Insurance essentials for community housing schemes
There is much that Sectional Title trustees and Home Owners’ Association directors can do to avoid large insurance claims arising in their housing schemes – and also much that they must do to avoid any claims that are submitted from being repudiated.
So says Andrew Schaefer, MD of leading property management company Trafalgar, who notes that insurance in community housing schemes is considerably more complicated than most people think, and that trustees and directors need professional help and a good grasp of what their insurance policies and schedules cover in order to comply with the relevant legislation.*
“Their priority must obviously 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 ST 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, he says, 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, says Schaefer, 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 ST 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.
“They may also have to make the excess payments on any other claims arising from a geyser burst, such as for water damage to ceilings or laminated floors, and it can be difficult to come up with these lump sums at short notice. For this reason, Trafalgar Financial Services does offer ST schemes a specialist insurance product called Trafex which covers owners against the most common types of excess, for under R100 a month per unit.”
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 at the moment,” he says “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.
“Our strong suggestion is thus that complexes 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 any 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,” says Schaefer.
“But these days it is definitely 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,” he notes.
“This might seem like stating the obvious, but the correct reports and certificates are the first thing an insurance company is going to ask for if there is a claim. Compliance and good record-keeping is thus essential.”
And finally, Schaefer says, 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.
*Section 3 of the Sectional Title Schemes Management Act stipulates that the body corporate must insure the buildings and the common property of a ST 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.
For more advice on insurance in community housing schemes, trustees and directors can contact Andrew Schaefer at Trafalgar on 011 214 5228 or watch the free webinar on the subject at https://www.trafalgar.co.za/webinars/