QUESTION: I bought a townhouse in a strata complex. A mortgage company provided the financing. Part of my monthly payment includes a charge for insurance. The lender says it is compulsory. I also pay a maintenance fee to the strata corporation. The fee also includes an amount for insurance. The corporation claims that insurance on the property is essential. In the event of a disaster, I can only file one claim. It seems unfair for me to be paying two premiums on the same property. Are the two premiums really necessary?
W. R., Kingston 7.
Answer: The mortgage lender and Strata Corporation are right. You have to continue paying the two premiums no guesses, doubts or maybes. My opinion is from two sources. The first one is The Registration [Strata Titles] Act. It deals with the operations of strata corporations. The other is a paper written by local attorney-at-law, Trevor O. Patterson. It is titled 'Legal Problems of Insurance on Strata Lots'.
INSURANCE-BUYING IS A KEY FUNCTION OF STRATA CORPORATIONS:
Sub-section (1) of section 5 of the act lists the functions of strata corporations. Five of the eight items relate to insurance. The first (a), obliges it "to insure and keep insured the building to the replacement value against fire, earthquake and hurricane and other such risks." Sub-clause (d) empowers the corporation to "apply the insurance moneys received in respect of damage to the building in rebuilding and reinstating the building."
The powers of the corporation are stated under sub-section (2). The first is to set up "a fund for administrative expenses for the control, management and administration of the common property, for the payment of any premiums of insurance and for the discharge of any of its other obligations."
Sub-section (5) of the act provides a partial answer to your question. 'A policy of insurance', it says, [which is] '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'. This means that it is possible to have more than one policy covering property falling under the act.
Attorney-at-law Patterson says the "principal duty of the strata corporation is to effect insurance." He argues that "severe problems would arise" if the decision to insure was left to each owner. Some would buy coverage. Others would not.
The latter would, in all probability, not have the financial resources to reinstate damage caused by a fire that affected two adjoining strata lots. Persons in the first group would. The insured owner could probably end up with a gutted structure beside his premises. The act was drafted to prevent this from taking place.
DO LENDERS NEED SEPARATE INSURANCE?
Strata lot owners are empowered under regulation 24 (1) to insure their property "against damage up to the amount secured by any mortgage," according to Mr. Patterson. You have a snowball's chance in hell in getting your hands on the policy moneys. This is because the insurance is arranged solely and exclusively for the lender's benefit.
This is precisely what sub-section (5) of the act allows. He describes the lender's coverage as "rather peculiar insurance." Its subject matter is "the security interest of the mortgagee in the strata lot and regardless of what happens the amount recoverable cannot exceed the mortgage debt."
It is very common to have two separate insurances on properties that fall under the Registration (Strata Titles) Act. The strata corporation's coverage is designed to protect all lot owners in one group.
The security interest of lenders and the interests of individual lot owners would not be properly served under a single policy. This is why the interest that a mortgagee has in an individual strata lot is protected by a separate policy.
Cedric E. Stephens provides independent information and advice about the management of risks and insurance. If you need free information or counsel to help you solve a problem write to The Financial Editor or contact Mr. Stephens directly at aegis@cwjamaica.com
