Clarifying Condo Coverage

The insurance requirements of a condominium construction project are complex. There is a fundamental distinction between the construction phase – when the developer, its contractors and consultants have ownership and care, custody and control of the property – and the post-registration and turnover phase, when the condominium corporation and the unit owners assume ownership of the property. In these two phases, the insurance requirements of a condominium are different.

During the construction phase, appropriate insurance must be in place to ensure that, in the event of an occurrence, sufficient funds will be available to complete the project and pay any damages suffered by the developer and its contractors. After the construction phase is complete and the condominium corporation has assumed ownership of the common elements, the insurance obtained by the condominium corporation must, at minimum, comply with the relevant legislative requirements. Beyond these requirements, the insurance needs of a condominium must be assessed based on the risk profile of the building at issue.

INSURING A CONDOMINIUM DURING CONSTRUCTION

During the course of construction of a condominium project, appropriate insurance must be obtained by the project participants to provide coverage over that period.

A builder’s risk policy will generally be obtained by the developer/builder to cover the project during construction. Such policies typically contain an exclusion for the cost of making good faulty or improper design, faulty or improper workmanship, and faulty or improper materials. In the event that a construction deficiency is identified on a condominium project, it will often be the case that such a deficiency is attributable to one of these causes and, as such, the cost of making good the deficiency may, therefore, be excluded (though resulting damage may be covered).

Commercial general liability insurance (CGL) is also essential for participants in the construction of a condominium project. There has been extensive litigation regarding the coverage afforded by CGL policies in condominium construction deficiency cases, particularly in British Columbia, where the “leaky condo” phenomenon has resulted in a significant number of cases over the past 10 to 20 years. The targets of these actions have included developer-builders, contractors and subcontractors, material suppliers, designers and municipalities.

In three recent class actions in Ontario brought by condominium unit owners against developers, designers, subcontractors and material suppliers following incidents involving falling glass, $20 million in damages was sought in each of these cases for loss of enjoyment of units, because the balconies of the units were closed, and for a diminution in rental income and value. The potential for large claims such as these must be taken into consideration in assessing the adequacy of the policy limits of the various participants in the construction process.

Professionals involved in the design and construction of a condominium project, including architects and engineers, will have professional liability policies in place. Often the limits of such policies will be quite low when compared to the costs of remediating a major design deficiency in a condominium.

INSURING A CONDOMINIUM FOLLOWING CONSTRUCTION

Following construction, once the condominium corporation has assumed ownership of the common elements, certain legislative requirements are imposed on the condominium corporation with respect to insurance. By way of example, Ontario’s Condominium Act, 1998 (the Condominium Act) is the main source of legislation governing the insurance of condominiums in Ontario and is referenced as a representative example of legislative requirements imposed on condominiums.

The act explicitly addresses insurance issues affecting condominium corporations, the directors/officers of condominium corporations and condominium owners themselves. The legislation does not, however, refer or give direction in respect of the insurance requirements of developers, builders and architects during the construction phase.

The Condominium Act creates a two-part insurance regime, which requires the condominium corporation to have two types of coverage:

(i) property insurance which provides coverage in respect of damage to the units and the common elements caused by major perils; and (ii) liability insurance.

In Ontario, a condominium corporation is required to obtain and maintain insurance for both itself and on behalf of the unit owners in respect of damage to the units and common elements caused by “major perils.” The major perils referenced in the Condominium Act are as follows: fire, lightning, smoke, windstorm, explosion, water escape, strikes, riots or civil commotion, impact by aircraft or vehicles, vandalism or malicious acts. While condominium corporations must obtain coverage for these “major perils,” whether coverage for other perils is required hinges on what is specified in the declaration or by-laws of the condominium corporation. Ontario’s Condominium Act does not address issues related to the availability of coverage for the above-listed major perils.

The amount of insurance required under the Condominium Act is the replacement cost of the property damaged, subject to a “reasonable” deductible. The act also includes a termination clause that requires an insurer to provide at least 60 days notice before terminating insurance coverage.

The insurance coverage required for condominiums has been the subject of commentary by Canadian courts. In Carleton Condominium Corp. No. 26 v. Nagur, for example, the court commented on the duty imposed on a condominium corporation in terms of repairing damage to units noting that the Condominium Act:

…requires all condominiums to maintain insurance coverage for the benefit of all owners on all common property and all units (up to the “standard unit”) for certain specified perils and damage. Therefore, where damage occurs to a unit and the corporation’s master insurance policy provides coverage for such damage, the corporation is responsible for repairs to such damage (either by making an insurance claim, or where it elects not to make such a claim for economic reasons, the corporation is itself responsible for repairs to the damage).

Insurance agents and brokers will be asked by condominium corporations, through their boards, to ensure that adequate insurance is put in place, including the following:

1.    confirming in writing that the insurance policy provides
coverage in respect of the prescribed major perils listed in the relevant legislation and any other perils set out in the declaration and by-laws of the condominium corporation. Even if the insurance policies held by a condominium corporation are in the form of “all risk” policies, a condominium board may seek assurances from a broker or agent that the damages that ought to be covered are, in fact, covered under the relevant policy so as to reduce any risk of ambiguity;

2.    assisting with regular insurance reviews and appraisals, particularly where there is a renovation to the common elements of a condominium; and

3.    advising that the deductible is “reasonable” such that, in the event of an incident, the condominium is financially prepared.

In addition, the condominium corporation will want to ensure the unit owners are adequately informed about the insurance needs of their individual units.

A condominium corporation is also required to obtain liability insurance. Pursuant to Section 102 of the Condominium Act, a condominium corporation is required to obtain and maintain liability insurance which insures against its liability (1) resulting from a breach of duty as occupier of the common elements or land the corporation holds as an asset; and (2) arising from ownership, use or operation of boilers, machinery and pressure vessels, and motor vehicles. Condominium corporations generally purchase commercial general liability policies.

A condominium’s board of directors also requires adequate insurance. The Condominium Act addresses both the indemnification of, and the insurance requirements for, directors and officers of the condominium corporation. Section 38 allows directors and officers to be indemnified pursuant to the by-laws of the corporation, except for any breach of the duty to act honestly and in good faith; Section 39 of the Condominium Act requires that officers and directors be insured, but only if such insurance is “reasonably available.”

The importance of this coverage was highlighted in Boily v. Carleton Condominium Corporation 145, a 2012 decision from Ontario. Directors and officers were held personally liable in respect of certain legal costs incurred in connection with a motion to enforce a settlement relating to a dispute between the condominium board and certain unit owners in relation to courtyard landscaping work and the appropriate procedure to be followed by the board in approving that work. What constitutes insurance for directors and officers that is “reasonably available” under Section 39 is not defined by the Condominium Act, but most condominium board members will want to ensure that adequate insurance is in place prior to taking on any role on a condominium’s board of directors.

The insurance requirements of condominiums will vary depending on the jurisdiction and the nature of the building, but the insurance needs of a condominium both during and after construction are complex and merit careful review and risk analysis with the advice of an expert insurance broker.

The author gratefully acknowledges the assistance of Rahim Jamal, a student at Borden Ladner Gervais, in the research and preparation of this article.