The Condo Conundrum

Strata insurance deductibles and broker input into the Insurance Corporation of B.C. (ICBC)’s plans to shift to a risk-based pricing model dominated discussions at the 64th annual conference and trade show of the Insurance Brokers Association of B.C. (IBABC).

The conference was held in Kelowna, B.C. on May 9-11.

In a standing-room-only seminar, Krista Prockiw of Alexander Holburn Beaudin & Lang LLP delved into several legal issues surrounding strata insurance — including the murky world of applying deductibles — during her presentation on May 10, The Condominium Conundrum.

CONDOMINIUM DEDUCTIBLES

Challenging fairness

B.C. condo unit owners have yet to take a run at challenging the fairness of deductible downloading bylaws of strata corporations, although case law seems aligned for such an opportunity, Prockiw observed in her presentation.

First, B.C.’s Strata Property Act does not limit the ability of a strata corporation to sue a condo owner to recover a deductible, Prockiw noted. Such an action can proceed if the strata corporation has a valid bylaw or rule allowing the damage to be charged to a unit owner.

Second, a strata corporation can sue a condo unit owner for the insurance deductible if “the owner is responsible for the loss or damage.”

Prockiw suggested this scenario is akin to strict liability, meaning a condo unit owner can be found “responsible” for damage without requiring a finding of negligence on the part of the owner. Consider, for example, OSP KAS 1019 v. Keiran, Simkus and Wawanesa Insurance. In this case, the owner of a condo unit had a pipe burst in the bathroom wall because high acid levels in the water caused a coupling to break down. The court determined the owner had a duty to repair and maintain the unit, which was not common property, and therefore was “responsible for the loss, regardless of the absence of fault or negligence on their part.”

Third, as Prockiw and brokers attending the seminar observed, policy deductibles for some strata corporations are substantial, running anywhere between $25,000 and $500,000.

“If you live in a strata corporation, you share everything in proportionate shares,” Prockiw explained. “You share maintenance fees, you share liability, so this whole idea that one owner is responsible for the entire deductible could be seen as contrary to [the common expense philosophy],” she added.

“No one’s ever taken a run at it, but we are certainly waiting for the case in which you do have an exceedingly high deductible, a strict liability bylaw and no negligence on the part of an owner. The owner might then take a run at [the deductible download] being significantly unfair.”

Four years ago, a case commenced relating to the Strata Property Act’s provisions on “significantly unfair” deductible downloads, Prockiw reported. But the case settled before trial, meaning B.C. courts still have not interpreted the standard of fairness.

“The courts have held that ‘significantly unfair’ is a really high threshold to meet,” Prockiw said. “It might not be possible to meet that.”

Defining an ‘occurrence’

Here’s a quick math question for strata insurance experts: If there is a $50,000 policy deductible for each “occurrence” of a loss arising from illegal drug activity, and 29 out of 90 condo units in a

single building are damaged because of marijuana grow-op activities, what is the total deductible?

Is it a $50,000 deductible for one occurrence that is part of a series of related illegal drug activity losses? Or is it a $1.45-million deductible based on 29 separate occurrences?

The answer seems to be who snitched on whom, based on the 2009 B.C. Supreme Court decision, OSP LMS 3904 v. Commonwealth Insurance Co. and St. Paul Fire.

Prockiw referred to the case in her analysis of insurance deductible issues for strata corporations. Commonwealth involved 90 condo units in the Cranberry Lane complex in Richmond, B.C., approximately one-third of which were being used for marijuana cultivation operations known as grow-ops.

The residential condo units used for grow-ops were discovered in a variety of ways. The most spectacular of these occurred in March 2005, when masked gunmen entered Unit #10. A subsequent police investigation revealed that they had selected the wrong door. They had intended to break into the grow-op located in Unit #9 instead.

Five days after the armed break-in, an anonymous tipster phoned police to suggest they should investigate grow-ops in Units #7, #13, #14, #16, #21, #22, #44, #49 and #60 — nine units in total. Further investigation revealed a final tally of 29 units being used for grow-op purposes.

The strata corporation made a total insurance claim for almost $471,000 to repair damage caused by the illegal operations. The strata’s insurance policy had a $50,000 deductible for each “occurrence” of illegal drug activity losses.

The strata corporation sought a court declaration that all residential units serving as grow-ops constituted a single “occurrence” under the policy, for a total deductible of $50,000. Occurrence in the policy was defined as “a loss and/or a series of losses which are attributable directly or indirectly to one cause, disaster or occurrence.”

In response, the insurer argued each of the 29 condo units counted as separate “occurrences,” which would have made the deductible slightly more than $1.4 million, exceeding total damages.

The court found the tipster’s knowledge of nine grow-op units indicated he was likely part of a common criminal enterprise involving those operations. Therefore, only one deductible applied for all nine units.

However, the court concluded the rest of the 20 units constituted 20 separate occurrences, since no evidence was introduced that they were related to the nine identified by the tipster.

Agreement reached

British Columbia’s public auto insurer, the ICBC, has committed to consulting with the province’s brokers about a proposed shift to risk-based auto insurance pricing. The move represents one aspect of ICBC’s much broader plan to modernize its service model over the next six to eight years.

ICBC’s commitment is contained in Accord 2020, an eight-year strategic agreement signed by IBABC, ICBC and the Credit Union Insurance Services Association (CUISA).

“Really, the important element is to ensure the broker remains the sole distributor of Autoplan and the right choice for B.C. auto insurance consumers,” IBABC president Maurice Poulin said during a presentation to the IBABC’s annual general meeting in Kelowna, B.C. on May 9.

In its 2014 Transformation Program, ICBC states that its intention to make a $400-million “reinvestment” towards a revamp of its service model, which will include shifting to a risk-based pricing approach, replacing aging technology, adopting new claims handling procedures and introducing more ways for consumers to interact with the insurer. The last will be achieved through the use of both paperless and electronic methods of communicating.

Of particular interest is the stated intention to shift to a risk-based pricing model from the Claims-Rated Scale (CRS), which the ICBC has used since 1982. Under the CRS, all new drivers pay a base rate for auto insurance and their premiums are adjusted up or down on the scale depending on their number of claims.

Some argue the CRS system does not differentiate effectively between high-risk and low-risk drivers. But under a risk-based pricing model, low-risk drivers would be offered lower premiums and higher-risk drivers would pa
y higher premiums.

Accord 2020 commits the ICBC to consulting with insurance brokers with regard to any future risk-based pricing model.

Accord 2020 — which follows previous accords signed by ICBC, IBABC and CUISA — is effective Mar. 1, 2012 to Jan. 1, 2020.