By: Jonathan Velto and Guy Gioino

A restaurant fire damages the entire high rise complex. A resident slips and falls because the snow removal contractor didn’t do their job. A leak from under a kitchen sink affects 8 units on multiple floors. A painter working in a tenant space falls off a ladder. Who should be responsible for the myriad of losses in a multi-tenant commercial or residential building and more importantly, who ultimately will end up being responsible?

The answer is, it depends. For property claims sustained in the building, responsibility for repairs to both common elements and within units depends on the approach that the building’s governing documents dictate. For liability claims, it depends on what risk transfer/hold harmless contracts are in place and how adequate the insurance policies obtained by third party contractors/vendors are written.

PROPERTY CLAIMS: Understanding a building’s governing documents
Generally speaking, a building’s governing documents – their bylaws and proprietary leases - will dictate what the building is responsible for insuring and repairing. Each building will subscribe to one of the following:

  • Bare walls – The building assumes minimal responsibility, only from the bare studs out. Unit holders/shareholders are responsible for everything else, including non-load bearing walls, etc. 
  • Original specs – Anything original is the building’s responsibility to insure and repair. This includes: ceilings, walls, counters and original fixtures – anything upgraded by a previous or current resident fall under the current unit owner/shareholder/tenant’s responsibility. This is the most common approach. 
  • All-in – The building assumes more responsibility than the unit owner. Any real property in the building, including the units, is the building’s responsibility to insure and repair. In this scenario, every upgrade must be accounted for and included in the building’s insurance policy limits, otherwise, if there’s a property claim, the building could be underinsured. Additional insurance costs are typically passed onto the tenant via monthly maintenance fee or assessment. In this case, residents should still carry their own insurance for items such as personal contents, additional living expenses, and liability coverage.

LIABILITY CLAIMS: Transferring risk to a third party via contract agreements
There are a number of ways to protect the building entity from becoming liable for claims stemming from work done by third party vendors on the premises. Consider the following best practices when you are transferring your risk through contracts and hold harmless agreements with your third party vendors:

  1. The certificate of insurance isn’t enough. When there’s any type of repair or demolition work done in a building, it’s important to have proper risk transfer in place, which traditionally means getting a certificate of insurance from the contractor and any sub-contractors they may use. Unfortunately, that’s not enough anymore. The demand for these certificates has increased, and the provinces don’t use a standard, regulated form when they issue a certificate electronically. The certificate of insurance may not reflect common endorsements or exclusions.
  2. Diligent review of third party policies. In addition to the certificate of insurance, ask for a full copy of the contractor and potential sub-contractors’ insurance policies. This will allow your HUB broker and your legal department to review the policy language and uncover coverage gaps and exclusions that even the sub-contractor likely doesn’t know exist. Examine the policy language, indemnification provisions and more.  
  3. Consider greater limits for high-hazard work. When the scope of a project contains high hazards, like major demolition, elevator modernization or craning AC units onto the roof of a high-rise, consider asking the contractor to take out a policy with higher limits. When big things go wrong, the liability can be catastrophic.
  4. Vet vendor risk in advance of a catastrophe. Establish relationships with third party vendors now, ahead of potentially catastrophic situations, like a hurricane or flooding. When you’re desperate to get someone to repair or rebuild, you may not have time to appropriately vet them or their insurance policy. Solidifying a partnership now allows you to review their policy language before you need them.   
  5. Make sure there’s an official contract in place. Even if a contractor has offered you their certificate of insurance, if you don’t have a contract that transfers risk to them in writing, you could be liable. For example, if you hire a plumber to do work that results in water damage to the building, and you don’t have a contract that stipulates the plumber’s job responsibilities and liability agreement, you will be on the hook for all damages.  

When a building’s governing documents and third party contracts are unclear, or a situation arises where the exposure is great, it will result in a claim. In addition to the great cost of a liability claim - especially if you’re the liable party - the building owner/operator could even be found uninsurable going forward. 

Having proper risk transfer in place is critical to tendering liability claims to the responsible party.  Failure to do so can leave the building exposed to the ultimate responsibility for both defense costs and bodily injuries/property damages sustained. This affects not only the insurability of the building, but also the cost of future premiums. For more information on how you can transfer your risk to the right policies and institute proper risk management strategies, contact your HUB agent today