Insurers will take on a risk with the understanding that the building is being used for its intended or disclosed use, and will provide cover accordingly. In the sectional title environment, it is generally accepted that the insurer is covering the buildings as set out in the sectional plan.
The insurance policy is a contract whereby the proposed risks are accepted in exchanged for a determined premium. The policy contract is subject to certain conditions such as compliance with national building regulations and local by-laws.
Duty of disclosure
One of the conditions is the duty of disclosure whereby the policy obliges the insured (the body corporate) to advise the insurer all they know about the property that could affect their decision to provide cover, how much premium to charge and whether to renew the policy. This information is inclusive of changes such as the occupation of the property, renovations or improvements that increase the exposure to weather perils and other changes that may increase the likelihood of loss, damage or legal liability.
Some examples are:
Change of garage to Living Area
This is usually easy to fix from an insurance perspective. Always advise the insurer of the change of use and have it noted on the policy schedule section. The insurer considers, for example, a 100sqm dwelling and a 36sqm garage attached to be used as such and rate these accordingly.
If the garage is converted to living area, it will now have more expensive finishes This is relevant because typically, a garage may be insured for R5,000 per sqm but a dwelling R9,000 per sqm. The insurer could apply average if they insure a garage but then living area damages may be claimed. Also, it is assumed that there will be a fire door between the garage and dwelling which may well have been removed. In so doing, the risk of spreading a fire is increased.
The solution is to simply advise the insurer and receive confirmation of the risk change being accepted.
Garages used for something other than its intended use
Garage sections are assumed to be used for vehicle storage and perhaps some tools, lawnmower or a workbench for domestic purposes. Where a garage is used as a home business workshop, for example to manufacture burglar bars, gates, etc. the risk will change. The insurer will need to be notified of this and will often apply commercial rates, or endorse the policy with restrictions in this regard. The same will apply to EUA (exclusive use area) garages.
Increase in section volume
This involved installing a mezzanine floor or building an attic room where there were previously ceilings and common area space between the roof and the ceiling. The sqm of the section is effectively greater and again, the insurer is insuring more sqm than what they are aware of. Also, very often these are wooden structures and not the standard brick and mortar, as may be expected. Insurers are also aware that this often increases the risk of severe fire; therefore, ventilation factors could be compromised.
Once again, the solution is to advise the insurer and treat these as additions, if necessary.
Joining two sections
This is common practice in office parks. In some cases, the building is purposely designed to allow for this possibility. That means a company can purchase two sections of 100sqm each, breaking through the walls to enjoy a 200sqm office. Always remember to advise insurers of this.
Changing residential use to commercial use
If a residential section is being used as a commercial section, one should check the policy as many policies are either residential policies or commercial policies with different insurance premium and conditions applying. In one instance, I have noticed a three-unit complex that was insured as a residential scheme being used to run a solar business, a hairdresser and another business. This required a quick amendment, switching the policy to a commercial policy immediately without any premium change.
In another scheme (7 units) in Gauteng, I recently found two out of seven sections converted to a day spa which translates into a completely new risk. Again, this required a quick and painless policy amendment.
These sections were all effectively not insured properly and if the cause of any damage related to the business activity, the claim would have been rejected out of hand.
Change of Occupancy
In the case of commercial sectional title buildings, or especially mixed-use, special care should be taken with regard to new tenants moving in. If the risk was underwritten for mainly an office but then a food takeaway shop with gas stoves and fryers moves in, the risk will naturally change. Occupancy by different retailers can also change, for example, a paint shop with inflammable products is a very different risk compared to an estate agency.
Woodworking risks are usually excluded automatically, even on commercial policies, unless specifically underwritten. If the woodworking risk is not advised of, and a fire occurs, the insurer will likely reject a claim if this occupancy was not accepted by the insurer.
Change of risk of a section
It is important that the owner, trustee or managing agent apply their minds in seeking clarity on the risk relating to commercial units. A classic risk we once stumbled upon during a routine visit to a property was a filming company that used their section for their filming activity. The owner happened to mention that they had a safe and a certificate or a permit to store dynamite used for pyrotechnics during filming. Whilst this was legal and complaint, the insurer was unaware and when advised, accepted the risk but trebled the body corporate’s premium.
Change of use within exclusive use areas (EUAs)
Permission may be granted to owners who enjoy such EUAs to install swimming pools and so on, but it is important to advise the insurer of the changed risk. Besides the change of risk, the additional improvement will need to be noted.
Working from home
Normal home office activity such as an accountant or bookkeeper doing books from their study within the section or someone doing administrative work on his or her laptop at home as a result of COVID-19, would certainly not increase the insurer’s risk. However, a hairdresser or beauty therapist who converts a living area into a salon and who has clients coming in while storing and selling flammable products may well increase the insurer’s risk. Bear in mind, it is not only the increased fire risks but also an increase of other risks such as liability arising from the changed use. The insurer simply needs to be advised so they may decide to either accept these risks and/or make any policy amendments or premium changes where required.
The examples stated are only a guideline and not necessarily the requirements of all underwriters or insurers. It is also not a fully exhausted list of risks but merely those that are most commonly found. What should also be mentioned is the storage of materials, use of roof areas for solar panels, extensions and many more.
Making use of the services of a professional valuer who is familiar with sectional title and who understands community scheme risks is important to assist in identifying and advising on some of these risks.
Author: Mike Addison
Contact Addsure – The Leaders in Sectional Title Insurance – to get fit and proper advice from advisors who understand Sectional Title. www.addsure.co.za.