Are owners entitled to cash in lieu of damage claims in sectional title schemes?

When it comes to insurance claims for property damage in sectional title schemes, many owners may wonder if they are entitled to cash in lieu of repairs. The short answer is no, and here’s why.

According to South Africa’s Sectional Titles Schemes Management Act (Act 8 of 2011), specifically Section 3(1)(j), insurance payouts must be used to repair or rebuild damaged buildings. This legislation mandates that any insurance money received for damages, unless there’s total destruction of the building, should be applied to the repair and reinstatement of the property. In layman’s terms, this means the insurance payout goes directly toward fixing the damage, and it is not meant for cash distribution to individual owners.

Why this requirement is important

This regulation exists to protect the interests of all owners collectively. Here are the main reasons this rule is so significant:

1. Collective protection
   The legislation ensures that insurance policies serve their intended purpose: funding repairs for damage caused by insured events. If individual owners could receive cash instead, there’s a risk that they might use these funds elsewhere, leaving the damaged property unrepaired. This would unfairly shift the burden of financing individual needs onto all other owners, while the shared property suffers neglect.
2. Mortgage bondholders’ security
   When an owner has a mortgage on the property, the mortgage bondholder (the bank or lender) is also interested in the policy, especially in seeing that the property remains well-maintained and secure. This rule ensures that the property is promptly repaired in case of damage; thus safeguarding the lender’s investment. In situations where a payout might be considered, it would be correct for the bondholder to receive the funds rather than the individual owner.
3. Protection against levy deductions
   This legislation also prevents a body corporate from applying insurance payouts to unpaid levy debts instead of making the necessary repairs. By directing the funds to reinstatement, the Act ensures the property is restored, benefiting all owners rather than addressing financial issues unrelated to the property.
4. Security in transactions
   Ensuring the payout goes to the body corporate’s premium-paying account further protects against the risks of cybercrime. With the insurer already having the correct account details on record, there is less risk of cyber theft, which has become increasingly common in insurance transactions.
5. Reduced administrative burden and accurate record-keeping
   When the insurer pays the body corporate directly, it simplifies the administration process. The body corporate can then handle payments to the contractor or, if an owner has already paid for repairs, reimburse that owner. This process ensures a clear and consistent record of the claim, which may be important for future reference.

Final thoughts

In summary, although it may seem appealing for an owner to receive cash in lieu of repairs, there are strong, practical reasons behind the legislation that requires repair funds to be used as intended. This approach provides a safeguard for all parties involved, the owners, the mortgage lenders, and the body corporate, ensuring the property remains in good condition and everyone’s interests are protected.