How Insurance Policies Contribute to Risk Mitigation
The Role of Insurance in Risk Management
Condominium insurance provides financial protection for:
Property damage (e.g., fire, flooding, vandalism)
Third-party liability claims (e.g., injuries in common areas)
Theft, fraud, or financial misconduct
Legal defense costs for the board and corporation
The Condominium Property Regulation (CPA Regulation) mandates that corporations must insure against specific perils, including fire, water damage, and liability risks. Failure to maintain proper insurance can expose the corporation to significant financial losses.
The Impact of Deductibles on Financial Planning
Understanding Deductibles
A deductible is the portion of a claim that the condominium corporation must pay before the insurance provider covers the remaining costs. Higher deductibles generally result in lower premiums, but they increase financial risk if a loss occurs.
Unit Owner Responsibility for Deductibles
Under the Condominium Property Regulation, if a loss originates from a unit, the unit owner is absolutely liable for up to $50,000 of the insurance deductible, even if the damage was unintentional.
Example:
A water leak from Unit 203 causes $80,000 in damage to three other units.
The corporation’s policy has a $50,000 deductible.
Unit 203’s owner must pay the full $50,000 deductible, and the insurer covers the remaining $30,000.
Best Practices for Managing Deductible Costs:
Ensure owners are aware of their potential financial responsibility.
Encourage unit owners to carry "deductible coverage" in their personal insurance policies.
Evaluate different deductible levels to balance financial risk and premium costs.
Special Considerations for Reserve Funds and Insurance Claims
Using Reserve Funds for Insurance-Related Costs
Reserve funds are for major repairs and replacements of depreciating property, not for covering routine insurance claims. However, in some cases, a condominium corporation might, in error, use reserve funds to cover:
Insurance claim shortfalls (if a deductible is too high for the operating budget).
Unexpected costs due to coverage gaps in the corporation’s policy.
Legal Limitations on Reserve Fund Use
Per the Condominium Property Act, reserve funds must only be used for their intended purpose. If a board improperly uses reserve funds to pay for insurance claims, it may face legal challenges from unit owners.
Best Practices for Financial Planning
Maintain a contingency fund in the operating budget for high-deductible claims.
Regularly review insurance policies to ensure adequate coverage and avoid unnecessary reserve fund withdrawals.
Educate unit owners about deductible chargebacks and their responsibilities.
