Lawyer questions meaning of ‘fair market value’ in report on national flood insurance

By Terry Davidson

Law360 Canada (October 17, 2022, 12:09 PM EDT) -- A Toronto real estate lawyer is questioning the wording in a recent report on proposed national flood insurance and its recommendation that “fair market value” be paid to homeowners deemed as living in high-risk areas and in need of relocation.

Last month, Ottawa announced that its Task Force on Flood Insurance and Relocation had published a report on what would be Canada’s first national flood insurance program, which would potentially be run through a public-private relationship with insurance providers.

But the report, Adapting to Rising Flood Risk: An analysis of Insurance solutions for Canada, also explores the potential voluntary and mandatory “strategic relocation” of those deemed most at-risk.

It talks of compensation for homeowners who agree to be relocated to areas facing lower risk — or no risk — of flooding, as well as potential mandatory buyouts of at-risk properties through expropriation.

The report’s authors looked at how municipal, provincial and territorial governments have been increasingly looking toward strategic location but found that property buyout programs “have primarily been ad hoc” and only developed in the “aftermath of a disaster.”

They found that buy-out programs across Canada vary in terms of “coerciveness” — that is, “the perceived degree of choice a homeowner has in where to accept a buyout. Some jurisdictions have resorted to “expropriation to acquire select properties” in cases of those deemed most at-risk.

The report notes that “compensation offered to homeowners has also varied across Canadian programs, with some programs providing payments based on fair market value, tax assessed value, or a pre-determined capped limit.

“At the household level, compensation should also consider what would be required to purchase a comparable property, in a comparable neighbourhood, but in an area with less risk,” the report recommends.

It is this aspect of compensation that has commercial real estate lawyer Ray Mikkola asking questions.

The problem, said Mikkola, is that the value of flood-prone properties has been reduced because of the flood risk. This is due to a number of reasons:

One, homeowners in such areas are generally unable to get insurance, either because it would be too expensive or outright unavailable. Two, if insurance is unavailable for the property, it is unlikely any new private buyer would be able to obtain a mortgage should they need one.  

These drive down the value of the property.

Those owners deemed needing relocation and have their properties expropriated would need to be paid more than fair market value to be able to buy a comparable home in a comparable neighbourhood not at risk of flooding, said Mikkola, a partner with Pallett Valo LLP, in Mississauga.    

Ray Mikkola, Pallet Valo LLP

“The problem is the fair market value of a house which floods every year, for which you can’t get insurance and for which no bank will lend money, is likely worth less than a comparable property that doesn’t flood. This is why the report also says that ‘compensation should also consider what would be required to purchase a comparable property, in a comparable neighbourhood, but in an area with less risk’. This presumably means that the compensation will have to exceed the fair market value of the at-risk property. While such additional ‘replacement based’ compensation is contemplated by existing expropriation statutes, in the case of flood-prone residential properties, such compensation would likely have to become pretty much standard”.

Public Safety Canada was asked to comment on this, but a response was not received by press time.

Earlier, the ministry was asked about the report’s use of the word “coerciveness” and what it means in this context.

“Please note that [this part of the report] is meant to synthesize best practices for strategic relocation, developed in consultation with academic subject-matter experts,” a spokesperson relayed in an e-mail. “It is not meant to convey a specific policy direction. Policy decisions on the proposed approach to strategic relocation have not been made.”

The Lawyer’s Daily was denied an interview with any official who could speak to the report.  

“Unfortunately, our policy experts have confirmed that members of the Task Force aren’t currently participating in interviews,” said spokesperson Magali Deussing.

According to an Aug. 30 news release about the report, flooding is the country’s most common natural disaster and causes $1.5 billion in damage to homes, property and infrastructure every year.

When it comes to personal property damage, homeowners end up taking on around 75 per cent of the repair costs, it states.

At the time, the Insurance Bureau of Canada stated that insurers are “eager to support” a program “capable of offering flood insurance to hundreds of thousands of high risk Canadians.”

The report’s release came less than a year after flooding ravaged parts of British Columbia.

In November 2021, floods destroyed homes and farms and damaged roads and bridges in that province. It led to at least five people dying and resulted in the B.C. government declaring a state of emergency in the province. The Insurance Bureau of Canada reportedly stated that B.C.’s flooding resulted in around $675 million in insurable damage alone.

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