“Best terms pricing” for strata insurance –but best for who?
A recent article in the Vancouver Sun makes mention of an arcane practice among insurance brokers called “best terms pricing.”
It seems that at the discretion of the insurance broker placing the policy, this pricing model can be used to set the premium for a policy of insurance on a strata complex.
Several insurance companies place bids on the complex to insure different percentages of the whole value, presumably to spread the risk in the event of a catastrophic loss.
Thus, if there were three bids for 90% of the value of the complex (i.e. $0.23/$100 for 30%, $0.25/$100 for 30% and $.027 for 30%), the insurance broker still needs to pick up an extra 10% coverage (as s.149 of the Strata Property Act requires insurance for full replacement cost, not just a portion thereof).
If none of the first three bidders can be persuaded to up the percentage that they wish to cover and a fourth insurer bids at $0.45/$100 for the remaining 10%, then the premium for the whole policy is based on the highest bid, namely $0.45/$100. This would result in a premium which is substantially higher than would be calculated under any of the first three bids.
It would seem that the commission to the insurance broker would also be higher, as it would be based on the premium value.
Thus, a win for the first three insurers and the insurance broker, but a huge loss for the insured strata corporation.
Why the insurance premium would not be calculated on a weighted percentage of the bidding insurers is not clear.
Insurance brokers have a fiduciary duty to their clients and a duty of care to provide both information and advice to them, so one would expect that the agent would attempt to get the lowest cost and the best coverage possible. To do otherwise would seem to be a conflict of interest.
As the article suggests that the majority of condo complexes in BC are subject to this pricing model, it might be contributing to the escalating insurance premiums faced by BC condo owners in recent years.
If the government was to regulate this practice out of existence in this province, it might give some insurers pause to provide coverage at all –and apparently there are only a handful of them providing it at present.
However, if private industry can’t or won’t step in to provide an essential service to BC condo owners, it is incumbent on the government to do so.
While I am no fan of government interference in the private market, one would think that if push came to shove, ICBC’s mandate could be expanded to provide strata insurance to those complexes that cannot obtain it through the existing insurance companies that service British Columbia.
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Questions? Call Kenneth Pazder or Melissa Valana (604-682-1509) at Pazder Law Corporation anytime for a free consultation.
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