As an investor, your own coverage is required for appliances, personal liability, rental income protection, betterments and improvements, and loss assessments.
Let’s discuss just a few of these important coverages:
Rental Income Protection
In the event of a valid claim that renders your condo uninhabitable for an extended period of time, your tenant will be required to find alternate living accommodations. Keeping up with the mortgage payments, without any rental income from your tenant, could prove financially impossible. An appropriate condo insurance policy will continue to provide you with rental income while the unit is being repaired. If the incident involved significant damage to the building, this could take many months or even years to complete. Check that your insurance provider offers extended terms for this essential coverage.
Betterments and Improvements
When purchasing a condominium unit, you are buying the unit-with its improvements. However, the Condo/Strata Corporation’s Master Insurance policy provides coverage for the unit as it was originally built by the owner developer. Therefore, any upgrades to the unit by you or by previous owners, such as lighting fixtures, air conditioners, flooring, kitchen and bathroom cabinets, countertops, floor and ceiling moldings, etc., requires your own coverage, referred to as “Betterments and Improvements.”
Therefore, as the unit owner, you need to ensure that any alterations or additions to your unit have sufficient insurance protection, regardless of who made the improvements.
Loss, Unit and Deductible Assessments
Condo/strata corporations insure all buildings within the complex, including common areas, through a Master Insurance policy. Because the common areas of a condominium complex (sidewalks, lobbies, hallways, exercise rooms, swimming pool, meeting and party rooms, etc.) are available for the shared use by all unit owners, there is a shared responsibility amongst all owners when a claim is made against the Condo/Strata Corporation’s Master Insurance policy. How does this shared responsibility work in the context of insurance?
Scenario One: A visitor slips on one of the condo complex’s sidewalks because the snow and ice have not been cleared. The visitor bangs his head, is seriously injured and unable to work. If the strata/condo corporation is sued, their liability insurance will usually cover their legal costs and any possible judgment against them. However, if the financial value of the claim is very large and the strata corporation is underinsured for the amount of the judgment, each unit owner is now assessed to cover the shortfall.
Scenario Two: Some condo/strata corporations fail to buy enough insurance to rebuild at today’s construction costs. Should the building suffer a serious loss, and the strata/condo corporation’s level of coverage is inadequate, each unit owner would be assessed to pay a portion of the cost to rebuild.
Scenario Three: Some strata/condo corporations purchase Master Insurance policies that have a very high deductible (i.e. $10,000 or even much more!), for property claims. Again, each unit owner can be assessed to pay a portion of the deductible when a loss occurs and a claim is filed. It is also quite common for one unit to be assessed the entire deductible if the owner is considered responsible for the damage or loss. Learn more about this alarming trend below.
Some Condo Owners on the Hook for a Huge Deductible Payment!
After a water leak in their unit caused damage to other parts of their condo building, some condo owners have been shocked to find that they are required to pay the entire deductible on the condo/strata corporation’s Master Insurance policy. These deductibles have seen huge increases in recent years with some strata corporations choosing deductibles of $50,000 or more!
An overflowing washing machine, leaky dishwasher, burst pipe, clogged drain-whatever the cause-a leak in an upper floor condo unit can quickly do thousands of dollars of damage to the units below. Luckily, there are lots of companies that offer water damage restoration so if this did happen to you, you do have a few options in terms of repairs. Some people will attempt to fix the damage themselves if it is not extensive, and whilst this is a possibility, it is usually best to leave it to the professionals to ensure that it is done properly to avoid further damage. Contacting a company like ServiceMaster of Lake Shore in Chicago, IL would be the most sensible move. If the issue is huge then it is best to leave it to the professionals as mentioned previously, however, there are some instances where following instructions can help you fix the problem without calling anyone out. Knowing how to clean a clogged sink drain is one of those personal needs that can be used continuously without creating a massive bill from a plumber.
In recent years, two alarming shifts in the way these situations are handled have taken place:
In the past, the Condo/Strata Corporation’s Master Insurance policy deductible for accidental damage to the condo building was typically covered by all unit owners, unless a single owner had been negligent. Some strata councils have now changed their bylaws so that they can designate an individual responsible if the cause of the damage originated in their unit, even if that person had not been negligent.
Previously, Condo/Strata Corporation’s Master Insurance policy deductibles were in the $1,000 to $5,000 range. Over the last few years however, strata corporations have been selecting higher and higher deductibles on the building insurance policy. A 2012 news report from CTV News Vancouver claims some may be as high as $250,000! Sometimes insurers are insisting on higher deductibles due to multiple claims for the same condo complex, and sometimes the strata corporation is simply looking to lower their premium by selecting a higher deductible.
So, what can condo owners do to protect themselves?
- Obtain a copy of your Condo/Strata Corporation’s Master Insurance policy each year to determine if there has been an increase in the deductible.
- Read your condo/strata corporation’s bylaws to see who can be held financially responsible if the cause of damage originates in one of your individual units.
- Ensure that you have your own insurance coverage, whether you are living in the condo yourself or renting it out to tenants.
- Ask your insurance broker if you have sufficient coverage to protect yourself from a high deductible in the corporation’s Master Insurance policy.
- Take steps to reduce your chances of falling victim to the number one cause of claims-water damage. (Stay tuned for our next article which will provide some helpful tips for preventing water damage.)
Protect your assets and become familiar with what is and what is not covered under your Strata/Condo Master Insurance policy and then fill in the inevitable gaps with an appropriate Condominium Unit Owner’s Insurance policy.
Chris Westrop is the Commercial Insurance Manager at Park Insurance. He has over 25 years of experience in the commercial insurance business and is a Chartered Insurance Professional with the Insurance Institute of Canada and a member of the Professional Liability Underwriting Society. He is also a REIN member and a regular attendee of many of our programs. Chris may be reached at (604) 659-3133 or firstname.lastname@example.org.