Insurance basics for sectional title schemes

There is a lot that Sectional Title trustees and Home Owners’ Association directors can do to avoid large insurance claims arising in their housing schemes – and also things that they must do to avoid any claims that are submitted from being repudiated.

Insurance in community housing schemes is considerably more complicated than most people think, and trustees and directors need professional help and a good grasp of what their insurance policies and schedules cover to comply with the relevant legislation – which is discussed below.

Their priority must be to ensure that there is adequate insurance in place at all times and that the ‘average’ clause is never applied to any claim made by their scheme as a result of under-insurance. This type of clause occurs in most insurance policies and requires that the insured party – in this case, the body corporate or HOA – bears a proportion of the loss if disaster strikes and assets are insured for less than their replacement value.

Consequently, it is vital, especially in sectional title schemes, that a professional replacement value survey is conducted at least every three years to ensure that the units in the scheme, any other buildings, and common property such as boundary walls, security gates, and lifts are all insured at their full replacement value.

This survey must be conducted by a qualified and accredited expert with professional indemnity insurance, and the updated unit values must be presented to owners at the next AGM, especially if there is a need to increase the insurance premium to ensure adequate cover.

Some owners may query the fact that unit replacement values generally exceed market values, but this is because replacement also includes demolition and rubble removal, professional fees, and alternative accommodation if disaster strikes and the units have to be rebuilt.

In addition, trustees and directors should work together with brokers who specialise in community housing insurance to:

Avoid “excess” shocks

More than 70% of all insurance claims in sectional title schemes are for geyser repairs or replacements – but many owners are not aware that they are individually responsible for the “excess” that is payable on any such claim.

Avoid bill shocks

These generally occur when the complex or an individual owner receives an unusually large account from the local authority for electricity or water usage. Unseen water leaks are a huge problem, especially in older buildings with galvanised pipes. These can of course lead to rising damp and water damage to buildings, but often they will just result in a sudden huge increase in water charge on a municipal bill.

One way to avoid this is for complexes to install bulk test meters complete with Smart software that monitors the flow of water in the complex at regular intervals and can quickly warn of unusually high usage that might indicate a leak.

Decide which cover limits are worth increasing

For example, it is seldom worth raising the cover limits on certain items often included as standard in the insurance policy such as machinery breakdown, or additional security guards if something happens and the perimeter wall or security gate is damaged.

However, it is worth increasing the limit of cover to the maximum allowed for power surge damage, as such events are becoming increasingly frequent due to loadshedding and unplanned outages, and modern complexes tend to have a lot of electronic equipment that can be affected.

Follow all compliance requirements to the letter

To ensure that the insurance is not invalidated, it is the responsibility of trustees and directors to ensure that fire-fighting equipment is inspected and serviced annually, that lift inspections and reports are completed every two years and that all compliance certificates required for electrical, gas, and electric fence installations are valid and current. Many policies also stipulate, for example, that generators or inverters can only be installed by certified electrical contractors, or that only geysers with a five-year warranty may be installed, and only by qualified and accredited plumbers.

Insurance companies are going to ask for these certificates if there is a claim. Compliance and good record-keeping are thus essential.

More about compliance certificates

And finally, trustees and directors need always to keep on top of maintenance in their complexes or estates. In addition to the planned maintenance and replacement events set out in a 10-year maintenance plan, they need to ensure that any problems which arise suddenly, such as a roof leak, are fixed as quickly as possible because their insurance will not pay for damages arising from neglect – in the same way, that car insurance companies won’t pay for engine damage in a car that has not been serviced.

What the Sectional Title Schemes Management Act says

Section 3 of the Sectional Title Schemes Management Act stipulates that the body corporate must insure the buildings and the common property of a sectional title scheme, while Regulation 3 lists the types of events that must be insured against and Prescribed Management Rule 3 provides for owners to increase or expand the insurance cover by means of a special resolution. PMR 3 also stipulates that the insurance policy schedule must include the replacement value of every unit in the scheme – and that a replacement value survey must be conducted at least every three years to update these values.

When it comes to HOAs, they are governed by either a Memorandum of Incorporation or a constitution, which will usually also provide for the insurance of the common property (such as boundary walls and security systems) as well as any property and equipment used by the HOA in the management of the scheme.

In addition, the Community Schemes Ombud Service (CSOS) Act stipulates that all community housing schemes must have fidelity insurance against loss of money due to deliberate theft or fraud by their trustees or directors, and for managing agents to have similar fidelity cover.

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