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Some of the most common and well-documented issues observed in the multi-family/ condominium sector surround the ever-increasing rise of insurance costs with these types of complexes. While the Canadian Council of Insurance Regulators are looking into and administering changes to lessen the consumer effects of “Best Term Pricing”, this doesn’t negate the fact that insurance costs are going to increase regardless.
“One of the best ways to ensure that your complex is accurately insured is to obtain an insurance appraisal by a qualified and designated appraisal company, that specializes in insurance replacement costs.“Pete West, CEO – Go West Valuations Corp
Why is an Appraisal important in the Insurance process?
An insurance appraisal performs two roles in the insurance process: firstly, it ensures that your complex is fully covered to the correct insurance limit in the event of a rebuild after a loss. And secondly, it makes certain that you aren’t paying unnecessary premiums due to over-insuring. This last point is particularly relevant to today’s market, as we are increasingly finding many properties that are over-appraised and thus over-insured.
An example of this can be found in a recent project we were asked to appraise, where the property had an insured value of $37 million which was based on another appraisal companies’ values. We re-appraised the complex correctly to $27 million, which in turn saw the insurer drop the policy limit to the new lower value. The condo corporation was paying approximately 30 cents per $100 of insured value for the complex, so with a $10 million reduction, the complex is now saving $30,000 per annum on their insurance premium. Great savings indeed, and whilst we can’t guarantee this type of savings for every complex, it does illustrate the effect that an accurate appraisal can have on your policy costs.
What’s involved in an Appraisal?
The Appraisal itself must include a valuation of all insurable components of the property, which can be broken down into:
- Building Improvements (the buildings on the land).
- Site Improvements (landscaping, roadways, walkways, fencing etc).
- There is also an important third value that needs to be addressed which is demolition, debris removal, and dumping fees.
After a loss, the very first amount that comes out of your insurance policy is for demolition, hence you get to rebuild your complex with the remaining funds. Easy to see why you need to have an appraised allowance in place for this additional cost.
The appraisal starts with an onsite inspection of the complex and will usually entail a viewing of select typical units. Once all the construction detail has been gathered and the appraiser observes the construction and material quality used in the development, the appraiser will then measure the units via building or condominium plans, or onsite measurement, and commence inputting all this information into a professional software program. From here, the appraiser will use their experience and judgment to modify the quality ratings of the different building components, along with applying percentages to the installed components observed throughout the building.
Example: Roof – 73% flat roof with SBS membrane/ 27% 8:12 sloped roof with architectural fiberglass shingles.
Also calculated are the current cost of all materials used in the construction which include wood frame materials, osb/plywood, concrete, rebar, steel, copper piping, siding, roofing, windows, electrical, HVAC and plumbing lines and equipment etc, along with all interior finishes noted in the common areas and units such as floor wall and ceiling finishes, along with kitchens and bathrooms.
In addition to these raw costs, we add in current labour rates, developer overhead, developer’s expected profit, permits, and architectural fees that are all required for a rebuild.
What is Standard Insurable Unit Descriptions (SIUD’s) for condominium complexes?
As of January 1st, 2020, the Alberta Government through Service Alberta has mandated that every condominium in the province must have an SIUD register with Land Titles. The concept is fairly straightforward, where a description of the interior details of a standard unit needs to be produced, which ultimately delineates between the corporation’s insurable responsibility and that of the unit owner’s insurable responsibility. Once a description has been completed, it needs to get passed by a board or ordinary resolution then registered with land titles.
What is the purpose of a SIUD?
The necessity of this mandate has arisen with the issues faced when a loss occurs in a condominium complex, with neither the corporation’s insurer or the owner clear on who needs to insure what and to what level within the units. Having an SIUD in place assuages any of those concerns and provides a clear, documented position for each party involved in the loss.
If you’re a condominium corporation that may require a SIUD for your complex, talk to your property manager about obtaining one. It’s relatively cheap and only requires to be done once.
- For further information on Appraisals and SIUD’s visit Go West Valuations Corp here: https://www.gowestcorp.com/
- Information on Best Terms Pricing can be found here: https://www.canadianunderwriter.ca/insurance/insurance-regulators-expand-scope-of-inquiry-into-best-terms-pricing-1004200770/
- Information from Service Alberta on Standard Insurable Unit Descriptions can be found here: https://open.alberta.ca/publications/standard-insurable-unit-description
NOTES FROM MAGNUM YORK:
Thank you to Pete West, the CEO from Go West Valuations Corp for providing such great information. As a preferred vendor, we trust Go West when it comes to providing appraisals for the properties we manage.
To read more about the changes that took effect on January 1st, 2020, visit our blog post here: January 1, 2020 changes to insurance deductibles for condo owners