Ideas for handling risks in some of JA’s elite human colonies
A FRIEND who chaired the executive committee of a strata corporation recently asked me to update my earlier articles on insurance and the law and regulations that prescribe how some of the risks associated with these kinds of developments should be managed.
The request was made against the background of the construction of an increasing number of multi-family, multi-storied housing developments, many of which will fall under the Registration (Strata Titles) Act, 1969.
Phase I of the research process for this piece began with me taking a brief look at the insect world. Could these species that live in large colonies – comprising hundreds and sometimes hundreds of thousands of individual creatures – that live in close physical contact and in harmony with each other, collaborate, and protect their common interests provide a model that human beings can emulate in their condominiums or multi-family units?
It has become increasingly clear to me over the years that ‘social risks’ like ignorance, dishonesty, selfishness, and predatory behaviours, which are uninsurable and affect human habitations are not discussed in the strata law.
There are no rules on how these risks are handled. They can negatively impact the operation of strata corporations and destroy value for all members.
The Gleaner’s March 10, 2019, article, ‘Homeowners wrangle with strata as complex goes to rot’, provides evidence of things that went wrong in Sunshine Village, Negril, Westmoreland and led some owners to seek Government intervention to solve the problems.
The excerpt from an article that I wrote 15 years ago offers another example of events that are not unlikely in Jamaica’s high-risk environment: “The Palm Beach Post published two articles on July 27, 2008, and January 1, 2009, that provide context for today’s essay. Two hurricanes hit a 42-storey condo on Singer Island, Florida, in 2004 that made it unliveable. One year later, Hurricane Wilma took another swipe at it. The building was insured for US$88 million. The estimated cost of repairs amounted to US$140 million. Each owner had to pay between US$110,000 and US$150,000 to cover construction expenses not covered by insurance.
It took four years to complete the repairs. Owners had to pay for the cost of alternative housing. They also had to continue to pay taxes and maintenance fees. Those costs added another US$40,000-US$50,000 to the bills of each owner.”
The average costs incurred by each owner amounted to US$200,000 to $250,000.
Local strata corporations are now facing uncertainty in insurance markets. This has resulted in substantial increases in premiums and limited capacity on the part of insurance and reinsurance companies for Caribbean catastrophe risks like earthquakes and hurricanes.
If it is any consolation, homeowners and other property owners in Florida, the US Gulf States and other areas like California are facing similar problems. These conditions are unlikely to improve anytime soon and will pose challenges for strata corporation executives.
THE DUTIES OF THE STRATA CORPORATION:
Section 5-(1) of the 1969 Act describes the duties of the strata corporation as follows:
a) To insure and keep insured the building to the full replacement value thereof against fire, earthquake, hurricane, and such other risks as may be prescribed, unless the proprietors by unanimous resolution otherwise determine;
b) To effect such insurance as it may be required by law to effect;
c) To insure against such risks other than those referred to elsewhere in this subsection as the proprietors may from time to time by unanimous resolution determine;
d) Subject to the provisions of section 14, and to such conditions as may be prescribed, to apply insurance moneys received by it in respect of damage to the building in rebuilding and reinstating the building so far as it may be lawful to do so;
e) To pay premiums on any policies of insurance effected by it;
f) To keep in a state of good and serviceable repair and properly maintain the common property;
g) To comply with notices or orders by any competent public or local authority requiring repairs to, of work to be done in respect of, the parcel;
h) To comply with any reasonable request for the names and addresses of the members of the executive committee.’
The regulations that were drafted under the 1969 law were updated in 2010. Three years later lawmakers passed the Registration (Strata Titles) Amendment Act. These laws and two sets of regulations create the legal structure and set out rules that govern how strata corporations must operate. A regulatory body for these complexes – the Commission of Strata Corporations – has been established, with far reaching powers under the amended Registration (Strata Titles) (Amendment) Act.
According to the Jamaica Information Service, “the amended Act gives the Commission of Strata Corporations (CSC) the power to monitor, regulate, and supervise the functioning of strata corporations; provides for the mandatory registration of each strata corporation with the Commission and the submission of annual financial statements and reports by each strata corporation; provides for the procedure to be followed where a proprietor fails, neglects, or refuses to pay contributions to the corporation; and gives the strata corporation a power of sale in respect of a strata lot, where a proprietor defaults in the payment of contributions to the corporation.”
The CSC’s CEO agrees with my ‘insects living in harmony’ metaphor. She stated that with “more people sharing less space, it has become necessary to ensure that the proper mechanisms are (put) in place to ensure that facilities are well managed, for the health and safety of owners and residents, to reduce conflict and maintain the value of these properties”.
Value preservation, in my language, implies that risks are properly managed. In 2021, it was announced that the Real Estate Board and CSC were merged to form the Real Estate Authority of Jamaica.
FULL (OR NEW) REPLACEMENT VALUE):
Full (or new) Replacement Value is a property insurance term. It refers to the cost of replacing an asset to its pre-loss condition with an asset of a like kind and quality at the time of replacement. In the Singer Island example, the correct sum insured should have represented the cost of effecting repairs four years from the date of the loss event.
Quantity surveyors and other construction professionals understand the concept and should be employed to advise on these matters instead of relying on arbitrary rules of thumb chosen by unqualified persons.
Catastrophe perils like hurricanes, earthquakes, and floods are subject to deductibles (or excesses) of two per cent of the sum insured. This means that insurers are contractually responsible for the remaining 98 per cent.
In the case of a strata development, where the replacement value was assessed at $400 million, losses would have to exceed the deductible ($8 million) before the coverage would be triggered.
The monthly maintenance fee paid by each owner should therefore be calculated to prefund the liability created by this policy provision and the compounding effect if two or more hazards were to occur during the same year.
Property owners and investors in strata corporations must ensure that the persons they select to represent their interests on the strata corporation’s executive committee are persons of integrity, are suitably qualified and committed to discharging the entity’s mission, much like those who run for office in municipal or national elections.
If you require assistance managing risks or solving insurance problems, Cedric E. Stephens offers free counsel and advice. To obtain information and counsel, please write to The Business Editor at business@gleanerjm.com or contact Mr Stephens directly at aegis@flowja.com. Letters and e-mails will be edited for clarity and length. January 24, 2024.