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Homeowners Associations and Insurance

Community schemes are usually structured as sectional title schemes or HOAs (Homeowner Associations). The HOAs are usually either in the form of an association with a constitution (common law association) or a NPC (non-profit company), previously known as a sectional 21 company. Some HOA’s refer to trustees and others directors as the representatives of the entities.

In the sectional title environment, we are guided by legislation (The Sectional Titles Act and its prescribed rules) which set out the trustees’ duties and responsibilities in respect of the insurance.

In the HOA environment, trustees or directors are guided by the constitution and owner agreements in the case of a common law association, or the memorandum of incorporation (MOI) in the case of non-profit companies.

Unless otherwise agreed, owners will insure their own properties within the scheme however, the HOA will be responsible for the common areas.

HOA directors or trustees need to consider the insurance needs of the HOA and should do so by:

  1. Carefully scrutinise the constitution or MOI for reference to insurance.
  2. Keep a formal list of insured immovable property and improvements that require cover.
  3. Keep an inventory of any and all moveable property requiring cover, e.g. weed eaters, gym equipment, refrigeration equipment, etc.
  4. Check minutes for resolutions in respect of insurance.
  5. Have a qualified valuer value the common property and identify the extent of the common property for which the HOA is responsible.
  6. Ascertain whether there are servitudes over municipal property for which the HOA is responsible.
  7. Using common sense in determining the risks, e.g. how drains cope with heavy rains, maintenance plans for gates, roofing, paving, potential problematic trees or roots, etc.
  8. Engage the services of an insurance advisor who specialises in community scheme risks.

Insurers are often faced with lower premium income versus a high risk in this environment, as essentially, they are only collecting premium based on the sum insured of the common areas only, i.e. without spreading the risk over all the buildings. Bear in mind, there is usually a higher risk in the entrance areas and walkways, particularly in respect of third party liability claims and gate or boom impact incidents. For this reason, insurers need to apply average. In other words, where buildings or improvements are found to be under insured, insurers will only pay claims in proportion to the under insurance. This strengthens the case for the need to value those HOAs.

Liability cover is important, especially with regard to trustees’ or directors’ liability. In the sectional title environment, trustees are indemnified to some degree however, in many HOA constitutions the indemnity is conspicuous in its absence.  Furthermore, NPC constituted HOAs are subject to the Companies Act and directors need to be more specifically covered.

HOAs which also incorporate sectional title schemes should preferably be insured by the same insurer under advice from the same intermediary. Liability risks as well as the material risks can be looked at as a whole without potential for disputes and any gaps in cover.

A specialist community scheme broker or advisor will have a better understanding and be more experienced with the risks associated with HOAs. Such an advisor or broker will analyse the risks based on the information gleaned from the directors, managing agents, MOI or the constitution and compare specific HOA policies specifically designed for HOAs. The HOA should receive written advice annually from the broker or advisor shortly before policy renewal, recommending the most appropriate product while taking all of this into account.

Additional products may be recommended, e.g. a Directors and Officers policy, FIDCURE (fidelity product) and additional liability cover, e.g. where community owned equipment such as gym equipment is being used.


Author:  Mike Addison, Addsure

Contact Addsure – The Leaders in Sectional Title Insurance – for 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