Cedric Stephens, Contributor
Question: My strata complex is not insured. Several owners say the peril insurance in their mortgages protects them. I disagree. Insurance for a detached single- family dwelling covers the replacement value of the property. Strata property insurance covers the mortgage balance. In the event of a total loss, the mortgage will be repaid and the strata owner will get nothing. Can you confirm whether I am correct?
- dean.williamson@cwjamaica.com.
Answer: The reader who posed the question that was the subject of the "Deciphering mortgage-related insurance" column published February 10, 2008, gave me a big fat 'F'. My homework was very slapdash.
That response, yours and those of other readers confirm that perils insurance plays second fiddle when houses are being bought.
The big deal is about getting the loan. Mortgages and insurance contracts are more like partners. In the case of lots in strata plans or condos, insurance is the senior partner.
There are 822,000 entries listed by Google under 'insurance for condominiums'.
The ones I looked at related to North America. The local 'Bible' on strata properties is The Registration (Strata Titles) Act. You can download a free copy by visiting http://www.moj.gov.jm/law/search?lawSearch+The+Registration+of+Strata+Titles+Act. The law says insurance for buildings in strata plans is compulsory. Owners in your complex are, therefore, in breach of the law - unless of course, all of you have agreed "by unanimous resolution" not to insure.
Section 5-1(a) of the act sets out the duties of the strata corporation. The first one is "to insure and keep insured the building".
It says what type of coverage is mandatory and that insurance should be for the "replacement value".
Six of the seven remaining functions are insurance-related. The powers of the corporation under Section 5-2 also relate to that subject. The local situation is not different from what happens in the US. See 'Risk Man-mation' at www.homesite.com/default.asp, and 'Property Insurance' published by the State of Delaware's insurance regulator at: www.delawareinsurance.gov/association.
Compulsory insurance provides money to fund repairs in the event of loss - partial or total.
At the best of times, local strata corporations find it hard to collect money to pay expenses. In the absence of insurance, it will be much harder to collect money to fund repairs.
Getting $250,000 at once from 10 owners to pay a $2.5 million repair bill will be far more difficult than collecting $2,500 per month for regular maintenance. Credit problems are avoided with mandatory insurance. The aim of the law is to preserve the value of strata property. It protects the interests of all owners.
'Insurable interest'
The interests of mortgagees are treated in law as separate from those of owners.
In insurance speak, lenders and, borrowers have 'insurable interest'.
The phrase means an expectation of monetary loss. The loss can be covered by insurance. In the case of a mortgage, the mortgagee's (lender's) interest is limited. It is the unpaid loan balance on the property pledged as security. That amount varies from time to time. In the case of the mortgagor (borrower), the amount of his/her interest would also change over time. When damage occurs, the borrower's main concern would be to get money fund the repairs since he/she has possession and the "interest clock" never stops ticking.
Borrowers' and lenders' interests are insured under separate policies. In the case of a condo, the owner's or mortgagor's interest is provided under the contract required by law. Law makers agree with the idea of separate policies for borrowers and lenders. Subsection (5) of Section 2 of the law says: "A policy of insurance authorised by this section and in respect of the building shall not be liable to be brought into contribution with any other policy of insurance save another policy authorised by this section in respect of the same building." In short, double insurance is okay when the interests are separate.
Regulation 23 of the act (see http://www.moj.gov.jm/laws/subsidiary/Registration) recognises that units in condos may have mortgages. These issues are dealt with in Regulation 24 (1) to (4).
Subclause (1) allows 'double insurance' where there is a mortgage. The sum insured should be 'for a sum equal to the amount (of the loan) secured'.
In the event of a loss, "the insurer shall be liable to pay" under sub-clause (2), the lesser of "(a) the value stated in the policy (the sum insured); or (b) the amount of the loss; or (c) the amount, sufficient at the date of the loss, to discharge the mortgage(s)."
You and the other owners will 'suck salt' in the event of a major loss in your complex. Please continue to persuade your neighbours to obey the law.
Cedric E. Stephens provides independent information and advice about risk and insurance. For free information or counsel, email Mr. Stephens: aegis@cwjamaica.com.
