How Appraisals Save Condo Corps/Owners Money (+ evaluate the Standard Suite Definition to save more)
Insurance is a critical aspect of general homeownership, and especially condos. The cost of repairing a home if it's damaged can be prohibitively expensive, so you must ensure that you have insurance - especially in high-density living situations where problems can spill over from unit to unit! If your corporation is spending excessive amounts with insurance, consider this advice that we received at the ACMO/CCI Condo Conference 2022!
From 2019 to 2021, we saw premiums and deductibles rising for condominium corporations - whether there were any claims or not. Generally, corporations are experiencing increases in both areas, explains Tom Gallinger (Atrens-Counsel Insurance Brokers). Although insurance rates are settling down, and labour and material costs are also stabilizing, insurance kept increasing due to inflationary factors.
On top of inflationary factors, we are also witnessing catastrophes and climate change affecting insurance. A catastrophe (that likely happened elsewhere in the city, country, or world) is affecting your insurance is due to the reinsurance companies, which insure properties everywhere and because of the wide areas that catastrophes may occur, they are raising their prices.
When paying a premium, the insurance company is investing it in certain types of funds - though lately, insurance companies are having a harder time making good investment returns due to the market. So with all these elevating costs, what are we able to do to help reduce premiums? After all, condos can't go without insurance! Furthermore, Section 99.7 of the Act states that a property must be insured to the replacement value, but how do you determine what the replacement value is? The answer is... an Appraisal.
Stephen Skolny (BFL Canada) mentioned the importance of appraisals. “As insurance brokers, we have tools to guide us, but it’s not a professional third-party company that determines the value of the property,” Stephen explained. Developers are determining costs of how much a building is worth based on a number of factors. So when they have the turnover meeting and the board is formed, developers can provide an estimated amount that the building is worth. And although they have an idea, Developers are not that third party company that can determine the value of the property. “We’re finding that appraisal companies are coming in and the values are significantly higher,” he added, leading to what insurance companies call a "co-insurance penalty", and it’s set to penalize buildings that are not insured to value.
Additionally, building and labor costs have increased, meaning that it costs more to build a building now than it did before and that it's especially vital for condo corps to keep the values of their property updated. To further understand this, let’s estimate the value on a sample property without an appraisal is $150M, however, an appraisal estimates it at only $130M. This means corporations are paying more in premiums (or vice versa), and this is where the penalties come along. Appraisals also provide insurance brokers with detailed information which helps to provide a detailed quote. Vic Persaud (Suncrop Valuations) added that builders are not including all of their costs and fees and therefore there are differences ranging from 30% - 40% in values in a total loss scenario.
Appraisals take the full replacement value from ground up when assessing a building. In a standard condominium with a standard unit definition, the appraisal is valued based on the standard unit definition., meaning that the corporation will not be responsible for 100% of the rebuilding.
Condo corporation insurance can cover a variety of structures such as fences, balconies and patios, but it does not cover items such as personal property or fixtures within the condo unit.
The Standard Unit Definition (SUD) is a document that describes what goes into each unit of the building. It’s important to know because it can affect insurance premiums, as well as how much money you will get back if your condo is damaged. Standard units are only applicable to condominiums registered as standard (i.e., Toronto Standard Condominium Corporation). “A standard unit is really a definition of responsibilities for insurance within the four walls of the unit,” David Outa (Cowan Insurance Group) noted. “The law says that the corporation shall not ensure improvements and betterments to that unit,” he added, meaning that anything that is not defined as standard becomes an improvement and the owner is responsible for insuring it. A condo corporation is able to change the definition of this bylaw; however, to modify the standard unit bylaw a corporation requires more than 50% of the owners to vote to approve the change - and this is often difficult to do in large corporations!
To save on costs, some corporations are excluding elements of the building to the bare bones. In some cases, it makes sense to remove some elements (such as flooring) from the SUD, making the owner responsible. This allowing corporations to manage their premium - the high cost of which is ultimately shared by owners via maintenance fees.
Unfortunately, some owners do not carry unit owner insurance and some may not even be eligible for it. How is the condo actually getting protection of the value of those units if you strip the unit bear? “Keeping the unit livable and sellable, it's actually more of a service, more of a benefit to the condominium community as a whole and protects the value of that unit,” Stephen added.
How much can the condominium corporation save by updating their Standard Unit Bylaw to cover fewer/minimal in-suite features?
Vic mentioned that corporations can see an approximate 5% decrease by removing flooring from the SUD. If corporations strip their SUD to the bare bones, they can expect a 15- 20% decrease. Of course, the exact way to determine these numbers would be based ultimately on an appraisal.
Many homeowners and boards are unaware of how appraisal services work and why they're so vital to the process of buying insurance. If you know someone who could benefit from an appraisal, take a second to share this article with them. They'll thank you for it!
Authored by Nabiel Ordonez, edited by Stratastic Inc.
“Insurance: Patrick's Done it Again” addressed the importance of knowing the accurate value of a property and how appraisals can benefit a condominium corporation. This session was moderated by Vic Persaud (Suncrop Valuations) with panelists David Outa (Cowan Insurance Group), Stephen Skolny (BFL Canada) and Tom Gallinger (Atrens-Counsel Insurance Brokers).