Laneway homes raise insurance questions

Converted coach houses, garages a potential solution to ballooning real estate costs

Soaring real estate costs are pushing some Canadian cities to embrace laneway housing, touted as the future of affordable living in urban centres.

But as the properties become more popular and balloon in value, questions are beginning to arise about whether current insurance practices are sufficient.

Home insurer Square One Insurance says it has been fielding so many recent calls about laneway homes — most of them in Vancouver — that it’s started offering a separate product created specifically for the structures.

Daniel Mirkovic, the company’s president and chief executive, says in the past, laneway homes or coach houses were often $50,000 conversions of detached parking garages created by homeowners to house their adult children.

“Now, because of the high price of real estate, the whole concept of laneway housing has changed,” Mirkovic said. “When you’re looking at a laneway home that the owners have invested $200,000 or $300,000 to build, that’s a very significant investment.”

Converting a back-alley parking garage into a residential structure is one way for homeowners to offset the cost of pricey real estate by generating rental income. However, not all Canadian cities allow for laneway homes to be built.

Vancouver is a notable exception. The city has issued more than 1,000 permits for laneway homes since 2009. In Calgary, city officials are launching a pilot project that will allow laneway homes to be developed along one of the city’s streets.

As square footage in Canada’s hottest real estate markets becomes pricier and developers look for new ways to squeeze housing into tight spaces, laneway homes will probably grow in popularity.

That could force insurers to rethink their policies.

Currently, most insurance companies — including Aviva Canada, Intact Financial and TD Insurance — cover laneway homes under the same policy as the main property and don’t offer a separate insurance policy for the structures.

Mirkovic says that could be problematic in certain circumstances — for example, if a natural disaster occurs that affects both the main structure and the laneway home. In the aftermath of such incidents, building replacement costs may soar, the result of a phenomenon referred to as “post-event inflation.”

In that situation, Mirkovic says, “the demand to build new homes or rebuild homes has gone up dramatically because there are thousands of people who need to rebuild their homes, and the supply is low. There’s only a certain amount of building supplies readily available; only a certain amount of contractors who can build homes.”

A home that cost $300,000 to build could cost $500,000 to rebuild. Typically, the insurance policy would cover the difference — but in the case of a laneway home, it might not, Mirkovic says.

“If you’re insuring something as a detached structure you only get coverage up to the limit specified, which might be up to $300,000. But if it actually costs $400,000, you’re out of pocket for the extra,” Mirkovic said.

There could be drawbacks, however, such as two deductibles instead of one. In some instances, premiums may be higher as well, Mirkovic said.

Mike Shepel recently opted for Square One’s laneway-housing package to insure a rental property he purchased in Vancouver.

Knowing that replacement costs are guaranteed to be covered in the event of a disaster such as an earthquake provides him with security, Shepel said.

The physician said he plans to use the same product to insure his second rental property — another laneway home — as well.

“They’re really cute little places,” Shepel said. “It’s a unique way to get more homes into the community . . . It really does feel like a small, little comfy cottage, where you feel more independent.”