On September 13, 2020, the British Columbia government (government) announced regulatory changes (regulations) to deal with rising insurance costs in layers in British Columbia. These changes follow the passage of the Municipal Affairs and Housing Statutes Amendment Act (No. 2), 2020 (Bill 14), which amended some insurance provisions of the Layer property law (SPA) and the Financial Institutions Act (SON).
CURRENT CONDITION OF THE STRATA INSURANCE MARKET
Bill 14 and the regulation follow an interim report by the BC Financial Services Authority (BCFSA), which found that insurance premiums and layered deductibles increased significantly on an annual basis.
The increases are partly the result of insurers struggling to sustain profitability in the BC strata insurance market due to rising claims costs. In addition, insurers have identified the BC strata insurance market as “high risk” due to rising property values and excessive exposure to seismic risk. The BCFSA report also noted that there is a lack of capacity in the layered insurance market to support future demand.
According to the BCFSA, the layered insurance market is “unhealthy” and “failing to meet the goals of sustainability, affordability and availability”. The BCFSA is conducting further investigations and plans to publish its final report later in the fall of 2020, which may include further regulatory and industry recommendations.
LAW ON FINANCIAL INSTITUTIONS
With immediate effect, insurers, insurance agents and vendors are prohibited from paying business referral fees in connection with multi-company insurance, unless the person making the referral is an authorized insurance agent or seller. As a result, tier property managers will not be able to collect fees for referring tier companies to insurance providers. If these fees are paid, the British Columbia Insurance Council may suspend, cancel or limit the licenses and impose fines.
In addition to the ban on referral fees, the following regulatory changes enacted under the FIA will come into effect on 1 November 2020:
- Notice of non-renewal or substantial modification: An insurer who intends (or an insurance agent who becomes aware of an insurer’s intention) not to renew a multiparty company’s insurance policy or to make material changes to a policy, including any increase in insurance premiums or deductibles , must inform the strata company at least 30 days before the policy expires.
- Commission disclosure: Insurance agents must disclose the amount of their commission, or a reasonable estimate, when providing a service or product to a tiered company, or in the event of renewal of a tiered insurance policy, no less than 30 days before the policy expires, where there is a substantial change in the policy.
- Sanctions: Failure to disclose the fee or 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 company.
These changes to the FIA will allow stratified companies to warn of insurance rate increases in advance and give them time to seek alternative insurance options. Additionally, tier companies will now be able to assess insurance agent fees when comparing policies, which could result in more competitive insurance pricing.
STRATA PROPERTY ACT
The following changes to the SPA are currently in effect:
- Reporting requirements: Layered companies must notify landlords and tenants as soon as practicable of any material changes in the insurance coverage of the multi-layered company, including any premium increases or deductibles.
- Prevention of significant losses: The SPA permits the payment of unapproved expenses from operating funds or contingency reserve funds if there are reasonable grounds to believe that the expenses are necessary to ensure safety or prevent significant loss or damage. Bill 14 makes it clear that “prevention of significant losses” includes obtaining and maintaining insurance by layered companies. This allows stratified companies to obtain and maintain insurance coverage in the face of unexpected premium increases, which prevents stratified companies from proceeding without insurance.
The following changes to the SPA will become operational by settlement at a later date:
- Property insurance for stratified companies: Bill 14 will remove the clause that insurance is only required for fixtures built or installed on a layered lot by the developer owner as part of the original construction. Consequently, stratified companies will be required to obtain and maintain insurance coverage on all fixtures built or installed on a layered lot, even where those fixtures were built or installed after the original construction. Additionally, the government may prescribe circumstances where such insurance coverage does not need to be based on full replacement value.
- Depreciation ratios: Each ply company containing five or more ply lots is required to obtain a depreciation ratio that estimates the repair and replacement cost for the main items and the expected life of those items. Bill 14 will prevent stratified companies from waiving this requirement and allow the government to pass regulations that:
- Stratified companies are exempt from the obligation to obtain depreciation ratios
- Set the dates on which depreciation reports will be requested
- Prescribe the form and content of the amortization ratios
- Require proprietary developers to obtain (or pay into the Contingency Reserve an amount sufficient to obtain) an initial amortization ratio
It is also envisaged that some existing sections of the SPA regulations concerning depreciation ratios will be modified following Law 14.
- Reserve funds for contingencies: The SPA requires a promoter to set up a contingency fund for the strata company in the amount of five percent or 25 percent (whichever is the first transfer of the strata batch) of operating expenses esteem of the society strata. Bill 14 removes these prescribed amounts and allows the government to set them by regulation.
- Insurance deductibles: To protect owners from claims by stratified companies seeking to recover the deductible portion of an insurance claim, Law 14 limits an owner’s liability where the owner is legally liable for the loss or damage that gave rise to the request, but not through the owner’s omission. In such cases, the owner’s liability will be limited to the amount prescribed by the regulation.
- Information certificates: Bill 14 will require stratified companies to include a summary of insurance coverage in any “information certificate” provided to an owner or buyer. This summary of insurance coverage will not be binding on the tier company if obtained from the insurer or insurance agent of the tier company.
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. The initial settlements eliminate referral fees and provide stratified companies with advance notice of increases in insurance costs, allowing them more time to compare policy quotes without risking losing insurance coverage. Required disclosure on fees increases transparency for layered companies and can reduce insurance prices as insurers try to remain competitive.
The remaining regulatory changes are expected to be implemented following further stakeholder consultations from the strata community and the final BCFSA report in Autumn 2020. Although the regulatory changes currently focus on strata properties, it is important to note that insurance premiums rapidly growing are not isolated this market segment. The purpose-built rental buildings are also facing a rapid rise in insurance premiums, leading to a call this summer from LandlordBC to the government to expand the scope of its regulatory action.