Can insurers cancel a scheme’s policy and if so, why would they?

As trustees of a sectional title scheme, one of your key responsibilities is to ensure that your community remains properly insured. This is clearly set out in the Sectional Tite Schemes Management Act 8 of 2011 (STSMA) itself as well as its regulations and rules. The Community Schemes Ombud Services Act 9 of 2011 (CSOSA) deals with fidelity cover requirements.  But what happens if an insurer decides to cancel your scheme’s policy? Can they do this, and if so, why?

Can an insurer cancel a scheme’s policy?

Yes, an insurer can cancel a scheme’s policy.  This is usually only done under specific circumstances and with due notice. Insurance policies are governed by a two-way contractual agreement, meaning both parties, the insurer (the insurance company) and the insured (the scheme), have rights and obligations. While schemes can typically cancel their policies immediately, insurers must follow a structured process, usually providing 30 or 31-days’ notice before termination. This ensures that schemes have time to find alternative coverage. However, insurers do not cancel policies arbitrarily. This usually happens due to serious risks or breaches of policy terms.

Why would an insurer cancel a scheme’s policy?

While insurers generally aim to maintain long-term relationships with their clients, some circumstances may lead them to cancel a policy.  There are a few, however, here are eight common reasons which crop up in sectional title:

1.Non-payment of premiums

If premiums are not paid on time, insurers may cancel the policy after due notice. Since insurance is critical schemes should prioritise premium payments in their budgets to avoid disruptions in cover. Payment of premiums is specifically stipulated as a function of the body corporate, under Section 3.(1)(k) of the STSMA.

2. Non-disclosure or misrepresentation

Insurance relies on accurate information. If trustees fail to disclose material facts, such as prior claims, structural defects, or the presence of high-risk features like thatch roofs, it could result in a policy being voided or cancelled. This includes things such as recent slip and fall incidents (potential liability claims) as well as suspected dishonest acts involving the schemes funds. Transparency with your insurer and broker is essential.

3. High claims frequency or severe losses

Repeated claims, especially for similar incidents (e.g., burst pipes, storm damage), can lead insurers to reassess the risk level of your scheme. If the claims history becomes unsustainable, an insurer may decide to impose higher premiums and excesses or even not renew the policy at annual renewal time.

4. Failure to comply with policy conditions

Most policies have conditions regarding security measures, maintenance obligations, and statutory compliance. If these requirements are not met, the insurer may cancel or refuse to pay out claims. Examples include failing to maintain fire protection systems or removing security gates without notifying the insurer.

5. Fraudulent or exaggerated claims

Submitting dishonest claims is a serious offence and can result in immediate policy cancellation. Trustees should ensure that all claims submitted are legitimate and supported by accurate documentation, proving the claim.

6. Exiting a market

An insurance company may decide to leave a particular country or industry segment due to financial losses. For example, some international insurance companies have withdrawn from South Africa after assessing the profitability of their operations.

7. Changes in underwriting criteria

Insurance companies regularly reassess their risk appetite. If they determine that certain properties, such as large buildings, wooden structures, or properties near high-risk areas like rivers, pose too great a risk, they may opt to discontinue covering schemes for such risks.

8. Reinsurance challenges

Insurers rely on reinsurers to help spread risk. Recently, international reinsurers have become more selective, and stricter terms in respect of capacity (extent of cover) making it difficult for insurers to secure coverage for higher-risk properties such as high-rise buildings. This can lead to insurers withdrawing coverage from certain types of properties or even entire market segments.

The insurance contract is a two-way agreement

An insurance policy is a contract between the scheme and the insurer, requiring both parties to uphold their obligations. The insurer agrees to provide cover under specified conditions, while the scheme agrees to pay premiums, disclose all relevant information, and maintain the insured property responsibly.

Unlike most service contracts, where both parties have equal termination rights, insurance policies tend to be weighted in the scheme’s favour. Trustees can cancel their scheme’s policy at any time, whereas insurers must provide prior notice, ensuring that schemes have sufficient time to secure alternative cover. However, to maintain this advantage, trustees must actively manage their policy and risk exposure. 

How to prevent policy cancellation

The good news is that these risks are avoidable. Here are some practical steps trustees can take to maintain uninterrupted cover and avoid disputes with insurers:

Ensure timely payment of premiums

• Ensure that monthly debit orders for premiums are well provided for and met.
• Keep premium payments as a priority expense in your budget.
• If financial difficulties arise, speak to your broker early rather than waiting until payments lapse.

Maintain transparency and open communication

• Disclose all relevant information to your insurer, including previous claims and changes in property use.
• Inform your broker about structural modifications, security changes, or risk factors like short-term letting.
• Review your policy annually to ensure all details remain accurate.

Adopt a proactive approach to maintenance

• Conduct routine inspections to identify and address potential risks before they turn into claims. This can be as simple as regular walkabouts to check things like swimming pool gates.
• Implement preventative maintenance for common issues, such as plumbing leaks and electrical faults.
• Keep records of all maintenance work, as this demonstrates diligence to insurers.
• Do annual roof inspections ahead of rainy season as well as clearing leaves, debris etc from gutters and downpipes.

Implement risk management strategies

• Improve security measures (e.g., perimeter fencing, access control) to minimize crime-related claims.
• Take precautions against weather-related damage by ensuring proper drainage and gutter maintenance. Ensure that water can be directed away from the buildings, unhindered.
• Implement geyser replacement plans such as utilisation of call centres where necessary and a higher specification of geyser such as a stainless-steel geyser.
• Work with your insurer or broker to identify risk-reduction initiatives that could lower your premiums.

Work closely with a specialist insurance broker

• A broker with sectional title expertise can help you understand policy conditions, negotiate better terms, and manage claims efficiently.
• They can also provide guidance on compliance and risk management tailored to your scheme’s needs. For example, help structure a policy to cater for higher spec geysers.

Ensure ethical claims handling

• All claims should be honest and based on actual damage.
• Avoid exaggerating claims or attempting to claim for pre-existing damage.
• Trustees should, where possible, have a hand in claims management to ensure accuracy and prevent fraudulent activities. A claims process/procedure is always a good idea.

Conclusion

Yes, insurers can cancel a scheme’s policy, however, should only do so for valid reasons and with the due notice. More importantly, schemes have the power to prevent cancellations by managing risks responsibly. By ensuring premium payments are up to date, maintaining transparency, addressing maintenance proactively, and working with an experienced broker, trustees can protect their scheme from unnecessary disruptions. Taking these steps will not only ensure continuous cover but also contribute to a safer, more financially secure community for all owners and residents.