Replacement-value insurance policy: the Court confirms the obligation of the syndicate and the administrators

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29 September 2017
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In a recent judgment of the Court of Quebec, Small Claims Division1, the Court confirms the obligation for the Syndicate and its administrators to take out replacement-value insurance coverage on the entire building of the co-ownership. Failure to do so involves the personal civil liability of the members of the Board of Directors in case of insufficient coverage.

The claims of the parties according to the Court
The plaintiffs, two co-owners of the syndicate, claim $6118.74 from the Syndicate and from its former interim administrator, a representative of the promoter of the real-estate project. They accuse them of having inadequately insured the building. Following a fire that caused the total loss of the building the insurance compensation was insufficient to reconstruct the building and they had to pay, as a special compensation, $6118.74 to balance the deficit, which is the amount they claim.

The Syndicate claims that it was up to the applicants to obtain an endorsement covering the lack of insurance from their insurer and that this omission is the cause of their damage. For his part, the former interim administrator endorses the arguments of the Syndicate and adds that he was in good faith and that he was not at fault considering the circumstances.

The facts according to the Court
In November of 2008, the plaintiffs buy condominium units in the building of co-ownership whose syndicate is formed since July 9, 2008. The applicants want to rent these units to third parties in order to obtain rental income. They subscribe to the usual insurance civil liability and loss of gain and furniture content.

The other defendant, the former interim administrator, acted in that capacity at the time of purchase of the condominium units by the applicants. He also has interests in the company that built the condominium units and sold the units acquired by the applicants.

On October 3, 2008, a fire destroyed the building which was in divided co-ownership. The units of the applicants were considered total losses. The Syndicate sends its claim to its insurers for the common portions and the plaintiffs do the same for their privative units.

On October 30, 2008, the plaintiffs hear, at a special meeting of the co-owners of the Syndicate, that the cost of reconstructing the building exceeds by $454,939 the insurance coverage that had been taken by the Syndicate at the time when the other defendant was acting as interim administrator. All the co-owners are invited to submit a claim to their insurers for their share of the deficit.

The applicants show the Court that, after checking with their insurer, the latter confirms them that, unlike those of the other co-owners, their insurance policy does not cover such damage related to lack of insurance.

On June 30, 2009, the applicants receive a special contribution notice in the amount of $6118.74, an amount that they pay on September 1, 2010. They are now requesting that sum from the Syndicate as well as from the other defendant, the former interim administrator of the syndicate.

On the merits of the dispute, the Court concludes that the plaintiffs are entitled to reimbursement of the money they claim, and this, from both the Syndicate as from the former interim administrator for the following reasons:
The declaration of co-ownership clearly sets out the obligation of the syndicate's board of directors to take out comprehensive insurance covering the replacement value of the building, i.e. all the privative units and the common portions.

The declaration of co-ownership clearly sets out the obligation of the co-owners to obtain and keep in force an insurance covering the added value brought by improving the privative portions, the damage to their personal property, and protection against civil liability. According to the declaration, any other coverage is at the discretion of the co-owners.

These obligations derive from Section 1073 of the Quebec Civil Code, which reads as follows:
“1073. The syndicate has an insurable interest in the whole immovable, including the private portions. It shall take out insurance against ordinary risks, such as fire and theft, on the whole of the immovable, except improvements made by a co-owner to his portion. The amount insured is equal to the replacement cost of the immovable. The syndicate shall also take out third person liability insurance.”

According to the Court, the syndicate's argument that it was up to the applicants to see to it that they were insured against the consequences of a lack of insurance coverage, is therefore unfounded, since the declaration and the law are clear on this. The Court believes that the possibility for the co-owners to take out additional coverage does not reduce the clear obligation of the syndicate.

As for the personal responsibility of the temporary administrator, the Court notes that the same article of the declaration of co-ownership provides a mechanism for determining whether the insurance coverage is adequate and equivalent to the replacement value of the building. Under this article, this mechanism is optional when an interim administration is in place.

The Court notes that the provisional administration regime is in place during the period when the developer puts the units up for sale, and that until there are enough co-owners to take over and form a representative board of directors.

At the time of the fire, the building which was in divided co-ownership, was part of an interim administration regime. The Court notes that it is the provisional administrator who has taken all the decisions prior to the disaster which are related to the insurance coverage.

The Court notes that the principles set out by the sections 1308-1310, 1318-1320, 2136, 2138 and 2144 of the Civil Code of Quebec on this subject and that are applied by the Court in the Archambault v. Syndicat des copropriétaires du Manoir St-Sulpice case2 establish the legal framework for the personal liability of the directors. Whether he would be the manager of the property of another or the agent, the administrator of a co-ownership is required to act with prudence and diligence within the mandate entrusted to him and which is defined, among other things, by the terms of the declaration of co-ownership.

The Court therefore holds that the interim administrator had a duty to act as a prudent and diligent administrator in his efforts to obtain insurance coverage consistent with the terms of the declaration of co-ownership.

The Court considers that, being himself involved in the company that built the units, the temporary administrator was, in the opinion of the Court, in a privileged position to establish this replacement value. He had access to all the data related to the construction costs.

For his part, the former interim administrator justifies his error by the fact that he failed to include the amount of applicable sales taxes in estimating the replacement value and that the deficit corresponds to the amount of these taxes. The Court considers that he did not act as a prudent and diligent administrator if he committed such an error, and consequently, he must also be held responsible for the damage suffered by the plaintiffs.

The Court considers that the Syndicate and the interim administrator should be held jointly liable for the damage suffered by the plaintiffs, but by the application of Section 469 of the Code of Civil Procedure, the Court considers that between the two defendants it is the temporary administrator who should be held responsible for 100% of the conviction. The Court notes that he made a mistake while acting as temporary administrator, and this at a time when the Syndicate had no board of directors made up of co-owners.

The Court condemned the syndicate and the former director jointly and severally liable for the damage caused to the plaintiffs, but states that between the defendants, it is the latter who is 100% responsible for the amount of the condemnation of $6118.74, plus interest at the legal rate and the additional indemnity, and the application fee of $159.

For any questions about this topic, as well as on real-estate law in general, do not hesitate to contact our team of legal experts in the field.

1. Marineau et al v. Syndicat de la copropriété Pimbina - Phase I et al. 2014 QCCQ 9625
2. 2013 QCCQ 2215

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