I am sure many of you have been reading a variety of headlines like, “The Condo Market is Crashing” and “Strata Insurance in Crisis.” While some of this is sensationalized to sell newspapers, there is merit. The strata insurance companies have unilaterally spiked insurance rates across the Province.
Strata owners are seeing their insurance premiums and deductibles going up at unprecedented rates. We are seeing the most concentrated areas, such as Greater Vancouver and Southern Vancouver Island hit the hardest.
It would appear that buildings with recent water claims, old or new, are being targeted. Additionally, larger stratas and high rises with many units are also being targeted, due to the greater exposure of multiple unit losses. That said, it would appear that no one is safe from these increases.
This crisis has been compared to the leaky condo crisis of the 1990s. However, it can be argued this is much worse. A building that is not rainscreened can be determined upon visual inspection. There are some buildings that were not built the stucco and were not susceptible to water ingress, like a building that was built with California style stucco.
Whereas every multifamily building in Vancouver is susceptible to the risk for a strata insurance spike in its premiums and deductibles. There are horror stories of deductibles going as high as $600,000 and premiums going up by more than 400%.
Why is this happening?
Insurance companies are business’ and they have shareholders they need to be accountable to. Over the past several years, there has been an increase in claims affecting the bottom line.
The big problem that strata buildings are facing is a lack of supply of insurance providers. Insurance companies are getting hit very hard with massive claims from buildings that are affected by water damage. There are companies that are choosing to leave the market and some are going out of business.
There are only three major insurance brokerages that will take on multifamily insurance policies while there are thousands of buildings in need of coverage – CapriCMW, Hub International and BFL Insurance.
As we have seen with real estate sales, when the demand increases and the supply decreases, prices go up. That is exactly what is happening with the insurance providers. There are less companies that are willing to take the risk of insuring in multifamily strata buildings. The ones that do decide to provide insurance are increasing fees and deductibles.
While an increase in a building’s insurance policy of over 400% may seem astronomical to some people and an increase in water damage deductibles in over $600,000 is, until now, unheard of, this is not an ideal solution for all parties. This is a complex problem that will need to be looked at on a deeper level.
What happens if an insurance provider will not provide insurance to a multifamily building?
This is a worst case scenario that we are starting to see. If a strata building cannot get insurance, then the owners are stuck. They cannot sell their home because, unless a buyer has all cash to purchase the property, it is unlikely a bank will provide a mortgage.
What can strata corporations and owners do?
Education is always paramount. Firstly, educating strata corporations on how to best maintain a building to reduce the number of potential water incidents. An example of this could be updating piping when necessary and not deferring. Secondly, educating occupants of the dangers of hitting, bumping or hanging anything from the sprinkler heads.
The Insurance Brokers Association of British Columbia (IBABC) have made a recommendation to amend the Provincial Strata Property Act in two key ways:
- Impose a $50,000 cap on strata deductible assessments (charge-backs to the unit where the damage originated from). This does NOT mean that the strata insurance policies will be capped at 50,000 deductibles. It means that $50,000 is the most that a single unit owner can be assessed with. For example, the strata insurance policy could still have a $100,000 water damage deductible. $50,000 can be assessed to the unit that caused the water damage and the remainder must be paid by the collective strata either using reserve funding or by way of special levy to the rest of the unit owners.
- Come to a universal definition of what a “bare bones” strata unit is since it can vary by strata which makes things very confusing (and costly) for the insurance companies to sort out in the event of a major loss.
I am the type of person that is always looking for solutions to problems. Other measures that could be implemented, which I have considered include:
- Amend the building code to mandate:
o have hard-wired water leak detection systems;
o all units have automatic water shut off systems; and
o that all sprinkler heads are installed with a protective sprinkler guards.
- Treat Contingency Reserve funds like taxes upon closing. For example, the taxes are adjusted to how much has been paid over the year and calculated portions to the Buyer and Seller on closing. If this were done with Contingency Reserve funds, perhaps owners would have a great incentive to invest more in the fund.
- Re-evaluate how claims are handled. Often what would perhaps be a small amount of damage gets inflated because it is an insurance claim. Additionally, high end accommodations are provided for those who are required to relocate due to damage. Perhaps seeing how funds can be more efficiently managed and costs can be brought down.
- Find a way to create incentives for insurance companies to invest in multifamily buildings to increase the supply. How do to this? I am open to your ideas!
What are some of the actions that are being taken now?
On February 25, opposition MLA Todd Stone introduced a private member’s bill, the Strata Property Amendment Act, 2020, to address concerns about rising strata insurance rates. If passed, the bill will:
- require a strata corporation to provide a copy of proof of insurance,
- add a new defined term “standard unit” to better ensure correct insurance-product pricing and greater clarity in the claims process,
- require strata corporations to be provided insurance renewal terms at least 30 days in advance, and
- require an owner of a strata lot to obtain and maintain liability insurance.
What can you do to protect yourself?
If you are looking to purchase a home in a condo building, part of the due diligence process is reviewing the insurance policy and being prepared as much as you can. Make sure the Real Estate professional you are working with is aware of these issues and explaining them to you and ensuring your protection.
For current condo homeowners, make sure any appliances you have that are water based, such as dishwashers, hot water tanks and clothes washing machines, are not past their prime. Use steel braided hoses for your clothes washing machines. Put protective sprinkler guards on your sprinklers. Do not leave water running unattended.
Also, make sure your insurance policy reflects the needs of your building insurance policy, especially in terms of deductible amounts. Furthermore, if you have made any upgrades to your home, let your insurance provider know, such as new flooring, cabinets, appliances and more. Unless specified in your policy, any replacement costs to a home will be based on the original condition of the home when it was built.
It is likely this crisis will get worse before it gets better. Unless substantial changes are made, the pool of insurance providers may continue to shrink, exacerbating the problem. Hopefully some measures will be put in place to help people. That said, insurance costs are going up. It is a price adjustment that is a bigger leap than many are used to, however, it is a reality of the world we live in. I did consider if we would be seeing more foreclosures in the future because of this, however, there is a catch 22 - if the building does not have insurance, no one can get a mortgage, therefore no one can buy it.
RE/MAX Select Properties