A closer look at the Report on Insurance Issues for Stratas: Should the definition of “major perils” in the Strata Property Regulation be amended to include earthquakes?
10 April 2019
By Kevin Zakreski
This post is part of a series highlighting key recommendations in the Report on Insurance Issues for Stratas. For other entries in the series, click here.
Brief description of the issue
The legislative mandate to insure property requires a strata corporation to “insure against major perils, as set out in the regulations.” The regulations contain a list of perils that make up its definition of major perils. The list is long, but it isn’t comprehensive. As one commentator has noted, “[e]arthquake coverage is probably the most notable omission from the list of major perils mandated by the Act.”
Since earthquakes pose a real threat to property in much of British Columbia, should the list of major perils that a strata corporation must insure against be expanded to include earthquakes?
Discussion of options for reform
This issue poses a yes-or-no question similar to that at the heart of the previous issue relating to directors-and-officers coverage. The rationale for bringing earthquakes within the mandate is that they represent an area of significant vulnerability for strata properties. Further, strata corporations might not always appreciate the risks posed by earthquakes.
Discussions of earthquakes in British Columbia tend to revolve around the looming danger of a generational catastrophic event. While such an earthquake would be devastating (and may be inevitable), it’s also worth noting that British Columbia is regularly subject to smaller-scale earthquakes. The damage created by these earthquakes may escape public notice because it isn’t widespread. That said, a relatively small earthquake could easily cause significant damage to any strata properties unlucky enough to be located near its epicenter.
The downsides of mandating earthquake coverage are the added costs and reduced flexibility such requirements impose on strata corporations. Earthquake insurance may be an expensive additional cost for strata corporations with high deductible values. Depending on their location, geology, proximity to water and slope-failure risks, and type of construction, and the complex exclusions contained within policies, the view of the committee is each strata corporation should in their own interest assess the cost, risk, and the exclusions to determine if they should purchase earthquake coverage.
The threat posed by earthquakes isn’t distributed evenly across British Columbia. While coastal areas (for example) are at significant risk, other parts of the province aren’t so dangerously exposed. Strata corporations in these areas might resent being required to purchase coverage for a risk they could rightly perceive as minimal.
Finally, requiring earthquake coverage would take the decision out of strata corporations’ hands. Many strata corporations already have earthquake coverage. An argument could be made that strata corporations are better placed than legislators to decide on this facet of insurance.
The committee’s recommendation for reform
The committee wrestled with this issue, noting that there are good arguments on both sides of it, in formulating its tentative recommendation for the consultation paper. That tentative recommendation ended up being the only tentative recommendation in the consultation paper that failed to attract the support of a majority of respondents. In light of this consultation result, the committee took a careful second look at this issue as it drafted this report.
The committee noted that a significant minority of consultation respondents (including respondents representing legal and insurance professionals) agreed with its tentative recommendation. But, that said, a majority disagreed, often citing the catastrophic results that would accrue to a strata corporation lacking this coverage in the aftermath of a major earthquake.
The committee gave this point further consideration and revisited its reasons for initially proposing not to extend the definition of major perils to cover earthquakes. Those reasons, in brief, were the unequal geographic distribution of risk from earthquakes and the view that those strata corporations that were at risk had already taken steps to protect themselves. In the committee’s view, these reasons continued to sway them in favour of not extending the definition of major perils.
The committee continued to be concerned about mandating insurance coverage in areas that are at a low risk of having an earthquake. While on paper it might be possible to have the mandate apply only in certain parts of the province, this solution struck the committee as complex and unappealing. In the main, strata-property law in British Columbia applies consistently to all strata corporations. The committee didn’t favour moving away from that principle to accommodate an expansion of the insurance mandate.
In addition, the committee noted that the vast majority of strata corporations in earthquake zones already have earthquake coverage. Extending the mandate in this case wouldn’t be analogous to extending it in the previous issue, which concerned directors-and-officers insurance. In that case, a plausible argument could be made that the holdouts from obtaining this coverage have failed to grasp the risks of managing a strata corporation in an increasingly complex legal environment. Strata corporations that don’t have earthquake insurance, on the other hand, are more likely to be located in regions of the province that rarely see earthquakes. Or, if they are located in earthquake zones, some combination of their organization and the insurance products on offer has stayed their hand. An example of this phenomenon is a bare-land strata that is faced with an insurance product that contains complex exclusions. The committee was reluctant to create a legislative mandate that would only, in effect, respond to these kinds of cases.
In the end, the committee concluded that the decision to obtain earthquake coverage should continue to rest with strata corporations. As noted earlier, many strata councils already do obtain this coverage. The committee also noted that there are avenues for the ownership to direct a council to obtain such coverage.
The committee recommends:
The definition of “major perils” in the Strata Property Regulation should not be amended to include earthquakes.