Community scheme insurance and AGMs

19 March 2021 | Mike Addison

Very often, at an annual general meetings (“AGM”), important insurance aspects are overlooked. This article will provide a few simple tips on how to avoid some of the pitfalls and risks.

Although this article applies to sectional title schemes, save for the schedule of replacement values, it makes sense for homeowners’ associations to follow more or less the same order at AGMs in respect of insurance.

Preparing the insurance aspects for the AGM is actually quite a simple task, but certain basic steps need to be followed.

Prescribed Management Rule (“PMR”) 17(6) of the Sectional Titles Schemes Management Act (“STSMA”) sets out the order of business at general meetings with PMR 17(6)(j)(ii) and (iii) specifically dealing with insurance.

We suggest the following as an example when setting out the insurance agenda items:

• Approval of the Schedule of Insurance Replacement Values (“SRV”), and

• Determination of the extent of insurance cover:

• Liability (PMR 23(6));

• Fidelity (PMR 23(7)), and

• Additional Cover (PMR 23(8)).

It is a good idea to spread these out as line items, particularly liability, fidelity and additional cover, in this format rather than a direct “cut and paste” from the rule which simply reads, “determine the extent of the insurance cover by the body corporate in terms of rules 23(6),(7) and (8).”

The reason for this, is to ensure that the item of insurance is properly discussed and not glossed over. The chairperson may otherwise not know what rules 23(6), (7) and (8) refer to or mean, and very important items will be at risk of not being dealt with.

To illustrate the danger of not dealing with this properly, let us take a look at a scenario:

A “good managing agent” takes over management from a “naughty managing agent” and immediately sets about to plan for an AGM which is overdue. Financials are available and a budget is prepared.

The insurance is not looked at properly, and the current policy has the standard old format fidelity cover of R50 000.00 (Fifty Thousand Rand) which does not cover the dishonesty of a managing agent. At the AGM, the fidelity is glossed over and not dealt with. A couple of weeks after the AGM, a large fraudulent event amounting to R1 000 000.00 (One Million Rand) is uncovered. Had this been properly dealt with at the AGM, there would have been an appropriate policy in place and this would have been covered. Now there is a loss of R1 000 000.00 (One Million Rand). Who is to blame?

This highlights the importance of the AGM as a starting point, and even the minutes of the last AGM to check whether these important items were dealt with. In this scenario, I would ask whether the trustees had written advice from their broker in terms of the Financial Advisory and Intermediary Services Act. Did the new managing agent check the insurance ahead of the AGM such that fidelity could be properly presented?

In this scenario, the writer believes that the trustees, the broker and the management are all blameworthy. This scenario applies equally to HOAs, refer to the Community Schemes Ombud Service (“CSOS”) Regulation 15.

By following the above, this could have been avoided.

So, let us now unpack the insurance agenda items:

Approval of the SRV

PMR 23(3) states that the body corporate must obtain a replacement valuation of all buildings every 3 years and present such to the AGM. PMR 23(4) follows, stating that “the body corporate must prepare before each annual general meeting schedules showing…etc.”

This is important to understand, as it certainly does not state “take a quick photocopy of the latest policy schedule”. However, this is so often done, and in the writer’s opinion, very risky.

The SRV should be prepared properly, and be based on the valuation undertaken. It is the policy schedule that is subsequently amended to match the prepared schedule, not the other way around.

We suggest that the schedule be properly presented to the members at the AGM, reference made to the latest valuation, have a copy at hand at the meeting, and the implications of the additional sums column explained. Presenting this properly, effectively hands over the responsibility of the insurance sums to the owners collectively for the year ahead. The SRV is a separate document, and although later partially reflected or mirrored in the policy, stands alone as part of the AGM pack.

In the event of a large claim being made later, where an owner finds themselves financially burdened with average being applied, being underinsured and receiving far less than the cost of damages to their section, you as a trustee and/or managing agent will want to be sure that this part of the AGM had been dealt with properly. At the time of writing this, we are busy with such a very large storm damages claim, and the writer has complimented the trustees for having all of this in order, which records are even proudly being presented to the loss adjuster and the insurer’s quantity surveyor to prove that average need not even be considered.

Liability (PMR 23(6))

Very simple to present at the AGM, yet very often overlooked. The prescribed rule simply states that this cover must be in place for a minimum amount of R10 000 000.00 (Ten Million Rand). These days, off the shelf community scheme policies have R50 000 000.00 (Fifty Million Rand) standard cover, yet I still see policies floating around with R1 000 000.00 (One Million Rand) or R5 000 000.00 (Five Million Rand) cover. It is a good time to verify the cover and amount so that this is confirmed at this point of the meeting.

Fidelity (PMR 23(7))

This has already been alluded to above and perhaps, the most glossed over item. One needs to understand that Regulation 15 of the Community Schemes Ombud Service Act (“CSOSA”) sets out a simple formula for the minimum amount of fidelity required. With the financials and budget at hand, this figure should be estimated ahead of the AGM, and even already applied to the policy. Read in conjunction with PMR 23(7), The amount as per Regulation 15 is then confirmed as enough or a higher figure is agreed upon.

Additional Cover (PMR 23(8))

Although a special resolution is required here, other items may need cover, given the circumstances. The body corporate may have a gym, or other amenities which need contents cover and additional liability. Arguably, additional cover such as legal cover or levy cover should be dealt with here.

Another practice, which is intended to have good intentions, transparency etc. is to include a copy of the latest policy schedule with the pack. Our experience is that this is generally a bad idea and has done more harm than good, occasionally having caused disputes.

Very often policy terms and conditions change during the year, and sometimes, even another policy replacing the one presented at the AGM. Then at the claims stage, an owner, who has only been provided with that copy, is angered when he or she finds that an excess has been increased, or something no longer covered.

Another problem is where such policy schedules provide additional information such as owner names and door numbers as well as their bond details. We have had complaints in the regard where unscrupulous salespeople have obtained such and used this for marketing purposes. There is also the risk of such owners being exposed to ill intended information hunters and fraudsters.

It is best to rather only provide the actual SRV in the pack and make the latest policy schedule available to owners upon request.

It is often a good idea to invite your broker to attend the occasional AGM so that they may present this section, of the AGM, to the owners. This is not always possible, however, now much more easily achieved as we work more and more with online meetings.

Should you wish to find out more about a specific point made and/or require our assistance, please contact us on 061 536 3138 or email info@tvdmconsultants.com.

About the Author: Mike Addison owns Addsure, a specialist sectional title insurance and financial advice service provider.