Spotlight on phases: Insurance coverage for a new phase
December 2, 2016
BY Kevin Zakreski
BCLI is running a public consultation on complex stratas. It is asking for public input into proposed changes to the law governing sections, types, and phases. For information on how to participate in the consultation please visit the Strata Property Law Project—Phase Two webpage.
This post is part of a series that spotlights issues on sections, types, and phases discussed in the Consultation Paper on Complex Stratas. To read other posts in the series please click here.
Brief description of the issue
As a strata property is developed, it is important to ensure that it has insurance coverage through the transition of control from the owner-developer to the strata corporation. While the strata property is under construction, the owner-developer will carry course-of-construction insurance. The Strata Property Act spells out the property insurance that a strata corporation must carry.
In most strata properties, the owner-developer manages the transition in insurance coverage. It is initially responsible for obtaining the strata corporation’s property insurance—a responsibility that arises upon deposit of the strata plan. Responsibility for insurance passes to the strata council when the first council is formed at the strata corporation’s first annual general meeting. To smooth the handoff from owner-developer to strata corporation, the Strata Property Act contains a special rule. This rule provides that the owner-developer “must ensure that the term of any insurance policy entered into by or on behalf of the strata corporation continues for at least 4 weeks after the first annual general meeting.”
The phasing process makes this transition more complicated. The picture is relatively clear for the first phase. The rule extending coverage for at least four weeks after the first annual general meeting applies in this case. It’s phases subsequent to the first phase that pose the problem. The Strata Property Regulation provides that the rule calling for a four-week extension in coverage doesn’t apply to any new phase deposited after the phased strata corporation has held its first annual general meeting. This creates a hard transition in responsibility for insurance coverage from owner-developer to strata corporation upon deposit of the new phase in the land title office. Although the owner-developer is required to notify the strata corporation when it plans to deposit a new phase, this notice often doesn’t give strata corporations enough time to arrange property insurance for the new phase. This creates the potential for gaps in insurance coverage. Should the act be amended to address the possibility that a gap in insurance coverage may result on the deposit of a new phase?
Discussion of options for reform
Since any gap in insurance coverage could have catastrophic consequences for a strata corporation, leaving the potential for such a gap to develop wasn’t considered an option for this issue. The committee considered two options designed to ensure such a gap wouldn’t appear.
The first option was to require an extension of the owner-developer’s insurance coverage for four weeks after the deposit of a new phase. This option is analogous to the Strata Property Act’s existing rule, with the reference point of the first annual general meeting changed to the deposit of the new phase. The advantage of this approach is that it gives a strata corporation a reasonable amount of time to obtain its own coverage for property in the new phase. The possibility of a gap in coverage is thereby dramatically lowered, if not entirely eliminated. This approach also extends an existing rule in the act, which ensures some familiarity for participants in the real-estate development sector.
There are disadvantages to this approach. The deposit of a new phase isn’t identical to the situation covered by the existing rule. The existing rule contemplates the owner-developer obtaining strata-corporation property insurance upon deposit of the strata plan and extending that coverage to at least four weeks after the strata corporation’s first annual general meeting. This option, in contrast, contemplates extending the owner-developer’s existing insurance coverage during construction for four weeks after the first phase, in order to give the strata corporation time to obtain property insurance. There is a possibility that an owner-developer’s coverage might not be appropriate in all cases. This approach also creates the possibility of double coverage for a time. Finally, this option will also increase costs for the owner-developer. These costs are likely to be passed on to strata-lot owners.
The other option the committee considered was extending the notice period for deposit of a new phase. The current rule simply provides that an owner-developer must “immediately notify” the strata corporation. The committee understands that, in practice, this tends to result in the strata corporation receiving notice on the day of deposit. Providing a set notice period of, for example, four weeks would give the strata corporation time to arrange insurance coverage before the new phase is deposited in the land title office.
The downside of this approach is that it relies on the owner-developer having a definite sense of when the new phase will be deposited weeks before it happens. In practice, this isn’t always the case. A longer notice period could end up being routinely flouted, as owner-developers simply won’t have the information needed to comply with it. A shorter notice period would be more realistic, but it would also leave in place the possibility that a gap in insurance coverage could result.
The committee’s tentative recommendation for reform
The committee favours extending, by analogy, the current rule generally applicable to strata corporations. Although there may be some disadvantages to this approach, it best addresses the underlying issue and provides the best assurance that a gap in insurance coverage won’t occur.
The committee tentatively recommends:
Despite the Strata Property Regulation, the owner-developer should be required to ensure that the term of any insurance policy entered into by or on behalf of a phase subsequent to the first phase in a phased strata plan continues for at least four weeks after the subsequent phase is deposited in the land title office.