Condo Smarts: Strata Insurance Covers Only Original Finishing — Not Improvements

Written By: Tony Gioventu, Executive Director CHOA

‘Could you please explain exactly how strata corporation insurance works for sectioned strata corporations?’

Dear Tony:

I run a small retail business out of a commercial strata lot in downtown Kelowna. Our building is mixed-use and divided into two sections between the residential and commercial units.

We had a water claim in our building over the summer that affected several residential units and two commercial units, including mine. The insurance claim covered the residential units and their interior finishings but did not cover our improvements — of which we had invested a significant amount of money. We were of the understanding that the finishing within strata lots, whether they were commercial or residential, were covered under the strata policy, so we had not purchased any additional insurance and are now left with over $75,000 in restoration costs.

Could you please explain exactly how strata corporation insurance works for sectioned strata corporations?

— Martin W.

Dear Martin:

There is often confusion about the terms of the Strata Property Act, which create misunderstandings around operations and liabilities for mixed-use properties. Whether your strata lots are residential or non-residential (commercial), either in mixed-use or as entire commercial entities, the Strata Property Act and Schedule Standard Bylaws and Strata Property Regulations apply. The term “tenant” that is used within the context of the Act applies both to residential tenants and leasehold or commercial tenants in the same fashion, with the exception that a strata corporation cannot restrict the rental of commercial strata lots.

Under the requirements of the Act, a strata corporation must insure for all original common property, assets and fixtures installed by the owner-developer. This will basically include all the original finishing; however, the original finishing does not include leasehold improvements in commercial strata lots or improvements or betterments in residential strata lots. The leasehold improvements that you installed were not part of the original construction and not an insurable interest of the strata corporation. Review your leasehold agreement with the strata lot owner and consult your lawyer.

Mixed-use strata corporations that have also created sections are not “divided” by this action. The full operations of the strata corporation still require compliance with the Act and the bylaws of the corporation. The sections are created as legal entities in addition to the function of the corporation and generally carry the same obligations and duties as the corporation. While the corporation still maintains insurance for the entire building as originally constructed, betterments and leasehold improvements are the responsibility of each strata-lot owner and leaseholder. In addition to the strata corporation requiring an annual general meeting, approval of budgets and election of a strata council, the sections must also meet these same conditions. Depending on the sections bylaws, select an executive strata council to manage the section operations. With two sections in addition to the strata corporation, there are basically three layers of functions every year.

It is always in the best interest of the sections and the leaseholders to review their sections bylaws and the nature of the section to determine if the sections require additional insurance coverage for claims that may impact directors and officer liability, general liability for the section or certain types of businesses, additional coverage for assets purchased or owned by the section, and to inform the leasehold tenants of their obligations to insure their personal assets and any leasehold improvements.

Strata corporations with sections created are often a complicated series of obligations and liabilities that require legal review of the general risks associated with the sections to determine if additional insurance coverage is required. Each section should consult an insurance broker with knowledge of strata corporations and sections, and review the sections bylaws as necessary to evaluate insurance needs.

Whether it is a strata with sections, a commercial strata corporation, a residential bare land or residential-detached strata, or a strata corporation as part of an Air Space Parcel agreement, I am surprised at how frequently the CHOA staff encounter strata corporations across B.C. that are not properly insured.

There are often hidden obligations in easements, shared-use agreements for facilities and obligations under Air Space Parcel agreements that are overlooked and never addressed until a major incident occurs. Proactive engagement of your broker is the first step. Don’t make any assumptions. Confirm all information in writing and consult with your lawyer to verify the insurance placed meets the needs of your type of strata lots and sections.

Tony Gioventu, Executive Director CHOA

Tony Gioventu is executive director of the Condominium Home Owners Association. Email tony@choa.bc.ca