Insurance Helpline with Cedric Stephens

Question: Strata lots have to bear a two per cent excess (or deductible) on claims in the event of damage caused by hurricane, earthquake and flood. A situation could, therefore, arise when the strata corporation does not have the funds to effect repairs. Are there any institutions that can provide loans to make the repairs? What would be the security for this type of loan?

- elsiewong@jamweb.net

Answer: Owners of strata lots are among my favourite persons. They give me lots of feedback whenever I write about insurance for this type of property. Your questions confirm many of the things I wrote about two Sundays ago. These, and other types of properties, will have losses of one kind or the other, sooner or later. Making plans to deal withthem before they occur - 'strategising' in management lingo - is an important task for the persons who head these entities.

The State of Florida is no slouch in this area. With US$5 billion in bank accounts it is borrowing up to US$7 billion. This is to pay claims in case a big hurricane strikes later this year.

Insurers give only partial coverage under property policies. In insurance-speak, these contracts are subject to excesses (or deductibles).

A typical excess clause says: "A sum equivalent to two per cent of the sum insured by each item shall apply - provided that if any building or series of buildings, whether or not such buildings are adjoining, communicating with each other, at one location are insured by more than one item - the deductible with respect to such building shall not be not less than 0.25 per cent (one-quarter of one per cent) of the total of the sums insured in respect of all items covering such buildings."

This applies to losses from earthquake, hurricane and flood.

COVERAGE NOT EQUAL

The clause also states that "a sum equivalent to 1.0 per cent of the amount of loss" (other than fire and lightning) shall apply to losses from other causes.

In short, coverage is given for a minimum of 98 per cent for losses due to earthquake, hurricane and flood. Full or 100 per cent coverage is given for fire, and 99 per cent for other types of losses.

The buyer assumes the remainder, or the excess, in cases where less than 100 per cent coverage is offered.

The two per cent excess can be a big burden. Where the insured value is $100 million, the excess would be a minimum of $2 million. That is for one hurricane. If there were three storms during one season - as happened in Florida a few years ago - the strata corporation would need to find $6 million.

Collecting funds from owners to pay insurance and other expenses is not easy, at the best of times. Finding extra money to fund storm damage after three events would be much tougher.

LAWMAKERS' VISION

Lawmakers showed foresight when they wrote the law on strata titles. The corporation can "borrow money required by it in the perfor-mance of its duties or the exercise of its powers," says Regulation 3(b).

It can also, as written in Regulation 3(c), "secure the repayment of moneys borrowed by it, and the payment of interest thereon, by negotiable instrument, or by mortgage of the unpaid contributions (whether levied or not) or mortgage of any property vested in it, or by a combination of those means."

A strata complex is like a village on a very small scale.

It mainly needs things to work, among them, in the words of an election advertisement, "a team and a driver".

The leaders should understand the 'runnings' - for example, law, business, management, finance, and operations. Money and other resources and the support of the owners working towards common goals are also necessary.

Plans to deal with events that can hurt all owners are likely to succeed when the other things are in place. Changes are driven by those leading, or sometimes by the followers.

A well-run strata corporation should have the funds to pay for losses that are excluded from its property insurance due to the excess clause.

If money is not the bank, steps can be put in place to get a loan from these lenders when the need arises. The law assumes that the complex will be kept up to scratch, whatever the situation. If this does not happen or the owners are dissatisfied, they need to vote when elections are called.

Cedric E. Stephens is an insurance consultant. He provides free, independent information and advice to consumers. Email: aegis@cwjamaica.com>