Included in the executive duties as per regulation 14 of the CSOS Act, the scheme executives must take reasonable steps to obtain sufficient information and advice on matters to be decided on so they can make conscientious and informed decisions.
It is good practice is for the trustees to deal with the insurance renewal a week or two ahead of policy renewal, preferably at a meeting of trustees. In order to make informed decisions, they should table:
- A copy of the written advice from the broker, commonly known as a Letter of Advice (LOA).
- A copy of the actual comparative quotes and present insurer’s renewal invitation
- A copy of the claims history – summary of claims for the past year, preferably the last three years.
- A copy of the most recent valuation and Schedule of Replacement Values (SRV).
The broker’s responsibility
First prize is that the broker or advisor attends the meeting but practically this is not always possible. This is the reason the delivery of good quality written advice is so important as it allows the trustees to be properly guided and informed when making policy renewal decisions.
Make sure that the insurance advisor (broker) has provided written advice (record of advice) in line with Financial Advisory and Intermediary Services Act (FAIS Act) regulations which should reflect the following:
- A brief summary of the information and material on which the advice was based.
- The financial products that were considered.
- The financial product recommended along with a clear and detailed justification.
This annual record of advice should be filed with the trustee’s minutes or resolution once the trustees agree on policy renewal.
Check when last a building valuation was done and that the automatic policy replacement value increase does not merely default to 10% or 15% on renewal. The renewal should be in line with that valuation as well as officially recognised building inflation rates. The body corporate must undertake a valuation at least every three years.
Check the fidelity formula and whether the correct fidelity figure is included per last AGM:
Fidelity cover needs to be for a minimum amount of:
(a) the community scheme’s investments and reserves at the end of its last financial year; and
(b) 25% of the community scheme’s operational budget for its current financial year.
CSOS & STSM
Our conclusion and understanding of the Community Scheme Ombud Services (CSOS) Act regulations and the Sectional Title Schemes Management (STSM) Act Prescribed Rules is that the CSOS Act sets out the minimum amount of cover required but the owners – at a general meeting – will decide if more cover is needed in terms of the rules. So, check latest financials for the minimum and compare it to what was agreed upon at the last AGM. Make sure that the policy reflects the higher of the two.
Also, ensure that the policy wording meets the requirements of the new legislation and that is does not simply cover dishonesty of trustees as traditional policy wordings imply.
Thirdly, check the amount of public liability or property owner’s liability. There should be a minimum of R10 million liability cover but we recommend at least R50 million.
Lastly, check the claims ratio and history. Ensure that the current premiums are fair and sustainable. The insurance advisor should discuss this aspect with the trustees. In very broad terms, a fair premium would be in line with an average claims ratio of between 35% – 50% of premium.
Therefore, in summary – the trustee’s checklist at policy renewal:
– Did the scheme receive written advice with comparisons?
– Valuation done within last three years?
– Replacement value escalated correctly?
– Schedule of Replacement Values (SRV) correct?
– Fidelity cover correct?
– Liability cover sufficient
– Claims history and claims ratio in order?
– Any other cover required, e.g. gym equipment and general liability?
Trustees are best advised by an independent insurance advisor who has a good understanding of the sectional title insurance requirements for which trustees are ultimately responsible. Insurance is an important aspect, ensuring that scheme owners are adequately covered for their property assets, fidelity and liability.
Author: Mike Addison
Contact Addsure – The Leaders in Sectional Title Insurance – to get fit and proper advice from advisors who understand Sectional Title. Contact us in Johannesburg (011) 704-3858; Durban (031) 459-1795; Cape Town (021) 551-5069