On September 13, 2020, the Government of British Columbia (Government) announced regulatory changes (Regulations) to address rising strata insurance costs in British Columbia. These changes follow the passage of the Municipal Affairs and Housing Statutes Amendment Act (No.2), 2020 (Bill 14), which amended certain insurance-related provisions of the Strata Property Act (SPA) and the Financial Institutions Act (FIA).
CURRENT CONDITION OF THE STRATA INSURANCE MARKET
Bill 14 and the Regulations follow an interim report by the BC Financial Services Authority (BCFSA), which found that strata insurance premiums and deductibles have risen significantly on a year-over-year basis.
The increases have partly resulted from insurers struggling to sustain profitability in the B.C. strata insurance market due to rising claim costs. In addition, insurers have identified the B.C. strata insurance market as “high risk” due to rising property values and excessive exposure to earthquake risk. The BCFSA report also noted that there is a lack of capacity in the strata insurance market to support future demand.
According to the BCFSA, the strata insurance market is “unhealthy” and “fails to meet the goals of sustainability, affordability and availability.” The BCFSA is conducting further investigations and expects to release its final report later in the fall of 2020, which may include further regulatory and industry recommendations.
FINANCIAL INSTITUTIONS ACT
Effective immediately, insurers, insurance agents and salespersons are prohibited from paying commission fees for business referrals in relation to strata corporation insurance, unless the person making the referral is a licensed insurance agent or salesperson. As a result, strata property managers will not be able to collect fees for referring strata corporations to insurance providers. If such fees are paid, the Insurance Council of British Columbia can suspend, cancel or restrict licenses, and impose fines.
In addition to the prohibition on referral fees, the following regulatory changes enacted under the FIA will come into effect on November 1, 2020:
- Notice of Non-Renewal or Material Change: An insurer that intends (or an insurance agent that learns of an insurer’s intent) to not renew a strata corporation’s insurance policy, or to make material changes to a policy, including any increase in insurance premiums or deductibles, must notify the strata corporation at least 30 days before expiry of the policy.
- Disclosure of Commission: Insurance agents must disclose their commission amount, or a reasonable estimate, at the time they provide a service or product to a strata corporation, or in the case of a renewal to a strata insurance policy, no less than 30 days before the expiry of the policy, where there is a material change in the policy.
- Penalties: Failure to disclose commission or to provide notice of non-renewal or material change may incur penalties of up to C$25,000 for an individual or C$50,000 for a corporation.
These changes to the FIA will allow strata corporations advance warning of increases to insurance rates and provide time for them to seek alternate insurance options. Additionally, strata corporations will now be able to assess the commissions of insurance agents when comparing policies, which may result in more competitive insurance prices.
STRATA PROPERTY ACT
The following amendments to the SPA are currently effective:
- Reporting Requirements: Strata corporations must inform owners and tenants as soon as feasible of any material change in the strata corporation’s insurance coverage, including any increases in premiums or deductibles.
- Prevention of Significant Loss: The SPA allows unapproved expenditures to be paid from operating funds or contingency reserve funds if there are reasonable grounds to believe that the expenditures are necessary to ensure safety or prevent significant loss or damage. Bill 14 clarifies that “prevention of significant loss” includes the obtaining and maintaining of insurance by the strata corporation. This allows strata corporations to obtain and maintain insurance coverage when faced with unexpected increases in premiums, which prevents strata corporations from proceeding uninsured.
The following amendments to the SPA will become operational by regulation at a later date:
- Property Insurance for Strata Corporations: Bill 14 will remove the stipulation that insurance is only required for fixtures built or installed on a strata lot by the owner developer as part of the original construction. As a result, strata corporations will be required to obtain and maintain insurance coverage over all fixtures built or installed on a strata lot, even where those fixtures were built or installed after the original construction. In addition, the Government can prescribe circumstances where such insurance coverage does not have to be based on full replacement value.
- Depreciation Reports: Each strata corporation containing five or more strata lots is required to obtain a depreciation report estimating the repair and replacement cost for major items and the expected life of those items. Bill 14 will prevent strata corporations from waiving this requirement and will allow the Government to pass regulations that:
It is also expected that certain existing sections of the SPA regulations that address depreciation reports will be amended as a result of Bill 14.
- Exempt strata corporations from the requirement to obtain depreciation reports
- Set dates for when depreciation reports will be required
- Prescribe the form and content of depreciation reports
- Require owner developers to obtain (or pay into the contingency reserve fund an amount sufficient to obtain) an initial depreciation report
- Contingency Reserve Funds: The SPA requires a developer to establish a contingency reserve fund for the strata corporation in an amount equal to either five per cent or 25 per cent (depending on when the first conveyance of the strata lot occurs) of the estimated operating expenses of the strata corporation. Bill 14 removes these prescribed amounts and allows the Government to set them by regulation.
- Insurance Deductibles: To protect owners from claims by strata corporations seeking to recover the deductible portion of an insurance claim, Bill 14 limits an owner’s liability where the owner is legally responsible for the loss or damage that gave rise to the claim, but not through an act or omission of the owner. In such cases, the liability of the owner will be limited to an amount prescribed by regulation.
- Information Certificates: Bill 14 will require strata corporations to include a summary of insurance coverage in any “Information Certificate” provided to an owner or purchaser. This summary of insurance coverage will not be binding on the strata corporation if it is obtained from the strata corporation’s insurer or insurance agent.
While the ultimate success of Bill 14 in addressing rising strata insurance costs remains to be seen, the Government has begun to implement regulatory changes that could have far-reaching consequences for the strata insurance market. Initial regulations eliminate referral fees and provide strata corporations with advance warning regarding increases to insurance costs, allowing them more time to compare policy quotes without risking a lapse in insurance coverage. Required disclosure over commissions increases transparency for strata corporations and may reduce insurance prices as insurers seek to remain competitive.
Remaining regulatory changes are expected to be implemented following further consultation with strata community stakeholders and the final report of the BCFSA in fall 2020. Although regulatory changes are presently focused on strata properties, it is important to note that rapidly increasing insurance premiums are not isolated to this market segment. Purpose-built rental buildings are also facing rapidly increasing insurance premiums, leading to a call this summer from LandlordBC to the Government to broaden the scope of its regulatory intervention.