SECTIONED STRATA CORPORATIONS & INSURANCE

Monday February 2, 2015

SECTIONED STRATA CORPORATIONS & INSURANCE

 

SECTIONED STRATA CORPORATIONS & INSURANCE

Sectioned Strata Corporation properties have become one of the most discussed topics in the real estate sector over the past 12 months and the responsibilities relating to insurance are complex. BFL’s Real Estate team has spent considerable time consulting with lawyers and insurers to construct an approach that ensures the interests of all parties are properly understood and adequately protected.   

Our recommendations are based on a Section being a legal entity, separate and distinct from the Strata Corporation. A Section is formed for the purpose of representing the different interests of different groups of strata lot owners that have distinct needs and interests.  A Section is created by the developer at the time the strata plan is filed at the land title office or by an existing Strata Corporation that has held an AGM or SGM passing a ¾ vote in favour of creating sections. A Section is governed by its Executive who administer all matters relating solely to the strata lots within the Section.

 The division of responsibility and the resulting obligations relating to insurance between the Strata Corporation and a Section are not always clear, however, the Strata Property Act (SPA) does address the different responsibilities. 

 Under SPA (s. 149-151) the Strata Corporation has a duty to purchase property and liability insurance and the option to purchase errors and omissions (E&O) insurance. A Section’s ability to purchase insurance is defined by s194 (4) which allows a Section to obtain insurance only against perils not insured by the Strata Corporation or for amounts that are in excess of amounts insured by the Strata Corporation.

 First, we focus on the three coverages outlined by the SPA.

Property Insurance

 We recommend the Strata Corporation and Sections purchase a single property policy to:

  • Comply with Law. SPA (s. 149) requires the Strata Corporation to purchase insurance for all common property. Limited common property is, by definition, common property designated for the exclusive use of owners of one or more strata lots and so is also the responsibility of the Strata Corporation to insure.

  • Avoid Disputes. One policy avoids potential conflicts that may arise between the Sections and the Strata Corporation.  One policy makes it unnecessary to draw lines between portions of what may well be a complex, integrated property structure. 

It is possible that a Section may own property and assets of its own.  If the property or asset is not owned by the Strata Corporation, it may not be automatically covered by the Strata property policy.  Any property owned separately by a Section should be identified.  Once identified, insurance for that property or asset can be obtained by (i) adding the property or asset (with the consent of the Strata Corporation) to the Strata Corporation property policy or (ii) purchasing a separate policy for those assets.

Action Item 1: Because a Section is a separate legal entity, it is essential that its interests are noted in the property policy. We suggest amending the Named Insured to include “Section [number of section] of the Owners, Strata Plan [the strata plan number]”

Action Item 2: Identify any property not owned by the Strata Corporation and discuss options with your broker.                                          

Commercial General Liability (CGL) Insurance

We recommend the Strata Corporation and Sections purchase a single general liability policy to:

  • Create peace of mind. Due to the shared nature of risks faced jointly by the Strata Corporation and Sections, it is difficult to separate liabilities.  A single liability policy, backed by one insurer, may be more efficient, allowing for a coordinated defence.
  • Avoid disputes.  Separate CGL policies provided by multiple insurers may cause dispute as to which insurer is to take the lead position.  This could create debate as to who is ‘primary’ and whether ‘other insurance’ clauses apply within the policy language.  

  • Minimize costs: It is more cost effective to purchase one policy with a larger limit than separate policies with separate limits. 

 Action Item 1: With the consent of the Strata Corporation and Section, add “Section [number of section] of the Owners, Strata Plan [the strata plan number]” to the Named Insured. 

 Action Item 2: With the consent of the Strata Corporation and Section, review the adequacy of policy limit.  Investigate the costs of increasing the limit.

 

Errors and Omissions / Directors and Officers (E&O / D&O) Liability Insurance

We recommend Strata Corporations and Sections obtain separate E&O / D&O policies because:

  • Potential for dispute: Claims between Strata Corporations and Sections are more likely to arise due to the respective exercise of Strata Council’s or Executive’s statutory powers. e.g., maintenance, repair, or governance issues. 
  • D&O Policy Exclusions: D&O policies contain “Insured vs Insured” exclusions that exclude coverage for claims brought by one insured party against another.  Should the Strata Corporation and Section share one policy and a Section sue the Strata Corporation for an alleged wrongful act, the Strata Corporation would not be able to rely on the E&O / D&O policy for defence.

  • Lack of Authority: Strata Corporations are permitted to purchase E&O / D&O insurance “for council members…for errors and omissions made in the exercise of their powers and performance of their duties as council members(s. 151).  The SPA does not require, and actually may not permit, Strata Corporations to purchase E&O / D&O insurance for a third party, such as members of a Section Executive.  

  • Different risk profile.  The source of E&O / D&O claims is based on the conduct of the Insured in performing their duties rather than on any relationship the Insured has to physical space within a stratified property. 

  • Distinct liabilities.  Section Executives may only act in matters that relate solely to the Section.  Strata Corporations are not liable for contracts entered into or legal costs incurred by a Section.  A Strata Council cannot be sued for the Section Executive’s exercise of its statutory powers and, likewise, a Section Executive cannot be sued for the Strata Council’s exercise of its statutory powers.

Action Item: The Strata Corporation and each Section should purchase their own E&O / D&O polices.  Whilst there will be additional costs, each party will have its own policy, limits and own defense counsel.

We now focus on other insurance issues not addressed in the SPA.

Other Insurance Coverage

Whilst not required by the SPA, most sectioned strata corporations typically purchase many other insurance policies to protect their mutual interests – terrorism, privacy breach, equipment breakdown etc.  Despite having no statutory requirement to do so we suggest the Strata Corporation and Sections can rely on single, shared policies with two exceptions:

 Legal Expenses Insurance.  Akin to the E&O / D&O coverage, because the Section Executives and the Strata Council are acting on behalf of different entities and have different risk profiles.

  • Crime/Fidelity Insurance.  Sections have separate trust accounts and manage their money independently from the Strata. 

Action Item:  We recommend separate Legal Expenses and Crime policies.  If only one policy is maintained, the consent of the Strata Corporation and each Section should be obtained.

Property Manager Involvement

It is important to name all entities involved on the policy including the Property Manager.  The Property Manager plays a critical role in the management of Strata Corporations and Sections.  Their interests need to be noted on policies, just as they are today.  Where multiple property managers may be involved, each should be noted in the line with the recommendations above.

Action Item:  Ensure Property Managers’ interests are adequately addressed in the policy language.

Questions

We fully expect there to be many questions on this material from Council Members, Executive Members and Property Managers.  We invite you to call and speak with one of our strata insurance experts. Click here for a list of our our strata insurance experts.

 

                                                

 

 

 

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