The condominium market has changed in recent years. Almost 12% of Quebec households live in a condominium—two out of five of them as renters; this represents a rise of approximately 30% over five years^[1]. Indeed, first-time buyers and retirees are increasingly choosing this type of housing. As massive condominium towers spring up in city centres, the claims ratio is exploding, with water damage accounting for the majority of claims.

These are a few of the reasons behind the changes insurers have made to how they evaluate risk in divided co-ownerships. This article will give an overview of how these changes affect deductibles and their repercussions on syndicates, in order to help brokers and agents effectively advise their clients.

The Evolution of the Deductible

“The deductible acts as a yardstick, dividing up a portion of the claim between the insured and the insurer,” explains damage insurance broker and vice-president at Gaudreau Insurance, Vincent Gaudreau. “Over ten years ago, it became clear that insurers were pricing their condominium products below the break-even point; in fact, sometimes they were priced at half the cost of rental-market products.” Since then, underwriting has been adjusted, in particular thanks to an increase in premiums, but also through fine-tuning deductibles according to the type of damage. “Whereas in the past, one deductible applied to the damages as a whole, today’s insurance contracts for syndicates include separate deductibles for various types of damage,” added Mr. Gaudreau.

According to Patrick Beauvais, damage insurance broker and Team Leader-Condo Protect Specialties, at BFL Canada, deductibles allow the insurer to assess the risk from two angles: “The insurer can demand a large deductible if it believes that the risk is high (for example, if the condominium building is situated near a waterway), or if it wishes to decrease the cost of the premium in order to better share the risk with the syndicate in the event of a loss.”  Worth noting are two of the main factors that may influence risk, and thus the amount of the premium and the deductibles: the building’s claims history and the number of floors and units.  

Over the past three years or so, Mr. Beauvais has observed that professionals have less leeway when negotiating insurance contracts for syndicates of co-ownership: “Based on its risk analysis, the insurer will generally impose a basic deductible—for example, $10,000—and another deductible for water damage, for example, $25,000 or even upwards of $100,000, depending on the nature of the co-ownership.”

In 2016, the Insurance Bureau of Canada stated that 95% of claims made by syndicates of co-ownership were related to water damage, and water damage accounted for 60% of compensation paid in these cases.^[2] As a result of this significant increase in condominium water-damage cases, water dama#_fnt2ge deductibles have shot up.

“Certain insurers have gone so far as to refuse to insure new condominium towers for the first few years after construction,” stated Mr. Beauvais. “History has shown that these towers are sometimes built quickly using shoddy materials; construction flaws and defects have resulted in enormous losses. It can therefore be difficult to find an insurer for this type of building, unless one is willing to accept a $500,000 deductible.”

When it comes to small or medium-sized condominium buildings, claims history is usually the decisive factor is setting deductibles. “An increased frequency in claims will definitely limit the options available,” comments Mr. Gaudreau. “When dealing with problematic cases, professionals have to turn to substandard insurance, which implies huge premiums and deductibles.”

The Impact of Deductibles on Co-owners

Co-owners suffer a number of financial repercussions related to the cost of deductibles. When the deductible is very high, the syndicate might be more tempted to not submit any claims to the insurer. That said, it will have to assume the cost of repairing the damages^[3] and apportion the cost between all the co-owners as a common expense, based on each co-owner’s share. In cases where a co-owner is held liable for the damages, the deductible and the damages that exceed the coverage provided for in the syndicate’s insurance contract (or that which is excluded) can be claimed from the co-owner. The Insurance Bureau of Canada has an article on claims settlement situations in which the syndicate decides to not submit a claim to its insurer. To learn more about a syndicate’s obligations, apportionment and remedies against a co-owner, read “Changements à l’assurance des copropriétés,” [Changes to Co-ownership Insurance, in French only].

And now, co-ownerships have to deal with a new financial-management requirement: As of April 30, 2020, syndicates must have a self-insurance fund that is used to pay deductibles. Syndicates will have two years from April 15, 2022 to deposit into this fund an amount equal to the highest deductible in the syndicate’s insurance contract, with the exception of deductibles for earthquakes and floods, if they are included in the contract. “In today’s market, it is not necessary to increase the deductible above the minimum suggested by the insurer,” Mr. Gaudreau advises. “The impact of increasing the premium is not sufficiently appreciable to warrant the amount that the client will have to set aside in the self-insurance fund.” It is worthwhile for the agent or broker to explain the options to the syndicate so that it can make an informed decision.

The upside of this new requirement is that the deductible makes syndicates and co-owners more aware of how important it is to reduce risks that lead to losses. “It is wise to educate syndicates on risk management by suggesting measures or tools to help them prevent damages, limit the loss ratio, and thus avoid an increase in the premium,” Mr. Beauvais explains. He goes on to list certain preventive measures that syndicates are encouraged to suggest to their co-owners at least twice a year. The list includes installing water leak detectors, shutting off the main water valve when leaving home for more than 48 hours, ensuring that appliance valves are in good working order, checking bathtub gaskets, and verifying the installation date of the hot water tank.

What is a reasonable deductible?

As of April 15, 2021, the syndicate of co-ownership “shall take out insurance against ordinary risks […] on the whole of the immovable” ^[4] in order to pay for reconstruction. Ordinary risks include, among other things, “water leak damage, sewer backup and overflows from appliances connected to water distribution piping within the building,”^[5] which in general represent the highest deductible in co-ownership insurance contracts.^[6]

In the meantime, the government may, by regulation, determine cases in which a deductible is considered unreasonable.^[7] “The government will undoubtedly exercise caution, though: given current tightening in the market, situations where a drop in deductibles leads to an increase in premiums—or, worse yet, to certain insurers withdrawing from this market—should be avoided,” Mr. Beauvais explains.

The Regroupement des gestionnaires et copropriétaires du Québec (RGCQ) believes that a “reasonable” deductible should be similar to that which would be found in an insured’s home insurance contract. This is what the RGCQ told the government in its brief,^[8] stating that “for a syndicate, per co-owner, the amount of a reasonable deductible should be similar to the amount of a deductible for a single-family dwelling. The criterion of reasonability should be evaluated, first and foremost, based on the insureds’ ability to pay.” [unofficial translation]

Using this approach, the amount of the deductible is divided by the number of units in the co-ownership. “In the field of home insurance, deductibles range from $500 to $1,000,” explains M^e Yves Joli-Cœur, a lawyer specializing in co-ownerships and General Secretary of the RGCQ. A water-damage deductible of $250,000 for a 500-unit tower would be reasonable, since the per-unit deductible would amount to $500. On the other hand, a $25,000 deductible for a 15-unit co-ownership would be unreasonable, since each co-owner would have to assume over $1,500.” Mr. Gaudreau, who also sits on the Board of the RGCQ, agrees: “in keeping with the reasonability rule, the cost of the deductible should be calculated according to the number of units in the co-ownership.”

Laurent Emery, Director General of the RGCQ, explains that a committee is currently working on a review of the premiums and deductibles co-ownerships pay in Quebec. “We have seen cases of co-ownerships that paid a deductible of $50,000 for water damage in 2017, only to see their deductible shoot up to $250,000 in 2020, despite not having made a claim and having installed a water-damage prevention system.” If the government decides to wield its regulatory power, the RGCQ will use the information its committee gathered in the field to make recommendations regarding cases where the deductible could be considered unreasonable.

^{[1] STATISTICS CANADA, 2011 National Household Survey and Census of Population, 2016. Data cited during the Journée d’échanges sur la copropriété divise – Ministère des Affaires municipales et de l’Occupation du territoire [One-Day Forum on Divided Co-Ownership – Ministère des Affaires municipales et de l’Occupation du territoire], May 11, 2018.}

^{[2] Insurance Bureau of Canada, Condo et dégâts d’eau, Protégez-Vous website, March 8, 2016 [in French only]}

^{[3] Article 1074.1 of the Civil Code of Québec.}

^{[4] Article 1073 of the Civil Code of Québec.}

^{[5] Section 4 of the Regulation to establish various measures in matters of divided co-ownership insurance.}

^{[6] With the exception of deductibles for coverage related to earthquakes and floods.}

^{[7] Article 1073 paragraph 3 of the Civil Code of Québec.}

^{[8] RGCQ, “Commentaires et observations sur le projet de loi 41,” [in French only] November 26, 2019.}

^{[9] Section 17 of the Code ethics of damage insurance representatives.}