The Insurance Myth

Subrogation and deductibles and standard units – oh my! The language used in insurance policies can be even stranger than being in Oz; but once you draw back the curtain, you can see that the magic isn’t all that complicated after all.

With the changes coming to the Condominium Act, 1998 (the “Act”), specifically those changes coming to Section 105, there has been a flurry of activity on Boards to enact insurance deductible by-laws before the ability to do so is taken away.[1] Hand in hand with this activity has been a renewed dialogue between Owners and Boards regarding just what exactly is covered by the condominium corporation and what Owners need to take care of themselves. 

Mandatory Coverage and Filling in the Standard Unit Gaps

Before we can talk about the intricacies of deductible by-laws, we should, to quote another famous musical, start from the very beginning (it is, after all, a very good place to start). What insurance coverage does the typical Unit Owner have without ever purchasing their own policy, and what additional coverage do they need?

Pursuant to Sections 99 and 102 of the Act, your condominium corporation is required to carry insurance policies that will cover both physical damage to the common elements and the units - such that the units will be returned to their state described in the "standard unit" definition as per the condominium’s documents (this will be explained further below)[2] - as well as liability insurance for the common elements and Corporation-owned machinery[3]. The cost of this insurance is included in your common expenses.

What does this mean? For the physical damage insurance, it means that when there is physical damage to the common elements or your unit that is caused by, for example, a flood or fire, the Corporation’s insurance will repair the damage up to the "standard unit" definition. The Unit Owner is responsible to repair any “improvements” made to the unit.

Think about it as though your unit was a hamburger (stay with me). The Corporation provides insurance for your standard hamburger: patty, bun, lettuce, tomato, condiments. If you decide you want a cheeseburger, or bacon on your burger, you improve or upgrade your hamburger. When it comes time to repair or replace the hamburger, if you want the cheese or bacon back, you have to pay extra, not the condominium corporation. That’s where your personal policy of insurance comes in; to cover you for the “improvements” to your hamburger of cheese and bacon, and make sure that when all is said and done, you’re not stuck paying out of pocket for all the improvements you made to your unit all over again.

For liability insurance, it means that if something happens on the common elements and the Corporation is found to have been in breach of the Occupiers’ Liability Act, - such as, for example, someone slips and falls on a patch of ice in the parking lot and hurts themselves - the Corporation (and, by extension, you, as a part owner of the common elements) is covered. However, this policy only covers the common elements. So, for example, if you have stairs in your unit and a guest trips over a loose carpet edge and falls down those stairs and hurts themselves, that’s on you as the occupier of your particular unit.[4] Unless, of course, if you were smart and got a personal policy of insurance as well. Then your personal condominium owner’s policy would kick in and provide you with coverage.

By now you will have guessed that we are in favour of unit owners obtaining their own personal condominium owner's insurance policies. This is because condominium owner's insurance policies are quite inexpensive and fill in important gaps in coverage between what the Corporation is required to carry and what you could, quite easily, imagine requires covering above and beyond that mandatory coverage.

Deductibles, or, Why Should I Pay Extra for Any of This?

So how do deductibles come into play and, more importantly, what are they? A deductible is an amount, set by the insurer, that must be paid by the policy holder when making a claim under that policy. It is usually a relatively small amount compared to the policy limits, but it acts as a deterrent against policy holders making frivolous claims. The rationale goes something like this: if someone needs to pay the first $500 of any repair bill, then they won’t come calling every time they need to buy spackle to cover up a small hole in a wall. Virtually every standard insurance policy has a deductible, and it serves to keep the cost of policies lower than they would be without them. Deductibles do not hinge on fault or responsibility; they exist for every claim, regardless of why you are claiming.

Section 105 of the Act, as it is currently drafted, allows condominium corporations to pass a by-law that permits the Corporation to charge back the amount of the deductible to the owner (or a person for whom the owner is responsible) in certain circumstances outlinted in the wording of the by-law.[5] The amount of the deductible is added to that particular owner’s common expenses, which saves all other owners from having to share the burden of the cost of the deductible.

If you’re an owner at a condominium with such a by-law, and are being charged back the deductible, this can seem daunting – especially if there was damage to improvements that you made to your unit which require you to claim under your personal policy. Claiming under your personal policy means you may not only have to contend with the corporation’s deductible, you may also have to deal with the deductible on your personal policy as well. Stacking deductibles is never fun to contemplate. However, most personal policies will cover the amount of the Corporation’s deductible as a term of the policy, since the Act defines this obligation as an “insurable interest”. [6]

If you’re not sure if you are covered in the event that the Corporation charges its deductible back to your unit, call your insurance broker and make sure your personal coverage adequately covers the condominium corporation’s deductible. This is a very straightforward question to ask, and your broker should be able to get you an answer relatively quickly. If you aren’t covered, but you would like to be, then ask your broker to add this coverage to your policy.

Subrogation – Why It Exists, and Why It Probably Doesn’t Apply

Under most home insurance policies, the insurer maintains the right of subrogation. Subrogation is a complicated word with a straightforward meaning. Essentially, in the event of an insurable loss, but where it is determined that the loss was the fault of a third party (a contractor or a negligent neighbour) then the insurer will pay for the repairs and replacements, but then the insurer has the right to demand repayment (seek indemnity) for the repairs and replacements from the third party that caused the loss. This includes commencing litigation against the third party in your name, as the policy holder. As the insured, you are required to cooperate with the insurer’s subrogation efforts.

Most condominium declarations, however, contain a waiver of subrogation against or “in favour of” the condominium corporation, the property manager, other owners, and their respective employees, members of their households, guests, and occupiers. This means that in the event of an insurable loss, the insurance company is unable to exercise its right of subrogation against the Corporation, you, your family members, your guests, your neighbours (and their family members and guests), or the employees of the Corporation. This waiver of subrogation typically does not extend to tenants.

Why is this a good thing?

Think about it as though you were living in a traditional home. Traditional homeowner’s policies do not permit the insurance company to bring a subrogated claim against your family members or guests, because they are considered insureds under the same policy. In the condominium context, everyone is, to a certain extent, sharing your home. The policy is, in fact, made out in the name of the condominium corporation as well as all owners, and includes mortgagees from time to time. A waiver of subrogation keeps the condominium community from descending into a never-ending game of finger pointing between owners or between an owner and the Corporation - just as it does in a traditional sense, when it keeps parents from pointing fingers at children and vice versa.

Consider the following example. A quite frequent occurrence, especially in high-rise condominiums, is water leaking into a lower unit from a unit above. Without a subrogation waiver, the insurer for the lower unit would be able to sue the owner of the upper unit to recoup all the costs associated with remedying the damage caused by the water leaking. In a private home, this would be the equivalent of allowing the person standing in a downstairs kitchen to sue the person in the upstairs bathroom for flooding the tub and causing water damage to the kitchen below. The policy of insurance covers all inhabitants in a private home - just as the statutorily required insurance covers all owners in a condominium.

In this way, insurance in the condominium context more closely resembles car insurance for property damage. Ontario is a no-fault province for automobile property damage, wherein each owner bears the responsibility for the deductible on car repairs in the event of an accident, regardless of fault; similar to how it is in a condominium that has a subrogation waiver.

A waiver of subrogation in the condominium context keeps your community collegial and welcoming. Nothing sours relationships quite so fast as litigation.

So there you have it: subrogation and deductibles and standard units – not so complicated after all!

[1] It appears, based on the wording in Bill 106 and the Regulations, that insurance deductible by-laws passed prior to the entering into force of Bill 106 will be grandfathered in. For more information, see Megan Molloy & Richard Elia, Insurance Deductible By-laws, online: Condocentric

[2] Condominium Act, 1998, SO 1998, c 19:

99 (1) The corporation shall obtain and maintain insurance, on its own behalf and on behalf of the owners, for damage to the units and common elements that is caused by major perils or the other perils that the declaration or the by-laws specify.

[…]

(4) The obligation to insure under subsection (1) does not include insurance for damage to improvements made to a unit.

(5) For the purpose of this section, the question of what constitutes an improvement to a unit shall be determined by reference to a standard unit for the class of unit to which the unit belongs.

[3] Condominium Act, 1990 , SO 1998, c 19:

102 The corporation shall obtain and maintain,

(a) insurance against its liability resulting from a breach of duty as occupier of the common elements or land that the corporation holds as an asset; and

(b) insurance against its liability arising from the ownership, use or operation, by or on its behalf, of boilers, machinery, pressure vessels and motor vehicles.

[4] Occupiers’ Liability Act , RSO 1990, c O.2:

1. In this Act,

“occupier” includes,

(a) a person who is in physical possession of premises, or

(b) a person who has responsibility for and control over the condition of premises or the activities there carried on, or control over persons allowed to enter the premises, despite the fact that there is more than one occupier of the same premises

[5] Condominium Act, 1990 , SO 1998, c 19, section 105(3)

[6] Condominium Act, 1990 , SO 1998, c 19, section 105(4)

All of the information contained in this article is of a general nature for informational purposes only, and is not intended to represent the definitive opinion of the firm of Elia Associates on any particular matter. Although every effort is made to ensure that the information contained in this newsletter is accurate and up-to-date, the reader should not act upon it without obtaining appropriate professional advice and assistance.

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