STRATA CORPORATIONS AND PROPERTY INSURERS IN BRITISH COLUMBIA
Ryan Dix, Angela Nelson, and James Dawson
Rev. October 2023
STRATA CORPORATIONS AND PROPERTY INSURERS IN BRITISH COLUMBIA
I. INTRODUCTION
This paper addresses several current legal issues arising from the interaction between property insurers, strata corporations and strata unit owners in British Columbia. The issues to be canvassed, dealing with both substantive and practical problems facing property insurers and the adjusters dealing directly with the insured strata corporation, include:
1. Prior case law had created procedural problems for property insurers attempting to sue third party wrongdoers in the name of a strata corporation. Those problems stemmed from requirements in the British Columbia Strata Property Act which obligated property insurers to obtain a special resolution from the strata corporation before commencing a subrogated action in the strata corporation’s name. This paper addresses the legislative response to situations where the necessary resolution has not been obtained.
2. Another issue arising from subrogated proceedings is the determination of the limitation period applicable to any legal action. Prior to June 1, 2013, property damage caused by an internal defect benefited from a six-year limitation period; since then, a two-year limitation period applies.
3. The last portion of the paper tackles several issues arising from the provisions in the Act requiring strata corporations to insure the common property, and the potential interaction between the strata corporation policy and property insurance policies covering individual strata units. Among these issues are questions about the definition of “fixtures”, the ability of the strata corporation to sue careless strata unit owners, and the obligation of a strata corporation to maintain insurance covering specific perils.
II. SPECIAL RESOLUTIONS OF THE STRATA OWNERS AS PRECONDITION TO STRATA CORPORATION’S LITIGATION
This section of the paper will discuss the procedural problems that affected strata corporations commencing legal proceedings following the decision in The Owners Strata Plan LMS 888 v. The City of Coquitlam et al., and the subsequent legislative response. It will also consider the question: “Do you still need a special resolution to pursue a subrogated action in the name of the strata corporation?”
1. THE LAW PRIOR TO JULY 1, 2000: THE CONDOMINIUM ACT
Prior to July 1, 2000, s.15 of the Condominium Act set out the law with respect to the commencement of legal proceedings by strata corporations:
15 (1) A strata corporation may, as representative of the owners of the strata plans included in the strata plan,
(a) bring proceedings for damages and costs for any damage or injury to the common property, common facilities and the assets of the strata corporation caused by any person; and
(b) be sued on any matter relating to the common property, common facilities or assets of the strata corporation.
(7) A strata corporation may sue on its own behalf and
(a) on behalf of an owner about matters affecting the common property, common facilities and other assets of the strata corporation, and
(b) if authorized by special resolution of the strata corporation, on behalf of those owners who consent in writing to the strata corporation so doing, about matters affecting individual strata plans even though the strata corporation, in the case of a contractual claim, was not a party to the contract about which the proceeding is brought.
The Court considered s.15 in Strata Plan LMS 1468 v. Reunion Properties Inc., where the defendants sought to strike the action on grounds that a ¾ vote of the owners had not taken place prior to the commencement of legal proceedings. The Court determined that s.15(1) applied to situations where a strata corporation was not asserting any right as a separate entity but, rather as a representative plaintiff and only in respect to common property, facilities, or assets of the corporation. The Court decided that s.15(7) covered situations in which a strata corporation may sue on its own behalf as well as on behalf of one or more strata unit owners. After considering the language in s.15(7) and the plaintiff’s claim for damage to common and individual property, the Court determined that that the strata corporation should have obtained a special resolution (3/4 vote) and written consent of the participating owners before commencing the action.
Despite this conclusion, the Court in Reunion did not accede to the defendants’ request to strike the plaintiff’s claim. Instead, the Court relied on Strata Plan No. NW 651 v. Beck’s Mechanical Ltd. in saying that although the plaintiff’s action was “not properly authorized” the lack of authorization was an irregularity capable of being cured by subsequently obtaining the requisite consent and special resolution. In Beck’s Mechanical, the court stated that:
The condition precedent of a special resolution and consent is entirely procedural. Failure to comply with it affects the right to proceed in the name of the strata corporation for damages suffered by individual owners; but failure to meet the condition precedent does not affect the cause of action. It is a defect which can be cured by amendment as in Hanson v. Sponchia (1980), 15 BCLR 157 (C.A.).
In Reunion, the Court gave the plaintiff 120 days to cure the irregularity, failing which the defendants could again apply to strike the action.
2. THE LAW SINCE JULY 1, 2000: THE STRATA PROPERTY ACT
The Condominium Act was repealed on July 1, 2000 when the Act came into force. Sections 171 and 172 of the new Act govern the commencement of legal proceedings by strata corporations, as follows:
171 (1) The strata corporation may sue as representative of all owners…about any matter affecting the strata corporation, including any of the following matters:
(a) the interpretation or application of this Act, the regulations, the bylaws or the rules;
(b) the common property or common assets;
(c) the use or enjoyment of a strata plan;
(2) Before the strata corporation sues under this section, the suit must be authorized by a resolution passed by a 3/4 vote at an annual or special general meeting.
[…]
(5) All owners…must contribute to the expense of suing under this section.
(6) A strata plan’s share of the total contribution to the expense of suing is calculated in accordance with section 99(2) or 100(1) […].
172 (1) The strata corporation may sue on behalf of one or more owners about matters affecting only their strata plans if, before beginning the suit,
(a) it obtains the written consent of those owners, and
(b) the suit is authorized by a resolution passed by a 3/4 vote at an annual or special general meeting.
(2) Only those owners on whose behalf the suit is brought must contribute to
the expense of suing under this section.
(3) A strata plan’s share of the total contribution to the expense of suing is calculated in accordance with section 99(2) or 100(1) except that
(a) only owners on whose behalf the suit is brought are required to contribute, and
(b) only the unit entitlement of strata plans owned by owners on whose behalf the suit is brought are used in the calculations.
The British Columbia Supreme Court first considered sections 171 and 172 in The Owners, Strata Plan LMS 888 v. The City of Coquitlam et al. In Strata Plan LMS 888, the Court was asked to decide whether the failure of the plaintiff to obtain a special resolution under s.171 and to obtain a special resolution and the written consent of each individual owner under s.172 prior to commencing its action amounted to a procedural defect capable of being cured.
In reviewing ss. 171 and 172, the Court concluded that:
The word “before” in sections 171 and 172 cannot be viewed as superfluous and must have the meaning ordinarily given to it. To conclude that the requirement that a ¾ vote be obtained “before” a suit is brought is merely directory, would not only render the word meaningless but would also suggest that the Legislature had no real purpose or reason to include it in the provisions.
The Court also refused to accede to the strata corporation’s contention that it should interpret ss. 171 and 172 to have the same meaning as s. 15 of the Condominium Act, which had been determined to be only procedural in nature. The Court opined that since the Condominium Act had been repealed and replaced with the Act, the strata corporation could no longer rely on judicial decisions based on the Condominium Act to determine its rights and obligations, particularly since its action was commenced after the Act came into force. In the result, the Court ruled that:
a) the strata corporation’s right to commence a representative action did not exist outside of sections 171 and 172 of the Act;
b) the strata corporation must conduct a ¾ vote before it commenced an action pursuant to s.171, and, in the case of s.172, the strata corporation must also obtain the written consent of the unit owners before doing so. Having failed to do so, its right to commence a representative action did not arise; and
c) non-compliance by the strata corporation with sections 171 and 172 must result in the action being declared a nullity.
3. STRATA PLAN LMS 888 AND THE LEGISLATIVE RESPONSE
Strata Plan LMS 888 made clear that all actions commenced by strata corporations on or after July 1, 2000 were a nullity if not previously authorized by special resolution, and in most cases written consent of owners participating in the proceeding was also required. As a result of the decision, it became incumbent upon property insurers to undertake new adjusting practices, specifically to ensure that the necessary resolution and consent were obtained prior to the commencement of legal proceedings. More importantly, the decision raised the spectre that a substantial number of legal proceedings could be declared nullities.
As a result of Strata Plan LMS 888, the British Columbia Legislature responded with s.173.1 of the Act, which provides:
173.1 (1) The failure of a strata corporation to obtain an authorization required under section 171 (2) or 172 (1) (b) or the written consent of an owner under section 172 (1) (a) in relation to a suit or an arbitration:
(a) does not affect the strata corporation’s capacity to commence a suit or arbitration that is otherwise undertaken in accordance with this Act,
(b) does not invalidate a suit or arbitration that is otherwise undertaken in accordance with this Act, and
(c) does not, in respect of a suit or arbitration commenced or continued by the strata corporation that is otherwise undertaken in accordance with this Act, constitute
(i) a defence to that suit or arbitration, or
(ii) an objection to the capacity of the strata corporation to commence or continue that suit or arbitration.
(2) Despite any decision of a court to the contrary made before or after the coming into force of this section, subsection (1) applies to a suit and an arbitration commenced or continued before or after the coming into force of this section.
(3) This section is retroactive to the extent necessary to give full force and effect to its provisions and must not be construed as lacking retroactive effect in relation to any matter merely because it makes no specific reference to that matter.
Section 173.1 is a strong legislative response to Strata Plan LMS 888, and makes it clear that “the failure to obtain the necessary authorization from the Strata Corporation prior to commencing an action will not invalidate the validity of the lawsuit”. The amendment is also unusual in that it is specifically made retroactive to all lawsuits that had been commenced since the Act came into force. The practical effect of the amendment is that defendants cannot raise the technical defence of a failure to obtain authorization from the owners prior to commencing an action under sections 171 or 172. It also means that subrogating insurers will not necessarily need to obtain the ¾ resolution authorizing the action before it is commenced.
4. ARE SPECIAL RESOLUTIONS REQUIRED FOR SUBROGATED ACTIONS?
In light of the fact that the decision to subrogate is often made shortly before the expiry of the limitation period, leaving little time for property insurers to obtain a special resolution from the owners, the legislative amendments are a welcome response to Strata Plan LMS 888. Property insurers can now instruct counsel to commence proceedings to protect against the expiry of a limitation period and then address getting the requisite resolution from the owners.
The question then arises, is it still necessary to obtain a special resolution when proceeding with a subrogated action? Many subrogated actions are commenced with the ultimate goal of securing a negotiated resolution of the property damage claim without proceeding with protracted litigation. In turn, this may lead property insurers to ask about the need for a special resolution at all, when the property insurer is the one receiving any proceeds from the litigation.
Notwithstanding that a special resolution is no longer required prior to commencing an action in the name of the strata corporation, there are a number of reasons that it is still necessary to obtain a special resolution. First, once the claim is resolved, the defendant is going to ask for a release from the strata corporation. A typical resolution authorizing the action in the name of the strata corporation permits the strata council to provide instructions to counsel in the handling of the action, and allows the strata council to sign any releases required upon resolution of the claim. Without a resolution authorizing the action, the property insurer will find that it is unable to provide the necessary release to the defendant because the strata council cannot provide one without authorization from the owners.
Another reason that a special resolution is still required for a subrogated action is to protect against potential future allegations that the settlement of a subrogated action is not binding upon the owners. If a special resolution is never obtained, owners who feel that they were not adequately compensated for the original damage may decide to commence their own actions against the defendant. The property insurer may then find itself facing a claim from the defendant for any amounts that it received in the settlement of the subrogated action that the defendant may be held accountable for to the owners in the separate claim.
While the legislative amendment permitting a special resolution of the owners to be obtained following commencement of an action in the name of the strata corporation allows steps to be taken quickly to avoid the expiry of a limitation period, it does not do away with the requirement that a special resolution be obtained at some point during the course of the litigation.
III. ALTERNATIVE METHODS OF COMMENCING A LEGAL ACTION CONCERNING DAMAGE TO THE COMMON PROPERTY
In some circumstances a strata corporation will be unable to obtain the ¾ resolution required for an action pursuant to sections 171 and 172 of the Act, such as, for example, if the strata corporation is unable to obtain the necessary support of ¾ of the owners. In that event, other procedural mechanisms may exist to permit a subrogated action to be pursued.
1. REPRESENTATIVE AND CLASS PROCEEDINGS
Two alternative methods exist in British Columbia for commencing an action without a special resolution: representative and class proceedings pursuant to the Rules of Court.
With respect to representative proceedings, British Columbia’s Rule 20-3(1) reads:
If numerous persons have the same interest in a proceeding, other than a proceeding referred to in subrule (10), the proceeding may be started and, unless the court otherwise orders, continued by or against one or more of them as representing all or as representing one or more of them.
A representative proceeding under the Rules may be maintained if three criteria are met:
(a) the purported class is capable of clear and definite definition;
(b) the principal issues of fact and law are essentially the same with regard to all members; and
(c) there is a single measure of damages for all members.
Additionally, the court must find it “just and convenient” in all the circumstances for the action to proceed as a representative proceeding.
Historically, the requirement that the principal issues be essentially the same for all class members made it difficult to conduct representative proceedings under Rule 20-3. However, the potential for “class actions” or “representative actions” increased dramatically after the Supreme Court of Canada’s decision in Western Canadian Shopping Centres Inc. v. Dutton.
Heard on appeal from Alberta, Western Canadian Shopping Centres involved a representative action by investors who participated in the Federal Government’s Business Immigration Program. The investors purchased debentures in WCSC, which was incorporated by Dutton, its sole shareholder, for the purpose of helping investor class immigrants qualify as permanent residents in Canada. WCSC solicited funds through two offerings to invest in income producing properties. When the developments did not materialize, the investors launched a representative action pursuant to the Alberta Rules of Court alleging WCSC breached fiduciary duties to the investors by mismanaging their funds.
The rule relied upon by the investors to commence a representative action, Rule 2.6 of the Alberta Rules of Court, states:
(1) Where numerous persons have a common interest in the subject of an intended action, one or more of those persons may sue or be sued or may be authorized by the Court to defend on behalf of or for the benefit of all.
(2) If a certification order is obtained under the Class Proceedings Act, an action in subrule (1) may be continued under that Act.
Similar rules to Rule 2.6 exist in virtually every province in Canada, including those that do not presently have legislated schemes for class action proceedings.
The Supreme Court of Canada determined that a class action can proceed under Alberta’s Rules of Court if the four following criteria are met:
(a) the class is capable of clear definition by objective criteria;
(b) there are issues of fact or law common to all members in that resolution of the common issue is necessary to the resolution of each member’s claim;
(c) success on the common issues for one is success for all; and
(d) there exists a class representative that adequately represents the class.
Even if these conditions are met, a court must also be satisfied that there are no countervailing considerations that outweigh the benefits of allowing the representative action to proceed. The court should consider the benefits the class action offers in the circumstances of the case as well as any unfairness that class proceedings may cause. In the end, the court must strike a balance between efficiency and fairness.
Further, a class action should not be disallowed on the ground that there is uncertainty as to the resolution of issues common to all class members. If the investors in Western Canadian Shopping Centres had to show individual reliance to establish a breach of fiduciary duty, the court could then consider whether the class action should continue. The same applies to the contention that different defences might be raised with respect to different class members. Simply asserting this possibility does not negate a class action. If and when different defences are asserted, the court may solve the problem or withdraw leave to proceed as a class.
The practical result is that by means of the “vehicle” of representative proceedings pursuant to the provincial Rules of Court, Canada’s highest court has de facto paved the way for “class actions” in all Canadian provinces, whether or not a province has passed specific class action legislation.
Accordingly, by virtue of Western Canadian Shopping Centres, the common issues do not have to be “essentially the same” and there is no requirement that there be a single measure of damages for all members of the class. Strata corporations can also circumvent the prohibition in British Columbia’s Class Proceedings Act, s. 41, against stratas commencing class actions under that legislation.
For strata unit owners asserting a claim in a “leaky condo” action, all the criteria for a representative proceeding are easily met, whether under British Columbia’s more restrictive test or under the criteria developed in Western Canadian Shopping Centres. First, the class is easily identifiable – strata unit owners. Second, generally the issue is common to all strata unit owners and success on this issue is success for all. Third, the damages are customarily a single measure of damages for all strata unit owners. Fourth, one strata unit owner can adequately represent the class as each strata unit owner has the same interest in the strata property as all of the other unit owners.
Accordingly, a property insurer could sue in the name of one of the strata unit owners, invoking the representative proceeding on behalf of all strata unit owners for damage to both the individual strata units and damage to the common property.
2. ASSIGNMENT OF RIGHT OF ACTION TO PROPERTY INSURERS, TO ALLOW INSURER RIGHT TO SUE IN OWN NAME
Where the property insurer has indemnified the strata corporation for a loss but cannot obtain a special resolution authorizing commencement of an action in the name of the strata corporation, the insurer may seek a written assignment from the individual strata unit owners of their tort rights and then commence the action in its own name, pleading its right to do so under the assignments.
In the case of damage negligently caused by a third party to common and limited common property, the cause of action is vested with the insured strata corporation. The Act stipulates that the strata corporation and the individual owners are named insureds under property insurance policies issued to strata corporations, regardless of the wording of the property policy. Section 66 of the Act also stipulates that the strata unit owners own all of the common property and assets of the strata corporation as tenants in common. Therefore, in the event of damage to common property or assets, the cause of action to recover against a wrongdoer is vested with the individual strata unit owners.
When a property insurer indemnifies a strata corporation (or individual owner) for damage to insured property, the property insurer is vested with a right of subrogation against whomever caused the damage. British Columbia’s Insurance Act stipulates at s. 36 that:
(1) The insurer, on making a payment or assuming liability under a contract, is subrogated to all rights of recovery of the insured against any person, and may bring action in the name of the insured to enforce those rights.
Policies of property insurance invariably have subrogation clause. A typical example reads as follows:
Release and Subrogation
The Insurer, upon making any payment or assuming liability therefor under this Policy, shall be subrogated to all rights of recovery of the Insured against others and may bring action in the name of the Insured to enforce such rights.
Historically, in English and Canadian common law, the property insurer has always been required to commence an action in the name of its insured if it wished to recover from a third-party wrongdoer indemnity the insurer has paid to the insured. When insureds have refused to lend their name to subrogated actions, the courts have compelled them to do so.
However, the property insurer may not proceed against the third party in its own name unless the insured specifically assigns the cause of to the insurer, but most proceed in the insured’s name. The provisions of the Insurance Act and the subrogation clauses of a property policy do not themselves assign the insured’s interest to the property insurer for all purposes. In order for a property insurer to pursue a subrogated action in its own name it must obtain an executed assignment from the insured. In the case of indemnity paid to a strata corporation in respect of damage to common property, the assignment must be executed by the individual strata unit owners.
From a practical perspective, such an assignment will be viable if the insured has been indemnified for 100% of its loss. It is possible to take an assignment if the insured has not been indemnified for 100% of its loss, but the terms of the assignment will have to address how the insured and uninsured portion of the loss will be dealt with between the parties. This also applies where the insured has paid part of the loss to satisfy a deductible. If the property insurers have not indemnified the insured for 100% of the loss, counsel must draft appropriate terms to deal with the uninsured portion of the loss, involving a pro-rata apportionment of any recovery between the insured and the property insurer.
An assignment agreement should contain in the preamble the following elements and references:
a) the legal name of the strata corporation, its address, and the number of units of which it is comprised;
b) reference to the insurance policy, the insured named in the property policy, the term during which the property policy was in effect and the names of the property insurer(s);
c) the nature of the loss giving rise to the damage to the strata property;
d) an indication of the parties who are thought to have been responsible for causing the loss, if known; and
e) an acknowledgement that the owners of the strata have been fully indemnified for the damage caused by the loss by the property insurer(s) (or, if that is not the case, it should specify the amount of indemnity and the nature of damage for which the insured has been indemnified).
In the body of the assignment agreement, the individual strata unit owner will be identified and he or she will confirm:
a) the unit(s) of which he or she is the owner;
b) that the damaged property is insured under a policy held by the unit owners of the strata as tenants in common, and such property has been restored (assuming that to be the case);
c) that, in consideration for the sum of the cost of restoration, the unit owner appoints the property insurer(s) as his or her irrevocable assignee of all his or her legal and equitable rights and remedies as against anyone potentially liable for the loss;
d) the assignee(s)/insurer(s) may commence an action in its own name to recover damages to the strata property for which the unit owner and strata corporation have been indemnified; and
e) if the insured has not been fully indemnified for the loss, an indication of how the parties deal with this matter between themselves.
Obtaining a special resolution pursuant to ss. 171 and 172 of the Act is usually feasible, but if the required ¾ support of the owners cannot be obtained, then the property insurer can proceed with its subrogated claim by taking an assignment of the cause of action from the willing owners. Note, however, that an assignment must be obtained before the action is commenced because the right to do so in the insurer’s name does not arise until the cause of action has been assigned. If time is of the essence, the adjuster may attempt to have a “town hall meeting” or go “door to door” explaining the nature and purpose of the assignment to each of the unit holders. If not every strata unit owner has executed the assignment by the expiration of the limitation period, the property insurer may not recover for the proportionate share of damages represented by those owners who have not executed the assignment.
IV. LAWSUITS COMMENCED BY INDIVIDUAL STRATA PROPERTY OWNERS FOR DAMAGE TO COMMON PROPERTY
Owners may also sue in their own name to recover for damage to common property. In Hamilton v. Ball, the British Columbia Court of Appeal had an opportunity to consider whether individual strata property owners could bring an action for damage to common property, particularly where the plaintiffs had been unable to obtain the necessary ¾ authorization to commence the litigation. In so doing, the Court of Appeal considered the nature of common property in the context of the Act and the relationship of an individual unit owner to the common property.
In Ball, the plaintiffs were individual unit owners who commenced an action against the strata council members who had allegedly authorized certain repair and maintenance work on the common property. The plaintiffs claimed the work had been performed defectively. The defendants applied to strike the action, saying the plaintiffs lacked authority to bring action, which was in essence “on behalf of the owners of the building as a whole”, without the necessary ¾ authorization.
The lower court decided that the plaintiffs could not commence the action against the defendants as the strata corporation was a distinct legal entity whose affairs were governed by the strata council and that, in essence, the common property was not property of the plaintiffs, but a distinct holding of the strata corporation.
On appeal, the plaintiffs argued that they were not commencing the action as representatives of all unit owners of the strata corporation. Rather, they argued that they, “together with others, are tenants-in-common of the common property, and assert that like any other co-owners, they are entitled to sue for a remedy for injury to their own interests in such property”. The Court of Appeal agreed. The Court noted that in British Columbia, common property is not owned by the strata corporation, but by the strata owners in proportion to their respective unit entitlements.
So why bother seeking a ¾ special resolution under s.171 of the Act when any individual member can sue for damage to common property? The Court of Appeal noted that “Section 171 creates a mechanism by which a three-fourths majority of owners may use the strata corporation as their vehicle for suing and spread the expenses thereof”. As the Court notes, “that is as far as the legislation goes”. In other words, individual unit owners may commence an action for damage to common property without obtaining the consent of any other strata owner, but other owners are not liable to pay the costs of commencing and maintaining the claim absent the special resolution.
Practically speaking, this decision has paved the way for multiple claims by owners in a strata corporation for recovery for damage to property in their own units and to common property.
V. LIMITATION PERIODS APPLICABLE TO CLAIMS FOR DAMAGE TO COMMON PROPERTY
However an action for damage to common property is commenced, it is important to correctly ascertain and adhere to the limitation period applicable to a strata corporation’s cause of action in relation to damage to common property. Such an analysis is important not only for the purpose of avoiding a statutory bar pursuant to the Limitation Act, but also for the purpose of ensuring compliance with sections 171 and 172 of the Act or, failing that, determining how to rectify any deficiency.
This section examines the previous and current statutory framework relevant to determining the limitation period applicable to a strata corporation’s cause of action for damage to common property.
Prior to July 1, 2013, the previous Limitation Act set a limitation period of either two or six years, depending on the nature of the claim. Section 3 of the previous Act read as follows:
(2) After the expiration of 2 years after the date on which the right to do so arose a person may not bring any of the following actions:
(a) subject to subsection (4) (k), for damages in respect of injury to person or property, including economic loss arising from the injury, whether based on contract, tort or statutory duty; […]
(5) Any other action not specifically provided for in this Act or any other Act may not be brought after the expiration of 6 years after the date on which the right to do so arose.
Section 3(2)(a) set a two-year limitation period for causes of action involving “injury to person or property”. Section 3(5) set a six-year limitation period for “any other action” not specifically provided for elsewhere in the Act.
The current Limitation Act came into force on June 1, 2013. Section 6(1) of the “new” Limitation Act provides a “basic limitation period” of two years as follows:
(1) Subject to this Act, a court proceeding in respect of a claim must not be commenced more than 2 years after the day on which the claim is discovered.
The British Columbia Supreme Court held in Zadi v. The Owners, Stata Plan LMS 3464 that alleged misrepresentations in a pre-purchase property disclosure statement had been made in 2005/2006, and were subject to the “old” limitation period of six years; as that period had expired by 2013, the claim was struck as out of time.
A complete analysis of when a limitation period expires continues to require consideration of the date the cause of action arises and the date when it was “reasonably discoverable”, both of which are beyond the scope of this paper. These issues can be particularly problematic in the case of latent defects causing either physical damage or economic loss.
VI. STRATA CORPORATIONS AND THEIR STATUTORY DUTY TO OBTAIN PROPERTY INSURANCE
1. INTRODUCTION
On July 1, 2000, the Act and the Strata Property Regulation, (the “Regulations”) repealed and replaced the Condominium Act, significantly revising the strata property legislation that had governed strata developments in British Columbia for over 35 years. The provisions in the Act and Regulations dealing with insurance represent a significant part of the overall reforms introduced by that new legislation.
This portion of this paper outlines the insurance provisions in the Act aimed at increasing accountability, and clarifying and expanding upon the duties, powers, and obligations of the strata corporation, which have impacted:
(a) the obligation of the strata corporation to obtain and maintain property insurance; and
(b) the respective obligations of the strata corporation and the strata unit owners to repair and maintain the common elements and individual strata units.
This portion of the paper discusses in detail how these statutory changes affect property insurers’ management of strata corporation claims.
2. STRATA CORPORATION PROPERTY INSURANCE
A) The Insurable Interest
According to general principles of insurance law, an entity must have an insurable interest in property before it can insure that property. In British Columbia, a strata corporation’s authority to insure strata property arises from s. 153 of the Act, which simply states that a strata corporation has an insurable interest in any property insured under sections 149 or 152. Allowing the strata corporation to obtain insurance on all common property provides an efficient means to ensure that all owners have adequate, affordable insurance and avoid prejudice to other owners that would result if an owner failed to obtain insurance or was unable or unwilling to pay for repairs to his own unit.
The Act empowers and obliges the strata corporation to maintain certain types of insurance for the benefit of the named insureds. Sections 149(1)(a)-(d) of the Act require a strata corporation to obtain and maintain property insurance on common property, common assets, buildings shown on the strata plan, and fixtures built or installed on a strata plan if the fixtures were built or installed as part of the original construction on the strata plan (“original fixtures”).
“Fixtures” are defined in s. 9.1(1) of the Regulation as including the original floor and wall coverings and the electrical and plumbing fixtures, excluding appliances, furniture, and other items that can be removed without damage to the building. Section 9.1(1) states:
9.1 (1) For the purposes of sections 149 (1) (d) and 152 (b) of the Act, “fixtures” means items attached to a building, including floor and wall coverings and electrical and plumbing fixtures, but does not include, if they can be removed without damage to the building, refrigerators, stoves, dishwashers, microwaves, washers, dryers or other items.
Although there has been no case law in British Columbia on the question of what constitutes a “fixture” under the Act, ss. 99(1) and (4) of the Ontario Condominium Act, 1998 state that condominium corporations need not insure improvements made to a condominium unit. By analogy, it would seem that s.149 of the Act and s.9.1 of the Regulations obligate a strata unit owner to insure improvements, or anything installed, or upgraded by or on behalf of the strata owner, and the strata corporation only has to obtain insurance on original fixtures installed by the developer.
Sections 149(4)(a)-(b) of the Act require the strata corporation to obtain full replacement value property insurance against major perils (as defined in s. 9.1(2) of the Regulations and discussed further below) and any other perils specified in the bylaws. The obligation to insure to “replacement value” means replacement cost. Replacement cost is defined as the amount it costs to actually repair and/or replace the damaged structure at the date the damage occurred with new materials of like kind and quality, without physical depreciation that may have occurred over time.
If a strata corporation does not comply with its obligation to actually repair and/or replace a damaged structure, the coverage reverts to “actual cash value”. The concept of “actual cash value” reflects replacement cost after physical depreciation and may also take account of other economic factors.
B) The Definition of Major Perils
“Major perils” is defined in s. 9.1 of the Regulations as the perils of fire, lightening, smoke, windstorm, hail, explosion, water escape, strikes, riots or civil commotion, impact by aircraft and vehicles, and vandalism and malicious acts. However, it does not include floods or earthquakes. It is up to the strata corporation whether to insure against those perils.
As a matter of commercial reality, insurance against “major perils” to the replacement value required by s. 149 of the Act is invariably subject to a deductible. Replacement cost insurance can exist with a deductible provided the deductible is reasonable in the circumstances. However, if the deductible is excessive it could be argued that the strata corporation failed in its duty to obtain insurance.
Ultimately, Part 9 of the Act only makes strata corporations responsible for bearing the risk of damage to property from a “major peril” and liability for bodily injury. A strata corporation may also obtain and maintain insurance with respect to a peril or liability not referred to in ss. 149 or 150, but is not required to do so.
3. THE OBLIGATION TO MAINTAIN AND REPAIR
Strata corporations and individual strata unit owners share between them three distinct duties with respect to damage and insurance:
a) the duty to repair, reflected in s. 72, as may be altered by the strata corporation bylaws;
b) the duty to obtain and maintain insurance placed upon the corporation by s. 149 of the Act, discussed above; and
c) liability for the costs of repairs which is dealt with by the strata bylaws, rules and regulations.
A) Section 72 of the Act
Section 72(1) of the Act states that the strata corporation must repair and maintain common property and common assets. However, s. 72 of the Act also permits a strata corporation to pass bylaws making them responsible for specific portions of a strata lot or to make an owner responsible for the repair and maintenance of limited common property. Section 72 also permits strata corporations to delegate repair and maintenance of common property to a unit owner, but only in circumstances identified in the Strata Property Regulation; however, the Regulation does not currently enumerate any such circumstances, so effectively, strata corporations cannot delegate such duties.
Strata corporations may establish a regime for liability for the costs associated with the obligation to repair and maintain the common property. Bylaw 8 of the Schedule of Standard Bylaws, appended to the Act, suggest a standard bylaw which addresses everything from chimneys to stairs and balconies. Ultimately, s. 72 of the Act can be used by a strata corporation to establish who is responsible to maintain and repair common property before a conflict arises.
However, a strata corporation cannot shift its statutory obligation to obtain and maintain property insurance as required by s. 149 of the Act indirectly to the strata unit owner through subrogation. In Beck’s Mechanical, discussed above, the court barred a subrogated claim by a property insurer against a negligent owner. In that case, the building suffered fire damage from the careless use of a torch during plumbing repairs. The named insured under the policy was the strata corporation, acting in its capacity as trustee for the individual owners. The Court determined that the owner, as an additional insured under the policy, was immune from the insurer’s subrogated claim because property insurers cannot subrogate against their own insureds.
Further, in Lalji-Samji v. Strata Plan VR-2135, a strata corporation advanced a subrogated claim against a strata unit owner for the cost of repairing a carpet that the owner had bleached. The strata corporation should have obtained insurance that would have covered the loss, but it had not. The strata corporation’s claim was disallowed because had the strata corporation insured for the loss, as it was obligated to, the owner would have been a named beneficiary under the property policy.
The Alberta Court of Appeal confirms that a strata corporation’s property insurer cannot subrogate against a strata unit owner even if the unit owner’s liability arises solely from conduct unrelated to the ownership of the unit. In other words, mere ownership provides full tort immunity regardless of the precise role exercised by the unit owner that ultimately gives rise to legal liability provided that the ensuing damage is to the common property. In Condominium Corp No. 9813678 v. Statesman Corp., a developer’s subcontractor negligently started a fire during the construction of a condominium development. The insurer paid out the claim and subrogated against the developer. The insurance policy stated that the insurer waived its subrogation rights against unit owners. The developer owned two units in the development. The insurer argued that it was entitled to subrogate against the developer and subcontractor because they were not being sued “in the capacity” of a resident. The Court ruled that the subrogation waiver applied despite the multiple “hats” of the owner/developer and stated that in such cases the insurer can always negotiate exceptions to coverage or to subrogation waiver clauses before it issues a policy.
Since a unit owner is a named insured under a strata corporation’s insurance policy, a unit owner is also covered by the liability coverage obtained by a strata corporation. In Ghag Enterprises v. Strata Corp. K-68, a tenant child residing in a strata unit fell off her bicycle because of a large depression in the unit’s driveway. The child was successful at trial and the unit owner sought indemnity for its costs of defending the tort action and for any damages it was liable to pay in the tort action from the strata corporation’s liability insurer. The Court decided that the liability insurer was required to indemnify the unit owner because it was deemed to be a named insured under the policy by virtue of s. 54(3) of the Condominium Act, which is essentially the same as s. 155 of the Act.
Accordingly, if an insurer who issues a property policy to a strata corporation also provides liability coverage, it will not only be prevented from subrogating against a unit owner who causes property damage covered by the policy, but it may also be liable to provide liability coverage to the unit owner for a tort claim. However, the obligation of a strata corporation’s liability insurer to provide liability coverage to a unit owner would likely be shared with the unit owner’s liability insurer, if the unit owner had his or her own coverage.
B) Deductible Recovery from a Named Insured
Whether a strata corporation can recover a deductible from a strata owner depends upon the provisions of the applicable statute and the strata corporation’s bylaws, rules and regulations.
Section 158(1) of the Act states that, subject to the Regulations, the payment of an insurance deductible in respect of a claim on the strata corporation’s insurance is a common expense to be contributed to by means of strata fees calculated in accordance with sections 99(2) or 100(1). Further, s. 158(2) specifically provides that subsection (1) does not limit a strata corporation’s ability to sue an owner in order to recover the deductible portion of an insurance claim if the strata lot owner is “responsible” for the loss or damage that gave rise to the claim. However, s. 158 merely permits a strata corporation to recover an insurance deductible from a unit owner who is “responsible for” damage to the common property. A strata corporation must also have a by-law which specifically permits this type of recovery in order to avail itself of the remedy contained in s. 158.
In Stevens et al. v. Simcoe Condominium Corporation No. 60, a case decided under the Ontario legislation, an air conditioner in one unit caused damage to another. The condominium corporation sought to recover the deductible from the owner of the air conditioner. Under a declaration of the condominium corporation, the corporation had established a regime of liability for allocating the costs of repair. The condominium corporation was required to obtain and maintain insurance against major perils and the insurance was subject to a deductible clause. The strata unit owners were required to maintain and repair their units and to be responsible for the repairs of other units if their failure to maintain their own unit caused damage to another. Similarly, the declaration also required the owners to indemnify and save harmless the strata corporation for the costs and damage that the corporation may suffer from an act or omission of the owner. The corporation had also adopted a specific rule with respect to damage caused by an air conditioner. The Court held that the strata unit owner was responsible for the deductible. While the strata corporation had a duty to maintain property insurance for the type of loss at issue, the strata bylaws clearly made the offending owner liable to pay the deductible.
In considering whether the Act, bylaws, rules and regulations of a strata corporation bar a strata corporation’s claim against a named insured for a deductible, the question is whether by contracting for insurance with a deductible the owners, through the strata corporation, implicitly agreed with each other to “self-insure” the amount of the deductible as a common expense, or intended that the owner responsible for any damage would bear the deductible. If a strata corporation chooses to limit liability to losses caused by a strata unit owner’s negligence, then that is what the courts will limit their ability to recover to.
In Reilly v. Freedom Gardens Condominium Ass., a unit owner’s dog chewed the waterline supplying a toilet tank in a strata unit, causing it to rupture and flood the unit but not any adjacent units. The trial judge held the unit owner responsible to pay the insurance deductible, as the sole damage was to his unit and he was obligated by Alberta condominium property legislation to repair his own unit. However, on appeal, the Court concluded that the bylaws only required an owner to cover the deductible if damage was caused by the owner’s “acts or omissions”; on the facts, the owner had not been negligent, so he did not have to pay the deductible.
The following three cases in British Columbia have considered whether s. 158(2) of the Act expands the strata corporation’s ability to sue a strata unit owner for repayment of a deductible beyond circumstances where the strata unit owner is at fault, on the basis that the word “responsible” in s.158(2) is not equivalent to negligence.
In Strata Plan KA 1019 v. Keiran, a strata corporation sought recovery of the deductible it had paid under the strata’s insurance policy after a pipe burst in the defendant strata owner’s unit. The pipe burst because of high acid levels in the local water, not from any negligence on the part of the unit owners. The Court noted that the pipe was not located within common property but “within the owners’ realm of responsibility, as would be the case with any homeowner”. The Court determined that the requirement in s. 158 that the owner be “responsible for the loss” meant a “situation where the homeowner had the duty to repair and maintain” the property. As such, the corporation did not have to prove the owner was at fault in order to recover the deductible.
The Court further considered whether the unit owners’ liability insurer had to indemnify the unit owners for the strata corporation’s costs in repairing the unit, totalling $3,787.80. The Court noted that $2,500.00 of that amount was covered by the unit owners’ insurance policy, which provided that “We will pay up to $2,500 for that part of an assessment made necessary by a deductible in the insurance policy of the Condominium Corporation”. The unit owners’ insurer paid this portion directly to the strata corporation. The strata corporation sought recovery of the remaining $1,287.80 from the unit owners, who sought coverage under their policy for damage caused by a covered peril, water escape.
The Court decided that the claim against the unit owners was not for damage to common property, but for “damage in respect of which an owner is personally and primarily responsible. It is not ‘made necessary’ by the strata corporation’s deductible, rather by the fact of the owner’s primary responsibility for damage to the owner’s unit.” As such, the Court found that the damage was caused by an insured peril (water escape) for which coverage should be provided, and was not within the meaning of the “additional coverage” for a deductible assessment.
On appeal to the British Columbia Supreme Court, the Court noted that “It is clear that being responsible is not the same as being negligent” and that strata unit owners are “responsible” for what happens in their units. The Court agreed with the reasoning of the lower court and found that the water escape which occurred in the strata unit was an event for which the unit owners were “responsible”. No fault need be shown on the part of the unit owner.
In Strata Plan LMS 2835 v. Mari, a faulty switch in a washer located in the defendants’ strata unit failed, causing water damage to the building totalling $9,888.86. The strata corporation sued the owners to recover the $5,000 deductible under the strata corporation’s property policy. The corporation was successful in Small Claims Court. On appeal, the Supreme Court agreed that “responsible for”, as used in s. 158(2) of the Act, meant “legally accountable or answerable”, in the sense of being a conclusion or determination, regardless of the type of action or non-action or degree of fault involved. Rather, the owners were liable for the deductible merely because they “caused” the washer to be used. No finding of negligence was required.
In making this finding, the Supreme Court distinguished the Alberta decision in Reilly on the basis that the Alberta condominium legislation did not contain a similar provision to s. 158(2) of the Act and the condominium’s by-laws in that case required an owner be at fault to be liable for the deductible. The Court also followed the Ontario decision of Stevens, since the Ontario legislation was similar to British Columbia’s and “it would be unfair to impose liability on all owners for what would ordinarily be insured by an owner of a particular unit if that owner owned the unit as a single family dwelling.”
Finally, in Owners Strata Plan BCS 1589 v. Nacht, a water pipe failed in a strata unit resulting in damage to other strata units and common property for a total repair cost of $87,000. The Strata Corporation sought to overturn the British Columbia Civil Resolution Tribunal’s (“CRT”) decision in finding that proof of negligence was required in order for the Strata Corporation to recover the insurance deductible, as the strata unit owners were found to be not negligent in this case.
The CRT acknowledged that previous decisions have found s.158(2) of the Act “to expand the strata corporation’s ability to sue an owner for repayment of a deductible beyond circumstances where the owner is at fault, on the basis that the word “responsible” in s.158(2) is not equivalent to negligence”. The CRT distinguishes this case from previous decisions in that the specific language of a strata bylaw applies, whereby the bylaw provides that “the standard to be applied in determining the owner’s responsibility for loss or damage is one of negligence”.
In appealing to the British Columbia Supreme Court, the Strata Corporation asserts that strata bylaws cannot narrow the application of s. 158(2) of the Act. The Court held that the CRT’s interpretation and application of the Act and the Bylaw were reasonable, and did not “meet the threshold of being deeply flawed such that it falls outside the range of reasonable statutory interpretation”.
4. SUMMARY
The issue of liability for a deductible is determined by analogy to the prevailing practice in the insurance industry which is to shift the deductible portion of the loss to the party causing the loss as a means of controlling insurance claims and in accordance with the provisions of the bylaws and rules of the particular strata corporation. There is no universal rule and strata corporations may design their own particular scheme.
However, even though the strata corporation’s property insurer cannot subrogate against a unit owner for loss to the common property (i.e., for “insured losses”), the strata corporation can recover its deductible from an owner who is “responsible for” an insurance claim (i.e., for any “uninsured losses” such as the deductible). A strata corporation can also recover amounts incurred to fix damage within the property insurance deductible from an owner who is “responsible for” the damage. Unless a strata bylaw provides specific language on the standard to be applied, the concept “responsible for” is broader than negligence and does not require fault on the part of the unit owner. Lastly, a unit owner’s insurer may have to indemnify the unit owner even if the amount of the loss is greater than the deductible coverage available in the unit owner’s policy if the loss is caused by an “insured peril”.
VII. HOW DO THE STRATA CORPORATION’S INSURER AND STRATA UNIT OWNER’S INSURER DIVIDE THE LOSS IF BOTH BUILDING AND UNIT CONTENTS ARE DAMAGED?
Before the Act’s proclamation it was unclear how responsibility for loss to common and unit property should be allocated between the respective property insurers of a strata corporation and strata unit owner. The previous Condominium Act mandated that the strata corporation provide coverage for “buildings, common facilities and any insurable improvements owned by the strata corporation”. This resulted in confusion when considering whether a certain portion of an individual strata unit was an insurable improvement and also resulted in potential for overlapping coverage.
To address this confusion, the drafters of the Act added a definition for “fixtures”. The new definition, designed to distinguish “original” and later-installed fixtures, was intended to enable the property insurers of the strata corporation and the strata unit owner to better appreciate their respective indemnity obligations.
One would expect then, that the question of how the property insurers of a strata corporation and strata unit owner should respond to a loss involving both building and contents damage would elicit a straightforward and complete answer. However, this question continues to generate considerable industry discussion and confusion, particularly when the loss adjustment involves a fixture “originally installed by the developer” that has subsequently been altered in some way by the strata unit owner.
We discuss below the ambiguities and resulting analytical problems that continue to confront both property insurers and insureds when dealing with strata property losses involving both the building and unit contents. At the same time, we highlight the obvious need for judicial and/or legislative guidance to address this uncertainty. We also offer advice regarding a possible approach to be taken by industry players who confront this type of problem.
1. INSURANCE COVERAGE REQUIRED OF STRATA CORPORATION
Section 149 of the Act sets out the breadth of insurance coverage required of the strata corporation, i.e., to ensure that property insurance is in place for the common property, common assets, and any buildings shown on the strata plan. As well, the strata corporation’s insurance must cover any original “fixtures” installed by the developer of the condominium project as part of the original construction on the strata plan. Fixtures are defined in section 9.1 of the Regulations as follows:
9.1 Definitions for Section 149 of the Act
(1) For the purposes of Section 149(1)(d) of the Act, “fixtures” means items attached to a building including floor and wall coverings and electrical and plumbing fixtures, but does not include, if they can be removed without damage to the building, refrigerators, stoves, dishwashers, microwaves, washers, dryers or other items.
It is apparent from this definition that the key consideration is whether the fixture was installed in the original construction or during a unit owner’s subsequent renovations. The addition of a definition for “fixtures” is meant to avoid any confusion as to whether fixtures are to be insured by the strata corporation as opposed to the individual strata unit owner.
Further to the legislative requirements outlined above, the typical strata corporation property policy provides coverage for both “building” and “contents”. The word “building” is usually further defined by the property policy to include “permanent fittings and fixtures attached to and forming part of the building(s)”. With respect to “contents”, coverage is usually only afforded to the “contents” that the strata corporation either owns or is legally obligated to insure and that are situate on the “premises”. Of particular importance, the strata corporation policy typically exclude coverage for loss or damage to “property belonging to strata plan owners” as well as to “improvements and betterments to individual units made or acquired by the owners of such units”.
An example of typical wording in a strata corporation property insurance policy is:
Improvements and betterments, as defined, made by, or for, or at the expense of an owner or tenant of a strata unit or dwelling unit.
A typical definition of betterment and improvement would be:
…physical structural changes, up-grading or enhancing of an individual strata lot or dwelling unit made by or for an individual owner of said strata lot or dwelling unit. For the purposes of this definition, improvements and betterments does not include:
i. Physical structural changes, up-grading or enhancement declared by the said owner and the value of which is included in the most recent appraisal available to the Insurer;
ii. Fire protective equipment.
2. INSURANCE COVERAGE AVAILABLE TO THE STRATA UNIT OWNER
Section 161 of the Act delineates the extent of insurance coverage which a strata unit owner may purchase, but is not required to purchase. Pursuant to this section, a strata unit owner may obtain and maintain insurance for the following:
(a) loss or damage to the owner’s strata plan and fixtures not insured by the strata corporation (back up insurance if the strata corporation does not obtain the required insurance);
(b) fixtures in the owner’s strata plan that were not built or installed by the owner developer as part of the original construction;
(c) improvements to fixtures built or installed on the strata plan by the owner developer as part of the original instruction;
(d) loss of rental value of the owner’s strata plan in excess of insurance obtained and maintained by the strata corporation; and
(e) liability for property damage and bodily injury, whether occurring on the owner’s strata plan or on common property.
Section 162 of the Act allows for a right of contribution between the strata corporation property policy and a strata unit owner’s property policy if the policies are issued for the same property. While this section attempts to avoid overlapping coverage between the strata corporation’s property policy and that of the strata unit owner, the potential for overlap remains.
Although strata unit owners are not legally obligated to purchase property insurance, most do. The typical strata unit owner property policy provides coverage for personal property as well as “unit improvements and betterments made or acquired by the strata plan owner”. Often coverage for such improvements and betterments is extended to items like materials and supplies on the premises for use in such improvements and betterments, as well as to items such as carpeting, light fixtures, and wallpaper.
Typical wording in unit owner policies include:
With respect to Condominium Unit Owners, this Insurance includes an additional amount of coverage of up to 100% of the limit in Coverage C, for unit improvements and betterments installed, made or acquired by the Insured, including
1) any building, structure or outdoor domestic water container, including swimming pools, hot tubs, saunas and attached equipment on the premises;
2) materials and supplies on the premises for use in such improvements and betterments.
We insure improvements and betterments to your Unit made or acquired by you, including any building, structure or swimming pool as well as materials and supplies intended for use in such improvements and betterments, all while on the premises reserved for your exclusive use or occupancy. We insure only damage directly resulting from an Insured Peril.
If you repair or replace the damage to the improvements and betterments within 180 days from the date of the occurrence, we will pay the actual expenses incurred by you. Otherwise, we will pay the actual cash value of the damage at the date of the occurrence. However, we will not pay more than an additional 25% of the dollar amount showed under “Value” in the corresponding Condominium Section of your Certificate of Property Insurance.
We insure unit improvements and betterments made or acquired by you, for an additional amount of up to 100% of the sum insured for Coverage C – Personal Property as shown on the Declaration page, including:
a) any building, structure or swimming pool on the premises;
b) materials and supplies on the premises for use in such improvements and betterments;
c) items such as wall-to-wall broadloom, light fixtures and wallpaper.
Unit owner policies also typically provide three other distinct types of coverage:
(a) coverage for the strata corporation’s property insurance deductible assessed against the unit owner;
(b) coverage for special assessments levied by a strata corporation; and
(c) contingent excess coverage if the strata corporation’s policy does not cover an entire loss, whether because the limits are inadequate or because the loss is excluded under the policy.
Examples of typical wordings for deductible and special assessment coverage are:
1) Loss Assessment Coverage – This Insurance covers up to 250% of the limit in Coverage C, for the Named Insureds share of any valid special assessment levied against the Named Insured by the Condominium Corporation in accordance with its governing rules when such assessment is made necessary by direct loss or damage to the collectively owned condominium property arising from a peril insured in this Insurance. When the assessment is made necessary by a deductible in the insurance policy of the Condominium Corporation, this Insurance covers up to the full limit of Loss Assessment.
We will provide an additional amount of insurance up to 25% of the dollar amount shown under “Value” in the corresponding Condominium Section of the Certificate of Property Insurance for your share of special assessments levied against the Unit Owners by the Condominium Corporation if the assessment is:
a) valid under the Condominium Corporation governing rules, and
b) made necessary because of direct loss by an Insured Peril to the condominium property owned collectively by the Unit Owners.
We will not pay more than $500 for that part of an assessment made necessary by a deductible in the insurance policy of the Condominium Corporation.
We will pay that portion of the common expense to a total of $10,000 made necessary by a deductible in the insurance policy of the “Condominium Corporation” for damage caused to the owner’s unit which is charged back as a result of an act or omission on the part of the “unit” owners contributing to an insured loss.
We will pay an additional amount of up to 250% of the sum insured for Coverage C – Personal Property, as shown on the Declarations page, of your share of any special assessment if:
a) the assessment is valid under the Condominium Corporations’ governing rules; and
b) it is made necessary by a direct loss to the collectively owned condominium property caused by an Insured Peril in this form.
We will not pay more than $25,000 for that part of an assessment made necessary by a deductible in the insurance policy of the Condominium Corporation.
Typical wording in a unit owner policy for contingent excess insurance include:
2) Unit Additional Protection – This Insurance covers up to 250% of the limit in Coverage C for Unit (excluding improvements or betterments) if the Condominium Corporation has no insurance, its insurance is inadequate or it is not effective, arising from a peril insured in this Insurance. “Inadequate” includes a deductible in the insurance policy of the Condominium Corporation. Any amount recovered from any insurance covering the collective interests of the Unit owners is deducted from the amount of the loss prior to the application of this insurance.
We will provide an additional amount of insurance up to 25% of the dollar amount shown under “Value” in the corresponding Condominium Section of the Certificate of Property Insurance to insure your interest in your Unit, excluding improvements and betterments, against direct loss or damage caused by an Insured Peril and glass which constitutes part of your Unit, including glass in storm windows and doors, against damage caused by accidental breakage to the limit stated above for Contingent Insurance, but only to the extent that:
a) the Unit is not insured by the Condominium Corporation; or
b) the insurance placed by the Condominium Corporation does not insure against the peril causing the loss or damage or the limit of insurance is inadequate to cover the loss or damage.
We will pay as follows:
– if the property is repaired or replaced within 180 days from the date of the occurrence, using similar materials, we will pay the actual expenses incurred by you for such repairs or replacement;
– otherwise, we will pay the actual cash value of the damage at the date of the occurrence.
We will no pay any portion of the loss resulting from a deductible in the insurance Policy of the Condominium Corporation.
Any recovery you are entitled to for loss or damage to your Unit from any insurance covering the Unit Owners collective interests, will be deducted from any amount payable under the Contingent Insurance.
We will pay the amount shown on the Policy Declaration Page for damage to the condominium “unit” described, excluding your improvements and betterments to it, if the “Condominium Corporation” has no insurance, its insurance is inadequate, or it is not effective.
We insure your unit, excluding your improvements and betterments to it, if the Condominium Corporation has no insurance, its insurance is inadequate or it is not effective, for an additional amount of up to 250% of the sum insured…
We do not insure losses or increased costs of repair due to the operation of any law regulating the zoning, demolition, repair or construction of buildings and their related services.
3. RESULTANT AMBIGUITIES AND THE TRADITIONAL APPROACH TO PROBLEM
The previous two sections have outlined the respective obligations of the strata corporation and the rights of the strata unit owner with regards to insurance, along with the typical coverage afforded to each by their property insurers. In order to highlight the ambiguities and resulting analytical problems that remain, this discussion will now turn to the application of a hypothetical factual scenario to the foregoing legislative and property policy provisions.
Consider a scenario where a loss occurs in a strata unit as a result of flooding caused by a defective toilet and damage is caused to both flooring and carpeting. For the purposes of this example, accept that the building developer installed the carpeting at a cost of $20.00 per square yard at the time of construction, and that five years later the unit owner replaces it with better quality carpet at a cost of $40.00 per square yard. As between the two property insurers involved, which is responsible for what portion of the costs to repair the flood damage?
In this scenario the following outcomes are possible:
a) The entire carpet is considered a “betterment” because (i) it is more expensive; and (ii) was not installed by the original contractor.
b) The strata unit owner’s policy covers the increased cost of the more expensive carpet, and the original cost is covered by the strata corporation’s policy (i.e., $20.00 per square yard borne by each insurer).
c) The entire carpet is still considered a “fixture” and the replacement cost is borne entirely by the strata corporation’s property insurer.
While the strata corporation property insurer is not required to insure improvements or betterments made or acquired by strata unit owners, unfortunately, neither the Act nor the respective policies define the terms “betterment” or “improvement”. To further complicate matters, no British Columbia court has considered this ambiguity, and when the replacement of a fixture will be considered a betterment or improvement currently remains unresolved.
In Boychuk v. Essex Condominium Corp. No. 2, the Ontario District Court dealt with the meaning of “improvement” in a different context. The Court was examining the statutory duty of the board under the Condominium Act of Ontario to obtain approval of strata unit owners for “improvements” to the common property. In this context the court stated that:
Improvement carries with it the idea of betterment of an existing facility or enhancement in value, not merely replacement of something which was already there and worn out.
The court is suggesting that a qualitative change to a fixture must so fundamentally alter its essential characteristics before the change will move from being a mere “replacement” to being an “improvement”.
Further guidance can be found in Black’s Law Dictionary which provides the following definition of “improvement”:
A valuable addition made to property (usually to real estate) or an amelioration in its condition, amounting to more than mere repairs replacement, costing labour or capital, and intended to enhance its value, beauty or utility or to adapt it for new or further purposes.”
Applying the foregoing factual scenario to the relevant legislative and property policy provisions, and keeping in mind Black’s definition, as well as the court’s comments respecting the idea of “improvement” in Boychuk, it could be argued that the “upgraded” replacement carpet should properly be construed as a “betterment” or “improvement” for which the strata corporation property insurer need not respond pursuant to the property policy exclusions.
It is worth noting that the traditional approach of the insurance industry in dealing with this issue has been to use the combined approach articulated in the Agreement of Guiding Principles (Property Insurance) which was developed in 1984 and which is administered by the Insurance Bureau of Canada. Section E of this Agreement provides guidelines for payments under condominium insurance policies. Under Section E, signatories have agreed that the strata corporation property policy should pay for the cost to restore the unit to its original condition, and that the strata unit owner’s property policy should cover any excess cost associated with replacing a replacement fixture of higher value or better quality.
Presumably then, many insurance companies have been collecting premiums based upon the expectation that the strata corporation’s property policy may be called upon to replace an improvement to its original condition, and that the strata unit owner’s property policy would only be called upon to contribute to any excess cost.
On this basis, some argue that to change the nature of these policies so that the burden of coverage falls exclusively upon the strata unit owner would mean that property insurers of strata corporations might experience a windfall, and property insurers of strata unit owners might experience a shortfall. However, in the combined approach, the strata corporation property insurer will be responsible for the majority of the cost of strata unit owner’s fixtures, even after they have been replaced with an improvement. One wonders whether the drafters of the Act intended this result. One also wonders whether a judiciary directly confronted with this result will condone it.
4. ABSENT JUDICIAL OR LEGISLATIVE REFORM, HOW CAN PROPERTY INSURERS RESOLVE THE AMBIGUITIES?
The root of this problem lies in the failure of most strata and unit owner policies to provide a comprehensive definition of the term “improvement and betterment.” This omission is particularly apparent in the case of unit owner policies which fail to provide even cursory definitions.
On the whole, strata corporation policy wordings do not fare much better. A typical property policy definition reads as follows:
“Improvements and Betterments” means physical structural changes, up-grading or enhancing of an individual Strata Lot or Dwelling Unit made by or for the individual owner of said Strata Lot or Dwelling Unit.” For the purposes of this definition, Improvements and Betterment’s does not include fire protective equipment.”
[emphasis added]
While the words “upgrading” or “enhancing” provide some guidance, the above definition nonetheless fails to resolve the ambiguities discussed above. This is more evident upon comparison to a more comprehensive definition from a different wording:
“Improvements and Betterments” means physical structural changes, up-grading or enhancing of an individual Strata Lot or Dwelling Unit made by or for the individual owner of said Strata Lot or Dwelling Unit. For the purpose of this definition, Improvements and Betterments does not include:
i) Physical structural changes, up-grading or enhancement declared by said owner and the value of which is included in the most recent appraisal available to the Insurer;
ii) Any physical structural changes, up-grading or enhancement made prior to the purchase or acquisition of the said Strata Lot or Dwelling Unit by the present owner at the time of loss or damage.
[emphasis added]
Why is the latter definition more helpful? Let us revisit the factual basis behind our original scenario and add one twist: the unit has since been sold to a second owner who purchased the unit after the original carpeting had already been replaced by the first owner. Applying the latter policy definition to this circumstance, it is clear that the strata corporation insurer is solely responsible to respond to the loss given that the renovation took place “prior to the purchase or acquisition of the Strata Lot by the present owner.”
Further, by expressly excluding those owner renovations whose value has been declared and included in the strata corporation’s most recent appraisal, the latter definition is also helpful because it addresses the industry concern that strata corporation insurers might experience a windfall where the replacement is deemed an improvement and betterment and the unit owner insurer is called upon to cover the entire loss.
5. SUMMARY
In considering the question of how property insurers of a strata corporation and unit owner should respond to a loss involving damage to both building and contents, the court will look to the applicable legislation and relevant policy provisions for guidance. This paper has highlighted the problems the court will run into when asked to resolve this issue. To date, in Canada, the question has not been directly considered by the courts, butit will likely arise soon given the increasing numbers of urban and suburban dwellers who enjoy this form of property ownership.
In the meantime, insurers should consider revising their policy wordings to address the factual scenarios discussed above, in order to increase the likelihood that any ambiguities are resolved in their favour.
VIII. DOES A STRATA CORPORATION REPRESENTATIVE HAVE THE AUTHORITY TO LEGALLY BIND THE STRATA CORPORATION?
For the insurer it is important to appreciate that the strata corporation can only act on a special resolution of the strata unit owners or by following the dictates of the strata council, which is ultimately responsible to the owners and must act within the confines of the Act and bylaws. For that reason, an insurer or an adjuster ought to be extremely careful in purporting to settle a property or liability claim with either a strata corporation or a management company retained by the strata corporation to conduct its business. Problems can arise by relying solely upon a policy’s terms without also considering the rules within which strata corporations must operate. For example, in most “all-risk” property policies written in British Columbia is a provision which states:
The Council of the Strata Corporation shall have the exclusive right to adjust any loss with the Insurer(s), and the owner of a damaged Strata plan shall be bound by such adjustment, provided, however, that the said Council may in writing authorize an owner to adjust any loss to his lot with the Insurer(s). (emphasis added)
The strata unit owners are not a party to the strata corporation’s insurance policies and could potentially challenge the validity of a settlement as not binding the strata corporation if it appears the corporation entered the settlement without jurisdiction. To guard against this eventuality, insurers should stipulate that the terms of the settlement be conditional upon proof of one or more of the following:
a) a special resolution of the strata unit owners ratifying the terms of the settlement;
b) proof of a prior special resolution of the strata unit owners that the strata corporation is empowered or delegated the authority to enter into any settlement without limitation as to amounts; or
c) proof of a prior special resolution of the strata unit owners that an agent has been appointed to conclude a settlement and has the actual authority to bind the strata corporation and the strata unit owners.
Except in emergencies or after the bylaws are amended, a strata council cannot, without the consent of the strata unit owners, authorize an expenditure exceeding $2,000 which was not set out in the annual budget and approved by the owners at the general meeting. To appreciate the practical difficulties this poses one need only examine the decision in Re Blunt and Strata Corporation VR45. The Court determined that the strata council had to obtain approval by special resolution for an expenditure of $2,400 to paint the building, even though the council had a duty to maintain and repair the strata building.
IX. SUMMARY AND CONCLUSION
Below is a brief summary of the topics covered in this paper, highlighting major points of the discussion:
1. The British Columbia Legislature has responded to the decision in Strata Plan LMS 888 and made clear through amendments to the Act that a special resolution is not required prior to a strata corporation commencing legal proceedings. However, a special resolution is still required at some point after commencing the action in order to provide finality to any settlement achieved.
2. There are alternative ways to commence a subrogated proceeding. With the consent of the other strata unit owners, an individual unit holder may commence a representative proceeding on behalf of the other owners pursuant to Rule 20-3 of the Civil Rules. The common law requires a common issue exist between the class members which makes the representative proceeding “just and convenient”. In typical subrogated proceedings on behalf of strata unit owners, this requirement is easily met.
3. Alternatively, a property insurer may commence a subrogated action in its own name if it obtains an assignment of the right of action from the individual strata unit owners. This course of action is subject to a pro-rata sharing of recovery with the strata unit holders for uncovered portions of the loss, and for the deductible paid by the strata corporation.
4. When considering a subrogated claim for property damage, the applicable limitation period is two years. Prior to June 1, 2013, the previous Limitation Act provided a limitation period of six years if the damage was caused by an internal defect which damages the thing itself. However, if the damage was caused by a negligent extrinsic act, then the limitation period remained two years.
5. The Act requires strata corporations to insure common property and common assets, including all the buildings on the strata plan, against “major perils” enumerated in the Regulations. Earthquakes are not listed as a “major peril”, although a strata corporation may elect to obtain additional coverage for that risk. The strata corporation must also have liability insurance.
6. Strata corporations are also obligated to maintain and repair the common property. However, the strata corporation may also delegate the duty to repair limited common property to individual strata unit owners. For example, responsibility for maintaining and repairing a sundeck used exclusively by one unit owner may be imposed upon that owner. Strata corporations cannot, however, delegate the obligation to maintain insurance on common property.
7. In cases where a strata unit owner is “responsible for” damage to the common property, the strata corporation may sue that owner for the deductible payable on the strata corporation policy. However, the strata corporation cannot sue the strata unit owner for the value of the loss, as unit owners are considered unnamed insureds on the strata corporation property policy.
8. Unless the specific wording of a strata bylaw states the requirement of negligence as the required standard, the strata corporation does not need to prove negligence or fault as against a unit owner to sue for recovery of the deductible. It need only show that the loss or damage originated from the unit owner’s property.
9. The strata corporation’s property policy will cover original “fixtures” inside individual strata owner’s suites. Strata unit owners’ property policies will cover “betterments”. It is unclear whether replacement of an original fixture with one of equal value is a betterment or a fixture, as those terms are undefined in the Act. If existing fixtures are replaced with upgraded fixtures (for example a pot lamp is replaced with a chandelier) then such a replacement would likely be a betterment, but if the replacement is of like kind and better quality (e.g., where a $20.00/square yard carpet is replaced by a $40.00/square yard carpet), both property insurers might have to cover portions of the loss.
10. When negotiating a settlement to a claim with a representative from the strata corporation, property insurers ensure that the representative has authority to act on behalf of the strata corporation. The strata corporation can pass a resolution to authorize an individual to act on its behalf in respect of the settlement, or that the settlement amount offered by the property insurer has been accepted by way of resolution.
APPENDIX A – DRAFT ASSIGNMENT AGREEMENT
1. Strata Plan VS 0000 is comprised of [# of buildings, # of units] located at 123 Misfortune Drive, Vancouver, B.C., including all adjoining lands as set out in the Strata Plan, including all common fixtures located thereon (the “Complex”), and including, in particular, a mixed commercial/residential building located at 345 Misery Lane, Vancouver, B.C., (the “Building”);
2. The Owners, Strata Plan VS 0000 were insured pursuant to a policy of insurance, [indicate certificate number, type of policy, named insured], which policy was in place from January 1, 2002 to January 1, 2003 (the “Policy”);
3. The Property Section of the Policy was underwritten by several insurers, namely ABC Insurance, CDE Assurance Company, and FGH Global, (collectively, the “Insurers”);
4. On January 2, 2002, an accident involving [provide general description] occurred causing damage to the Building (the “Loss”);
5. The damage to common and limited common property owned by the Owners, Strata Plan VS 0000 and insured pursuant to the Property Section of the Policy that was occasioned by the Loss was restricted to the Building and certain fixtures and/or appurtenances located immediately adjacent to the Building (the “Damaged Property”);
6. The Owners, Strata Plan VS 0000 contacted the Insurers following the Loss. The Insurers appointed an independent adjuster to adjust the Loss and facilitate restoration of the Damaged Property;
7. The Insurers indemnified the Owners in the amount of $1 million (One Million Dollars) including the cost of design professionals and construction contractors as well as other costs incidental to the restoration of the Damaged Property;
8. The limitation period to commence an action to recover damages for the Loss will expire on January 2, 2004.
9. The Owners were indemnified for the Loss by the Insurers and the Insurers therefore seek to commence an action in their own name to recover for the indemnity paid to the Owners pursuant to the Policy as a result of the Loss.
I ____________________________ am the owner of Unit ________ of Strata Plan VS 0000, which Unit is located within the Building damaged by the Loss.
The Building, including the common and limited common property forming part of the Building and any damaged fixtures and appurtenances adjacent thereto has, since the Loss, been restored, and the Owners have been indemnified for the full cost of the restoration by the Insurers.
In consideration of the payment to the Strata of $ 1 million (One Million Dollars) from ABC Insurance Company, CDE Assurance Company, and FGH Global, I __________________, (the “Assignor”) hereby make, constitute and appoint ABC Insurance Company, CDE Assurance Company, and FGH Global and their successor companies, as the case may be, as my lawful irrevocable assignees (the “Assignees”) in and to my legal and equitable rights and remedies against any person or entity which may be responsible for the Loss and against whom the Assignees may in their discretion choose to proceed to recover damages in respect of the cost associated with repairing the Damaged Property resulting from the Loss.
I have had the opportunity to seek legal advice in respect of this Assignment and confirm that I make this assignment voluntarily.
