Insured amount equal to the reconstruction value
Co-ownership insurance has certain particularities. The following is intended to familiarize the broker with the topic in order to help him exercise due diligence in providing information and advice.
The cost of reconstruction of an immovable is not necessarily the same as the cost of construction. This cost must be established based on the condition in which the building is today, according to current standards, uses and best practices.
Source: condolegal.com — Definition : Insurance - Reconstruction cost
Taxes
There is a difference in the taxation of construction and reconstruction: the contractor does not include GST and QST in his construction cost, as he generally receives an input tax credit (he can recover the amount of taxes he paid on the goods and services acquired to sell the building); whereas in the event of a loss, the consumer will have to pay taxes on the reconstruction.
Costs related to the condition of the land
Another difference is in the costs associated with the condition of the land: a contractor who builds on a vacant lot does not have to clear it; whereas, after a fire, there will be clearing costs since the land will have to be restored. The contractor does not have to take this cost into consideration. Finally, there is a difference in the conditions under which the work is done: since the time of the disaster is not chosen, the reconstruction could be required to take place in the middle of winter, for instance.
There are several elements to consider; the best way to do this is therefore to obtain an evaluation from a certified appraiser who will establish the exact cost of reconstructing the building with new materials of equal quality. Moreover, article 1073 of the Civil Code of Québec places an obligation on the syndicate of co-owners to have the cost of reconstruction of the building evaluated every five years. If the board of directors does not respect this obligation, it could be sued by the co-owners who would then have to contribute to the settlement of the claim.
Deductible
Since immovables held in co-ownership are quite prone to losses, it is not uncommon to see the deductibles applicable to certain events – such as water damage – in the hundreds of thousands of dollars, especially when the syndicate has a poor claims history. Previously, this had little impact on co-owners, since the syndicate could easily turn to the civil liability insurer of the co-owner whose unit was the cause of the loss in order to claim payment of the insurance deductible. Following the recent changes to the Civil Code of Québec, this is no longer as simple, and syndicates are now faced with frequent claims being refused by co-owners’ insurers. Indeed, the Act now provides that the cost of the deductible will be borne by all co-owners, unless the syndicate can demonstrate that the loss was caused by the fault of one co-owner, or by the act or fault of another person, or by property in his custody.
Self-insurance fund
The Act was recently amended to require co-ownership syndicates to establish a self-insurance fund for the payment of insurance deductibles or for repairing damages to the building when the cost is lower than the deductible, or when the syndicate’s insurance cannot provide for them, either due to an insurance cap or to exclusions.
The total amount to be contributed is the syndicate’s highest deductible, with the exception of deductibles for earthquake and flood. The deductible for water damage is included in the calculation. In fact, for most syndicates, the latter will be the highest deductible and therefore the target to reach for self-insurance fund contributions.
Co-owners will have until April 15, 2022 to pay into the fund an amount equal to half of the syndicate’s highest insurance deductible. The balance will have to be contributed the following year. Therefore syndicates will have two years to replenish an empty self-insurance fund. If the fund is partially funded, it should be checked to see if it is funded at more or less than half the highest deductible. If there is less than half, an assessment will need to be made for an amount corresponding to half of the missing sum the first year, and the balance in the second year. If there is more than half, it will be sufficient to assess the difference between what is in the fund and the amount of the deductible.
The amounts to be contributed to the self-insurance fund are calculated at the same time as the contributions to the contingency fund, in the course of the annual budget preparation.
Because of this impending obligation, and the fact that co-ownerships are (too) often subject to losses that require the payment of deductibles, syndicates should immediately set up a self-insurance fund. Indeed, when a syndicate is faced with major water damage requiring a large deductible to be paid within a short period of time in order for the repair work to proceed promptly, getting payments from the immovable’s co-owners will prove rather difficult. Remember that if the payment of the highest deductible has not been provided for in the annual budget, the syndicate will have to convene a special meeting to consult the co-owners as to what special assessments should be imposed. These special assessments come as unpleasant surprises to co-owners.
It is therefore essential, when purchasing an immovable, to verify the amount of the syndicate’s highest deductible and to ask whether the syndicate has established its self-insurance fund (and if so, how much money it contains). This is part of the information relevant to a buyer’s decision. If the syndicate does not have a self-insurance fund, the co-owner can expect to be required to pay sums (in proportion to his relative value) for the potential payment of a deductible in the event of a loss, and to fund the self-insurance fund, which must be half-funded by April 2022.
Water damage: impacts on co-ownership insurance policies
Water damage is by far the most significant type of claim in co-ownership properties, and in fact in all types of dwellings. Some deductibles can be as high as $10,000, $25,000, $50,000 and even over $100,000. In such cases, the amount to be paid by the co-owners will be higher. This is why it is important to carefully review the terms of the insurance policy taken out by the syndicate of co-owners.
In addition to verifying deductible amounts, it is necessary to verify the coverage: is water damage covered?
In some cases, insurers refuse to maintain coverage for water damage if the building has suffered several significant water damage events.
Damage caused by water heaters
Water heaters are one of the most common sources of water damage in co-ownerships, as indeed they are in other types of homes.
A co-owner should be aware that not all water heaters in the building have necessarily been replaced and that there may not be a by-law requiring co-owners to replace them at regular intervals. It is important to do this verification and to determine if the repair and replacement of water heaters is a responsibility of the syndicate or of the co-owner (depending on whether it is a common or private portion). Water heaters that have 10 years or more of wear and tear are at risk. A leak can cause damage, especially if it takes place over several hours or even days.
An insurer could refuse to insure a co-owner for water damage, even if his water heater is new, because those in other units are not. In fact, insurers are becoming more and more demanding regarding the age of water heaters. They will require that all co-owners replace their water heaters after a certain number of years, which rarely exceeds 12; the standard is generally 10 years.
Leasehold improvements
The insurance policy taken out by the syndicate covers the value of the original assets that existed when the building was constructed.
Improvements made to a private portion are not covered by this policy, but rather by the co-owner’s policy. In this case, it is the added value that is covered. For example, if a carpet is replaced with another of the same quality, no changes need to be made to the insurance policy. However, if the kitchen is renovated with higher quality materials, it is the co-owner’s responsibility to ensure that his insurance covers these improvements.
Heat pumps and air conditioners
Special care must be taken when the dwelling unit is equipped with a heat pump or air conditioner, as this type of equipment may be covered by either the syndicate of co-owners policy or the co-owner policy.
If it was the co-owner who purchased the equipment for his unit, then it must be covered by his own insurance.
A buyer should check the description of the “unit of reference” for the unit he has purchased (or intends to purchase), which is found in the register of co-ownership maintained by the syndicate, to determine if the equipment should be covered by his own insurance.
Commercial and rental activities
Commercial activities in co-ownership properties and the rental of dwelling units have an impact on the rates charged by insurers. If such activities are taking place in the building but are not listed in the co-ownership’s insurance policy, there could be a dispute in the event of a claim.
It is important to make sure that the use that will be made of the immovable is indicated in the insurance contract.
Renting out dwelling units or engaging in a commercial activity in a co-ownership property represents an additional risk from an insurer’s point of view, which is why the insurer must be notified.
