Brief description of the issue

There are real concerns that rising insurance deductibles could harm strata-lot owners. This potential for harm might even be exacerbated by the previous recommendation. One response to this harm might be to encourage what many strata-lot owners have already done: take out their own insurance against the prospect of having to pay the strata corporation’s deductible.

A proposal for legislation to implement this requirement was considered recently in Alberta. As part of its law-reform project, Service Alberta asked “[s]hould the Act require unit owners to get condominium unit owners’ insurance that also covers the payment of any deductible the owner may be required to pay on a claim made under the corporation’s insurance policy?”

Discussion of options for reform

The main advantage to this proposed reform is that it provides a practical means to support the broader reforms that the committee is contemplating for insurance deductibles in strata properties. Those reforms could be severely undercut if they were to depend, in the face of rising deductibles, on strata-lot owners paying out of their own pockets. Insurance for owners is an effective way to help ensure that the system works for all.

In addition, requiring owners to obtain this insurance likely wouldn’t be a radical departure from the current situation. Many owners already have such insurance, either because they have decided independently to obtain it or because it is one of the conditions imposed through a mortgage.

The main downside of this proposal is that it could prove to be difficult to enforce. It would likely be a challenge for a strata corporation to know whether or not an owner had such insurance. But even if it did, there may be relatively few effective means to compel an owner to carry insurance against a deductible claim. But without an effective enforcement mechanism, any legislative provision could end up being nothing more than a paper tiger.

The proposal would also have the effect of imposing some costs on strata-lot owners and limiting some of their freedom to act. Strata-lot owners who live in strata properties with relatively small insurance deductibles might resent this mandate for these reasons.

The committee’s recommendation for reform

The committee decided that mandating this insurance coverage for owners would be a useful way to shore up its broader reforms for insurance deductibles and to provide needed protection for strata-lot owners and strata corporations alike. The committee was concerned about the problem of enforcing such a requirement. In its view, the best way to ensure compliance is to make the requirement a part of the standard bylaws for strata corporations. This approach might also address some of the concerns about the rigidity of requiring owners to purchase insurance, as it leaves open the prospect that a strata corporation might decide to amend its bylaws and remove the requirement.

While a sizable majority of consultation respondents agreed with the committee, a significant minority of respondents took issue with the committee’s proposed reform.

The committee recommends:

A new standard bylaw should be added to the Schedule of Standard Bylaws that requires a strata-lot owner to have insurance that covers payment of a deductible under a strata-corporation policy.

For more information, visit the Strata Property Law—Phase Two Project webpage or read the Report on Insurance Issues for Stratas.

The post A closer look at the Report on Insurance Issues for Stratas: Should the Strata Property Act require strata-lot owners to have insurance that covers payment of a deductible under a strata-corporation policy? first appeared on British Columbia Law Institute.

Brief description of the issue

The Strata Property Act’s provisions on insurance deductibles have created uncertainty and litigation. In part, this is the natural result of a system that appears (1) to rely in large part on a third-party decision-maker to establish liability (by calling on a strata corporation to “sue an owner” to establish liability) and (2) to implicitly invite strata corporations to vary the standard at which liability will be imposed by amending their bylaws.

Similar issues were at play in Ontario’s project on reforming its strata-property law. After noting concerns that Ontario’s act was “unclear about who pays the corporation’s deductible for the damaged property,” it was recommended that “[t]he Act should provide that an owner is responsible for repair costs or the deductible under the corporation’s insurance policy, whichever is lower, as a result of damage to other units or the common elements caused by an act or omission by the unit’s owner or resident.”

Should British Columbia adopt a similar approach as a way to dispel uncertainty and potentially reduce litigation over insurance deductibles?

Discussion of options for reform

The advantages of adopting a proposal like the one discussed in Ontario were hinted at in the framing of this issue. The main virtue of the proposal is that it would lend “greater clarity” to the law. The space that the current law has seemingly provided for strata-corporation bylaws to occupy has created much of the present uncertainty. That space would effectively be closed off, as an express legislative assignment of responsibility would eliminate the rationale for these bylaws. This would bring a measure of certainty and consistency to the law.

It would also likely have the effect of cutting down on litigation over insurance deductibles. Litigation tends to thrive on uncertainty. And, in this case, the need for litigation is given a boost by the express reference in the current provision to suing a responsible owner. Doing away with that reference and setting out a legislative standard for liability should significantly reduce the incentive to litigate issues concerning insurance deductibles.

Finally, it’s worth noting that versions of this proposal have been adopted in other jurisdictions. In addition to Ontario, Saskatchewan and Manitoba have legislation on this point. Alberta has recently announced that it plans to implement this proposal in the near future.

A potential downside of this proposal is the effect it could have on some owners. It’s clear that many strata corporations in British Columbia have property insurance with some very high deductibles, particularly for water damage. These deductibles may be the result of claims history, market conditions, or simply the realities of living in a large, high-rise building. A responsible owner who ends up on the hook for such a deductible could be faced with a crippling debt, one that is out of proportion with what a typical homeowner in a single-family home would ever have to face. An argument could be made that such strata-lot owners are being confronted with something that goes beyond the acknowledged purposes of an insurance deductible, which are usually seen as devices to weed out small-value nuisance claims and to crack down on the potential for fraud.

Another disadvantage could flow from what might typically be seen as one of the strengths of the proposal. One of the proposal’s goals is to cut down on needless litigation by providing a clear legislative allocation of responsibility for the deductible. In some cases, though, this authorization could encourage strata corporations to overreach, leaving owners vulnerable to claims of questionable merit. This could lead to more litigation, which would be particularly frustrating from the owner’s point of view.

Finally, the proposal would limit strata corporations’ flexibility. The current law appears to allow strata corporations some latitude in dealing with insurance deductibles by amending their bylaws. This latitude may be used in some cases to tailor provisions that conform to a strata corporation’s unique features. This flexibility has been lauded in at least one court case.

The committee’s recommendation for reform

In the committee’s view, good points may be made on both sides of this issue. On balance, the committee favoured the proposal to amend the act and expressly assign responsibility for an insurance deductible to a responsible owner. The current law appears to give strata corporations some flexibility in managing this issue, but unfortunately that flexibility has brought with it uncertainty and conflict. Adopting a consistent standard in legislation should dispel that uncertainty and cut down on the amount of litigation over insurance deductibles.

A large majority of consultation respondents agreed with the committee’s proposal on this issue.

The committee recommends:

Section 158 of the Strata Property Act should be amended to allow a strata corporation to decide to charge back to an owner, if the owner is responsible for the loss or damage that gave rise to the claim, the lesser of the following amounts: (a) the cost of repairing the loss or damage; (b) the deductible limit of the insurance claim.

For more information, visit the Strata Property Law—Phase Two Project webpage or read the Report on Insurance Issues for Stratas.

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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.

For more information, visit the Strata Property Law—Phase Two Project webpage or read the Report on Insurance Issues for Stratas.

The post 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? first appeared on British Columbia Law Institute.

Brief description of the issue

In the strata-property field, directors-and-officers insurance is “[i]nsurance that provides coverage for members of [strata councils] against ‘wrongful acts,’ which might include actual or alleged errors, omissions, misleading statements, and neglect or breach of duty on the part of the [strata council].” Commentators have stressed the importance of directors-and-officers insurance coverage. The Strata Property Act pays some heed to this point, by enabling strata corporations to purchase this coverage.

Equivalent legislation in other parts of Canada goes even further than the Strata Property Act. Four provinces’ acts mandate directors-and-officers insurance for strata corporations. In view of the acknowledged importance of this type of coverage, should British Columbia follow these provinces’ lead and add directors-and-officers insurance to its legislative mandate?

Discussion of options for reform

The options considered for this issue boiled down to two: either add directors-and-officers coverage to the insurance mandate or retain the status quo.

The case for treating directors-and-officers insurance like property and liability insurance rests on recognizing that it too provides coverage for a significant area of vulnerability for strata corporations. The act provides that a strata corporation functions through its council. In this role, council members are often faced with making difficult decisions, which must meet the requisite standard of care. In the absence of directors-and-officers coverage, the individuals who make up the strata council may be personally on the hook for errors and omissions. If they lack the resources to cover any losses, then the strata corporation and its constituent owners (the parties that are most likely to have claims against council members) could find themselves suffering costly losses.

A mandate for directors-and-officers coverage could also have benefits outside the insurance sphere. It might help with recruitment of strata-council members, who may be reassured to know that the legislation requires this coverage.

The disadvantages of this proposed reform are that it could impose added costs on strata corporations and would limit their flexibility to make decisions on insurance coverage. Very small strata corporations, in particular, might struggle with an addition to the act’s insurance mandate.

These considerations could give support to the status quo. The current provision could be seen as striking the right balance by enabling, but not requiring, directors-and-officers insurance. In this way, it helps bring awareness to the issue, without binding strata corporations to a single solution.

The committee’s recommendation for reform

While the committee understood the concerns regarding added costs and rigidity, it decided that adding directors-and-officers coverage to the insurance mandate would on balance benefit the strata-property sector. The committee accepted the view that a lack of this coverage could leave a strata corporation and its strata council vulnerable to significant losses.

In view of the special position of very small strata corporations, the committee discussed proposing an exemption that would apply to them. While it may be possible to design such an exemption the committee wasn’t convinced of the wisdom of this approach. Even small strata corporations may be exposed to losses in this area. They may also find it more difficult to recover from a loss.

The committee also understands the directors-and-officers insurance is relatively inexpensive, which limits the concerns about its ongoing cost to strata corporations.

In addition, the committee understands that, under the current legislation, the vast majority of strata corporations have opted to have directors-and-officers coverage. In the committee’s view, it’s worthwhile to have the legislation close the remaining gap. The fact that the majority of strata corporations should not notice a difference from a change in the law was seen as a benefit for this proposal, as it would limit any potential disruption flowing from reform.

Finally, it should be noted the bulk of respondents in the public consultation favoured amending the act to require strata corporations to obtain directors-and-officers insurance.

The committee recommends:

The Strata Property Act should require a strata corporation to obtain directors-and-officers insurance.

For more information, visit the Strata Property Law—Phase Two Project webpage or read the Report on Insurance Issues for Stratas.

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