Cedric Stephens | Insurance protection for property investments
ADVISORY COLUMN: RISKS & INSURANCE
QUESTION: I am a Jamaican living in Canada who is about to make a real estate investment in Kingston 6. I plan to buy a three-bedroom apartment in a condominium. The purchase will be funded from my resources and a loan from a financial institution. How can I protect my proposed investment using property insurance?
– W.A., Toronto
RISKS & INSURANCE: You have asked a relevant question about property insurance. This is especially because of the scores of multifamily residential complexes that are now being built and which are altering the St Andrew skyline.
The law governing this kind of housing development contains specific rules about insurance. It has been around since 1969. Few buyers take the time to read the original statute, The Registration (Strata Titles) Act or its amendment, which went into effect 41 years later.
The first law, among other things, imposed duties on the owners of strata lots, which is another way of describing what I call, multifamily complexes. One of those obligations is to “pay all rates, taxes, charges, outgoings, levies, (these words, I would argue, are broad enough to include insurance premiums) and assessments that may be payable in respect of his/her strata lot".
Another one is to “repair and maintain the strata lot, and keep it in a good state of repair”.
The law also created an entity called a ‘corporation’ for stratas. This is a legal vehicle in which all owners of individual units in the complex have an interest and which operates on their collective behalf. Section 5(1) lists nine functions of the corporation, six of which relate specifically to insurance. They are to:
• Insure and keep insured the building to the replacement value thereof against fire, earthquake, hurricane, and such other risks as may be prescribed unless the proprietors by unanimous resolution otherwise determine;
• Effect such insurance as it may be required by law to effect;
• Insure against such risks other than those referred to elsewhere in this subsection as the proprietors may, from time to time, by unanimous resolution determine;
• Subject to the provisions of Section 14, and to such conditions as may be prescribed, to apply insurance monies received by it in respect of damage to the building in rebuilding and reinstating the building so far as it may be lawful to do so;
• Pay premiums on any policies of insurance effected by it; and
• Keep in a state of good and serviceable repair and properly maintain the common property.
These clauses generally outline actions that the corporation must undertake to preserve the collective value of the investment; and take steps to ensure that if the buildings are damaged, funds are available to repair or rebuild for the benefit of all owners.
The lawmakers recognised that situations often arise where consumers do not buy sufficient insurance to properly protect themselves to save money. To prevent this, the law says that the building should be insured for its replacement value or cost.
These words mean, in an insurance context, the amount of money that the corporation must spend today, or in the future, to repair or replace the asset that was damaged or destroyed by an insured peril. The advice of building-cost experts like quantity surveyors or contractors is generally sought to calculate replacement costs for insurance purposes.
Insurance decisions are made and executed by the executive committee of the strata corporation on behalf of all proprietors. The buildings are insured under one property insurance contract,and the corporation is named as the policyholder. This means that you will not be required to have your own policy but must pay your share of the premium.
Double insurance is allowed for individual units to protect the interests of mortgage lending institutions.
The law says: “A policy of insurance authorised by this section and in respect of the building shall not be liable to be brought into contribution with any other policy of insurance, save another policy authorised by this section in respect of the same building.” As a result, owners end up paying twice for property insurance – once for the strata corporation’s property insurance and the second time for the mortgage lender.
Payment of the mortgage lender’s insurance premium ends when the mortgage has been repaid while that for the strata corporation goes on and on.
The best way to protect your investment is to get a seat at the table. This means getting elected to the executive committee.
I nearly wrote that this is unlikely to happen because you are living oversea, but time and space should be no obstacle because of advances in technology, which are exemplified by the trend of working from home. I do not know whether there is anything in the law to prevent you from doing this. I suggest that you speak with your attorney in Jamaica to explore what is possible.
Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: firstname.lastname@example.org