Covering Condos

It only takes a quick look at the skyline of any Canadian city to recognize that condominiums are becoming the residence of choice for many homeowners. Whether it is the young professional purchasing their first home, or the empty-nesters downsizing as they enter retirement, condominiums are clearly satisfying the needs of an increasingly diverse segment of the urban population

Led by markets including Toronto, Vancouver, Montral and Calgary, Canada has just seen another record year of condominium development, with further growth clearly in sight.

Popular wisdom suggests condo owners tend to purchase for the purposes of earning rental income, but figures from a recent Canadian Mortgage and Housing Corporation report show the exact opposite: steadily decreasing in number over the past 10 years, rental units comprise only 19% of all condominiums.

CONSIDERING CONDO EXPOSURES

From a homebuyer perspective, this trend represents a clear move towards the convenience and flexibility of the condominium lifestyle. From an insurance perspective, however, it brings to light unique – and often overlooked – risk exposures. The unfortunate reality is that, more often than not, condo owners do not carry the proper insurance and can find themselves out in the cold during a time of loss because their policies did not properly address all of their coverage needs. The reason why insurance gaps exist within condo policies is multi-fold:

* Insuring a condominium unit is complicated by the fact that there are two parties involved: the owner and the condominium corporation.

* In any type of loss involving a condo unit (partial or total), the unit-owner almost always has to seek alternate living arrangements, sometimes over an extended period of time because of the number of parties involved.

* Insurance gaps are magnified in high-end condominiums or condos with unique luxury finishes that can sometimes add up to more than the cost of the condo itself.

With tens of thousands of new condominium units under construction across Canada, the demand for insurance coverage is increasing. The prudent broker’s responsibility is to ensure all coverage elements work together to meet the unique protection needs of their clients, particularly in three key areas: contents, additions and alterations and unit assessments.

CONTENTS

Contents is the primary type of coverage clients purchase when they buy a condominium policy. Determining the amount of coverage one needs for their personal possessions can be a difficult task.

Contents can be one of the most underinsured lines of business in the personal insurance marketplace. While it is easy to add up values for large items like appliances and major furniture pieces, clients often underestimate and/or overlook the replacement cost of smaller items like personal electronics, clothes, kitchen utensils, CDs, DVDs, children’s toys and tools. A home inventory guide can be very helpful in determining the correct amount of contents and is a useful tool the broker can provide to his client.

As modern condominium units get smaller, the need for occupants to put a portion of their contents into a storage locker – either in the same building or off-site – has increased. A prudent broker will examine the extent of coverage for contents not stored in the insured unit. Some policies may limit the percentage of contents covered outside the insured unit or the perils that are covered. This can be of particular concern for clients who are downsizing from a larger home but want to keep some of their larger possessions.

Insurance policies will also include special limits on high-value items like wine, jewellery and fine arts. If your client is in a high-value condominium, there is an increased chance they have more than what the typical policy will cover under such “special limits.” Your client needs the right policy to provide the flexibility of a rider or floater to cover items such as a large wine collection, antiques or fine art. Often these items can be insured at a lower rate than the standard contents rate.

ADDITIONS AND ALTERATIONS

When a unit is purchased from the condominium corporation, the purchaser is buying the standard unit and then adding upgrades according to their taste and budget. Upgrades can include appliances, lighting fixtures and carpets, as well as less obvious additions such as hardware, kitchen and bathroom cabinets, countertops, floor and ceiling mouldings, tile floors and hardwood floors.

While condominium laws require that the condo corporations have their own insurance that protects the structure and common areas of the building, upgrades are usually excluded from the corporation’s insurance policy. It becomes the responsibility of the individual condominium owner to insure losses to the upgrades to their unit.

Brokers need to ensure additions and alterations (or improvements and ‘betterments’) coverage is sufficient to protect all enhancements that unit holders have installed in their units.

This potential coverage gap also applies to all subsequent owners of a condominium. If the current inhabitant of a condo unit purchased the space with upgraded features from a previous owner, those extra features are still considered part of additions and alterations by the insurance companies and will continue to be excluded from the condominium corporation’s insurance policy. If there was a loss and the new owner did not purchase the proper amount of additions and alterations coverage, there could be a gap in coverage.

Traditionally, the walls of the unit and the plumbing lines within them are considered part of the unit where the master policy would respond. Different provinces will dictate different rules about how the master policy will respond to damages within the unit. It is best practice to have the insured check with their condominium corporation about what is not covered, and to read the fine print carefully with their broker or insurance advisor.

UNIT ASSESSMENTS

In a condominium, a number of common areas are available for common use by all tenants of the building: the gym, lobby, swimming pool, meeting rooms, party room, etc. If a loss occurs to one of these areas, a unit holder might have to pay to have the loss repaired in one of several different ways.

Condominium corporations insure through a commercial policy that is usually subject to a substantial deductible. Unbeknownst to many condo owners, at the time of loss involving a common area each unit holder is typically assessed to pay their portion of the deductible. A condominium insurance policy can cover this assessment up to a certain dollar value; however different policies have different limits.

If there is a particularly large loss to a common area beyond the coverage provided by the condo corporation policy, each unit can also be assessed their portion of reparation costs. A proper and thorough condominium insurance policy can provide coverage for this type of unit assessment, usually expressed as a percentage of the contents amount (e.g. 200%) up to a specific value.

The Canadian marketplace has many different condominium products. It is important to realize they are not all created equal. A broker needs to carefully examine the coverage being provided by the policy and make sure it meets the needs of client’s exposure. Is there enough contents coverage? Is there enough betterments and improvements coverage? If the client were forced out of their home for several months, is there enough additional living expense coverage? All these questions need to be answered in the decision making process.

By properly examining the needs of the condominium owner and understanding the policy coverage, the broker can offer their clients the expertise necessary to provide quality service to this growing market segment.