Whether semi-detached or row, the townhouse is a good compromise between the typical co-ownership apartment and the single-family home. This type of project is established in "horizontal co-ownership". Each of the fractions is composed of a private portion (usually a house) and a share of common portions (the land). Each co-owner is the owner of his private portion "from nadir to zenith", while the common portions are usually limited to traffic lanes, parking lots and certain strips of land. From a legal point of view, horizontal co-ownership has no special status. Horizontal co-ownerships are governed by the same rules set out in the Civil Code of Quebec that apply vertically (e.g. residential towers).
LEGAL FRAMEWORK FOR INSURANCE
Like vertical co-ownerships, horizontal co-ownership syndicates must take out the insurance coverage required by law. However, it is not uncommon for the syndicate to ensure only the common portions in a horizontal co-ownership. Many co-owners mistakenly believe that they only have to insure their home and that, obviously, syndicate insurance is not required for their unit. Although it is tempting for some to do this for several reasons, it is important to know that, in most cases, it is not possible to do so.
NATURE OF THE PRIVATE PORTIONS
The first paragraph of article 1073 of the Civil Code of Quebec states that "The syndicate has an insurable interest in the whole immovable, including the private portions. It shall take out insurance against ordinary risks providing for a reasonable deductible and covering the whole of the immovable, except improvements made by a co-owner to his portion, where they can be identified in relation to the description of that portion. [...] ». In 1994, when the new section 1073 was introduced, the Minister of Justice's comments stated: "This section reproduces section 442a C.C.L.C. while supplementing it. Unlike the previous law, which left the declarant or administrators the discretion to take out insurance, this section makes it an obligation. It thus aims to avoid legal and practical problems related to insufficient insurance, liability for repairs in the event of a claim, conflicts between experts regarding the assessment of damage, etc. [...] ». The law that the syndicate's insurance must cover the units, excluding the improvements that have been made to them, is therefore very clear. Even if all the co-owners consent, it is not possible to derogate from this obligation which is of public order of direction. In addition, it is generally not possible to qualify townhouses as improvements. Indeed, in most cases, it is not the co-owners who have or had their house built. Moreover, when buying a new home, the preliminary contract usually provides that the property sold by the developer consists of land and the house. The improvements relate rather to the choice of a granite countertop, instead of one of laminate.
RISKS ASSOCIATED WITH INDIVIDUAL INSURANCE
The first flaw in the individual insurance of townhouses by each co-owner consists in the impossibility of being sure that the houses will always be rebuilt, in case of partial or total destruction. In the case of a horizontal co-ownership, the private portions often share at least one common wall, so the destruction of one unit has direct consequences on other neighbouring units, which will be exposed to the elements. Not to mention the fact that the entire project may be affected in terms of the resale value of the units, if one or more damaged houses are not rebuilt.
Even if the declaration of co-ownership required the co-owners to take out insurance with an endorsement indicating that the sole purpose of the insurance indemnity is the reconstruction of the building, it is not guaranteed that all insurers agree to introduce this type of clause in their policy. This would therefore reduce the insurance offer for co-owners.
In addition, it would require the board of directors to constantly check that the co-owners' insurance policies include this endorsement. It should be noted that obtaining confirmation of insurance, on a given date, is not a guarantee that it will exist the day after that confirmation. The syndicate has no way of knowing whether the contract has been terminated by the parties, whether it has ceased to be in force or whether the insured has taken certain actions that compromise his right to compensation in the event of a loss, unless he himself is a beneficiary of the co-owner's insurance coverage.
Another problem related to individual home insurance: it exposes co-owners to insufficient insurance as to their civil liability, if they are at the origin of a fire destroying several houses. Indeed, because of their proximity, it is likely that several houses and their contents will be affected by the fire, causing several million dollars in damage, a sum significantly higher than the basic liability coverage. The insurance of the private portions by the syndicate has the advantage of preventing the subrogatory recourse of the insurer against a co-owner, a person who is a member of a co-owner’s household and a person in respect of whom the syndicate must take out insurance covering liability.
Finally, another major shortcoming of individual insurance is related to the right of the hypothecary creditor of the co-owner to be reimbursed for his claim from the indemnity, in the event of a claim. When this right is exercised, there is no reconstruction or rehabilitation of the building from the indemnity, which is used to pay the sums owed by the co-owner to his lender. It is article 2497 of the Civil Code of Quebec that recognizes this right: "The indemnities due to the insured are awarded to priority creditors or creditors holding a hypothec on the damaged property, according to their rank and without express delegation, subject to a simple denunciation and justification on their part, despite any provision to the contrary. [...] The only way to defeat the mortgagee's right to claim compensation is for it to be owed to the syndicate. Article 1075 of the Civil Code of Quebec provides that the insurance indemnity, in the event of a significant loss, is paid to the trustee appointed by the syndicate and that it must be used for the repair or reconstruction of the immovable, unless the syndicate decides to terminate the co-ownership.
Co-owners whose townhouse is individually insured are not immune to all worries, under the pretext that their policy covers their property as a single-family home. In the event of a claim, the insurer could accuse this co-owner of having made a false declaration, failing to mention that it was in fact a fraction of co-ownership. Remember that in insurance, a false declaration is an inaccurate statement made by the insured, in good or bad faith, about the nature or importance of the risk to be insured. This distorts the insurer's assessment of the risk it is being asked to insure. Thus, by providing all the information, the insurer may have claimed a higher premium, or it would have agreed to underwrite the risk, subject to certain restrictions, or it would have refused to underwrite the risk altogether. If full disclosure is not made by the co-owner, the insurer could invoke (rightly or wrongly) that it has been misled and, consequently, refuse to indemnify.
WHAT YOU SHOULD KNOW ! Insuring townhouses individually can cause a set-up problem in terms of compensation in the event of a major disaster. It can be difficult to agree on an orderly reconstruction of damaged homes when multiple insurers are involved.
WHAT TO KEEP IN MIND : The directors cannot ignore or ignore the obligations of the law regarding insurance, even if the co-owners unanimously make the decision to have only the common portions insured by the syndicate, each co-owner insuring his private portion.
WARNING ! Directors who do not follow the rules imposed by law could engage both the liability of the syndicate and their own in their personal capacity.