Owners of heritage homes get an insurance surprise

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In recent months, some residents of Toronto’s historic Cabbagetown neighbourhood have been told by their insurer that, for reasons not entirely clear to them, their home is no longer insurable.

For Bruce Thomas, the change was inexplicable. The former physician’s house on Amelia Street is in the Cabbagetown Heritage Conservation District but has no specific heritage designation. Yet earlier this year he was told by his insurer of many years, The Wawanesa Mutual Insurance Co., that they would no longer provide coverage. The core of the problem, said Mr. Thomas, was the insurer’s decision that it would no longer “recognize replacement costs.” He got no satisfactory explanation of the change.

“We continue to write insurance for heritage homes on a policy by policy basis,” said Brad Hartle, a spokesperson for Wawanesa. “Heritage buildings require special care and attention,” he said, but “nothing specific has changed with the way we calculate replacement costs on these homes. Should a policyholder of ours have concerns with a decision we made, we are always willing to take another look.”

Mr. Thomas tried for several weeks to find an insurer that would take him on at a reasonable price, but again and again, he said, the stumbling block was replacement costs. Usually, he said, negotiations faltered once they realized his neighbourhood – where homes frequently sell for upwards of $3-million – is within a Heritage Conservation District. One quote he got was for more than $7,000 a year – close to twice what he had normally paid.

Ultimately, he connected with Economical Mutual Insurance Co., which provided an acceptable replacement cost clause. “I got insurance with more than I was getting for practically the same price,” he said. “It ended happily, but it sure was a lot of hassle.”

At community meetings in Cabbagetown, stories like Mr. Thomas’s abound. Some residents say they have had periods where they have not had any insurance at all for months. Others talk of being turned down flat because their home is more than 100 years old. The common thread seems to be insurers scared off by the potential high costs of rebuilding a heritage home after it is damaged.

Toronto’s Heritage Protection Services department has assured homeowners there are no requirements that a Cabbagetown home that needs to be rebuilt must be restored exactly as it was originally built 150 years ago.

Nevertheless, several homeowners have described interactions with insurers that raised heritage as an issue.

“Older homes can be more complex and many factors act together to determine premiums to ensure the home is insured to value properly,” said Jennifer Beaudry, a spokesperson for one of Canada’s largest providers of home insurance, Intact Financial Corporation. “These factors can include older components of the home’s infrastructure such as electrical, heating and plumbing as well as proper maintenance.”

Some see the replacement issue as a symptom of wider uneasiness in an insurance industry rocked by the prolonged COVID-19 pandemic.

Adam Mitchell, President of Mitchell & Whale Insurance Brokers Ltd., said insurers are seeing the cost of fulfilling replacement guarantees rising at the same time as parts of the industry – such as the commercial market – are in disarray.

“When they are not making money in parts of their book, some other things get the spotlight of internal auditors to fix and correct. I wouldn’t be surprised if some heads of actuaries came into particular insurance companies and said: ‘We’re out of that. That needs to double in price or the model says this won’t work.’”

In a recent report, Opta Information Intelligence Corp, which provides market data to insurers, found reconstruction costs were 5 per cent higher across Canada in 2020. Costs in Alberta and British Columbia lead the way with 6- to 8 per cent price increases. These costs were driven in part by competition for resources and labour from the renovation market. Pre-pandemic, 1 in 50 homes were under renovation; by September 2020, 1 in 20 homes were under renovation, a 150 per cent increase. Additionally, Statscan found residential construction permits were up dramatically in 2020, peaking at more than 50,000 permits a month in June.

In addition to labour costs rising 10 per cent, raw materials went on an absolute tear in 2020 and have only continued rising in 2021. You need framing lumber in almost all renovation or rebuilding projects, and in May the price of Western SPF 2x4s hit US$1,593 per thousand feet of board, almost five times the price of the same lumber in early 2020.

And that’s all before you get into the unique needs of period homes. Greg McManus has been a contractor in the Toronto area for 30 years and specializes in heritage reconstruction. He says depending on what the homeowner wants, the costs to renovate or restore a heritage house could be five times higher than if it was a simple replacement with modern commodity materials and finishes. Add the current lumber pricing to the extra costs for hand-made baseboards or plaster crown moulding and things get dicey.

“It’s changed my relationship with my customers: I no longer offer firm pricing, I go cost-plus which means we undertake to track all of our expenses and we have a pre-arranged agreement on markup,” said Mr. McManus. That way when lumber jumps 20 per cent in a month, he won’t pay the difference.

But even if Toronto’s heritage bylaws don’t force the insurer to do extra work on interiors, or even exteriors, Mr. Mitchell said unless an insurance policy has a cap on replacement costs it’s what the homeowner wants that defines how much gets spent. “By contract law of the insurance policy, the spirit of it is to put you back into the same house you had,” he said. “If you guarantee replacement costs that’s 100 per cent of the liability. If it costs $8-million to do it, they are on the hook.”

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