Syndicates of co-owners must establish a self-insurance fund that is liquid and available in the short term. The purpose of this fund is to anticipate and finance, in particular, expenses related to the execution of work following a loss. This fund, mandatory under Article 1071.1 of the Civil Code of Quebec, has become necessary due to a substantial increase in insurance deductibles. Previously, the amount of these deductibles was negligible most of the time, whereas today, it can reach tens or even hundreds of thousands of dollars.
An indispensable monetary reserve
The self-insurance fund enables the creation of a crucial monetary reserve to pay amounts not covered by the syndicate’s insurance. For example, in the case of a loss, if the deductible is $10,000 and damages are assessed at $18,000, the insurer will pay only $8,000.
Furthermore, it should be noted that the government has determined, by regulation, the terms establishing the minimum contribution of co-owners to this fund.
Purpose
The self-insurance fund, which relates to the insurance coverage of a co-ownership, is intended for the payment of the various deductibles that the syndicate of co-owners must pay following a loss. These deductibles affect building insurance and the civil liability insurance of the syndicate, directors, meeting officers, and the manager. This fund must also serve to repair damage to property for which the syndicate has an insurable interest (e.g.: payment of the cost of rehabilitation work on the building not indemnified by the insurer), when the contingency fund or insurance indemnity cannot cover it (e.g.: in the case of an insurance limit, under insurance or exclusions).
This reserve is established based on the deductible that the syndicate of co-owners must pay in relation to the co-ownership’s insurance coverage, plus a reasonable additional amount to cover other required payments. The financial contribution of the co-owners must equal the highest deductible (Article 2 of the Regulation), among all the insurance coverage taken out by a syndicate. Deductibles for earthquake and floods, if such protections are part of the insurance contract, are excluded from the calculation.
Minimum contribution to the self-insurance fund
Under Article 2 of the Regulation to establish various measures in matters of divided co-ownership insurance, the board of directors must, when adopting the annual budget, determine the contribution of co-owners to the self-insurance fund provided for in Article 1071.1 of the Civil Code of Quebec. This obligation is in addition to determining common expenses and the sums allocated to the contingency fund.
The Regulation specifies three calculation methods, depending on the fund’s level of capitalization, based on the highest deductible taken out by the syndicate (in our examples, always $100,000).
1. Capitalization less than or equal to half of the highest deductible
When the fund is less than or equal to $50,000, the minimum contribution equals half of the deductible.
Year 1 (example): Deductible = $100,000; Initial fund = $0
Minimum contribution = $50,000
Result: the fund reaches $50,000
2. Capitalization greater than half the deductible but less than its total amount
When the fund is greater than $50,000 but less than $100,000, the contribution must cover the difference to reach the deductible.
Year 2 (example): Deductible = $100,000; Initial fund = $50,000 (carried over from Year 1)
Minimum contribution = $100,000 – $50,000 = $50,000
Result: the fund reaches $100,000
3. Capitalization equal to or greater than the deductible
When the fund already equals or exceeds $100,000, no additional contribution is required.
Year 3 (example): Deductible = $100,000; Fund = $100,000
Required contribution: $0
Result: the fund reaches $100,000
4. Limit
The Regulation provides for a specific limit: if the minimum contribution calculated under the previous rules causes the fund to exceed $100,000, it may be reduced to cap the capitalization at that amount.
Example: Deductible = $100,000; Initial fund = $95,000
Normal contribution according to the rule = $50,000 (since the fund is below half the deductible)
But this contribution would bring the fund to $145,000
Application of the cap: the contribution may be reduced to $5,000 to reach exactly $100,000
A separate fund
The amounts accumulated in this fund remain the property of the syndicate. They are not refundable to co-owners who sell their private portion. In addition, as with the contingency fund, the self-insurance fund cannot be seized by a creditor who has obtained a judgment against the syndicate, unless this judgment concerns the recovery of an amount to which the self-insurance fund is related.
Furthermore, the board of directors must use this fund wisely. Under no circumstances may it be used to finance maintenance expenses related to the building or the day-to-day management of a co-ownership. It should only be used to pay for the repair and replacement of common portions following a loss.
WHAT YOU SHOULD KNOW ! The self-insurance fund is established based on deductibles and a reasonable additional amount to cover other required payments. This fund must be liquid and available in the short term, so that the syndicate can act promptly when repairing damage to insured property.
WHAT TO KEEP IN MIND : To avoid any confusion between the amounts paid into the administration fund (intended for current operations), the contingency fund, and the self-insurance fund, a separate bank account should be opened for each of them.
WARNING ! The failure of the board of directors to establish a self-insurance fund could be considered a fault. Asa mandatary of the syndicate, board members have the obligation to comply with the law and act diligently. Their liability could also be engaged if they establish a clearly insufficient self-insurance fund in relation to their obligations, as is the case with the contingency fund.
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