Fidelity cover: Who should arrange it?

When it comes to protecting a community scheme’s money, there’s often one simple but important question:  Who should arrange the fidelity cover – the body corporate or the managing agent?

Let’s unpack this properly.

The short answer – The body corporate is responsible for arranging fidelity cover.

That responsibility is not informal or based on practice, it is set out in legislation.

In terms of the Community Schemes Ombud Services Act 9 of 2011, Regulation 15, every community scheme is required to insure against the risk of loss of money due to fraud or dishonesty by certain role-players.

This means that fidelity cover, as described in the sub regulations, is compulsory and applies to all community schemes (sectional title, share blocks, retirement villages, and HOAs)

Under sectional title, where we focus mainly in this article, the obligation to insure sits with the body corporate.

Against whose dishonesty must the scheme be covered?

Sub regulation 15.(2) goes further and clearly sets out who the scheme should be insured against.

Fidelity cover should protect the scheme against dishonest acts by:

Scheme executives i.e. trustees and directors

Employees or agents who have control over the scheme’s money

Managing agents

Contractors or service providers, acting under the control of the managing agent who handle the scheme’s money.

In practical terms, if someone has access to or control over the scheme’s funds, they should be included.

How much cover is required?

The minimum level of fidelity cover is determined by a specific formula in sub-regulation 15.(3).

This is important. It’s not simply a matter of choosing an amount that “feels right”.

Many schemes unknowingly underinsure, or apply outdated limits.

Sub-regulation 15.(3) states:

The minimum amount of the fidelity insurance cover required in terms of sub-regulation (1) is the total value of –

(a)  the community scheme’s investments and reserves at the end of its last financial year; and

(b)  25 per cent of the community scheme’s operational budget for its current financial year.

A proper review, ideally with a broker who understands community schemes, is advisable. These figures should be prepared ahead of every Annual General Meeting, preferably, as soon as financials and budgets are made available.

At claims stage – what should the policy look like?

A compliant fidelity policy should be workable in real-life situations. Sub-regulation 15.(4) sets this out too. In particular, it should allow for reasonable proof of loss within a reasonable period and not require a criminal conviction before a claim is paid.

Older-style policies sometimes required conviction first, which created delays and complications. Modern policies designed for community schemes address this.

So where does the managing agent fit in?

This is where some confusion often arises.

While the body corporate carries the responsibility, the managing agent may assist by:

Calculating the required sums to be insured when figures become available

Obtaining written advice from the broker pertaining to fidelity quotations

Preparing the fidelity presentation part of the AGM Agenda (Sectional Title Schemes)

However:

The responsibility itself does not transfer it remains with the scheme

Not all policies include proper fidelity cover, and many brokers and insurers do not fully understand the difference between a fidelity policy in the traditional sense and that required by community schemes.

Also, not every insurance policy automatically provides adequate fidelity cover as part of a building policy.

If the cover is missing, or does not comply with the regulation, then a standalone fidelity policy may be required. The good news is that these policies are generally cost-effective, especially when weighed against the potential financial loss.

AGM reminder (often overlooked)

Fidelity insurance should be a standing item at the Annual General Meeting (AGM).

Trustees should ensure that the cover is properly presented and discussed, the adequacy of the sum insured is considered and confirmed and members are aware that the scheme is compliant.

Final thoughts

Fidelity cover is one of those protections that tends to sit quietly in the background until it’s needed.

And when it is needed, it becomes critically important.

The key takeaway: The scheme is responsible for arranging fidelity cover, even if professionals assist in the process. Getting this right is part of good governance and ultimately protects every owner in the scheme.

If you’d like to explore this further, your Sectional Title Insurance Guide (blue button below) includes a detailed breakdown of fidelity requirements and practical examples.