Occupancy risk in sectional title schemes

(Updated 11 February 2025)

In the sectional title insurance environment, occupancy risk disclosure plays a crucial role. It could be a determining factor at claims stage, as to whether a claim is admitted and accepted by an insurer. When higher-risk activities are not disclosed, insurers may reject claims. For example, if a woodworking business operates within a business park, but this elevated material risk is not declared to the insurer, a fire damages related claim may, most likely, be rejected. The insurer must assess and agree to the additional risk exposure, beforehand.

Trustees’ responsibilities in managing occupancy risk

Trustees need to be aware of how occupancy risk exposure affects the overall insurance coverage of a building. Whilst the Sectional Titles Schemes Management Act (STSMA) 8 of 2011 and its Prescribed Management Rules (PMRs) do provide guidance and regulate the permitted use of sections and exclusive use areas (EUAs), this article focuses on the insurance implications rather than the legal framework. However, it is important to reference Section 13.(1)(g) which states that if a scheme’s registered plans and rules designate sections and EUAs for a specific use, they may not be repurposed, unless all owners consent. PMR 30 further empowers the body corporate to take reasonable steps to prevent certain aspects of use of sections and common property. Prescribed Conduct Rule (PCR) 6 deals with the storage of flammable materials, which can also have an impact at any claims stage. This rule should be dealt with very carefully, when consenting to the use of sections, especially in commercial use environments.

Understanding occupancy risk and insurance implications

Insurance policies are designed, based upon the intended use of a building. A residential building should not be used for commercial activities unless explicitly declared and insured as such. Conversely, a commercial or industrial business park is structured to accommodate businesses involving retail operations, manufacturing or storage and is generally not suitable for residential accommodation/living.

There are also certain municipal by-laws, town planning requirements and national building regulations which need to be adhered to. It is a condition in all policies that these regulations and standards should be complied with and abided by.

Many sectional title schemes do feature mixed risk occupancy, where ground-floor units are designated for retail or commercial use (e.g., shops and restaurants), while upper floors are designated for residential or office use. This mix of occupancy types has significant implications for insurance underwriting and risk assessment. For example, if chip frying in a take-away restaurant and a paint retailer occupy downstairs sections, we would certainly draw the insurer’s attention to this and ensure that regular risk surveys are undertaken.

Why do insurers care about occupancy risk?

Insurers primarily focus on what activities take place within a section. When a section is used for a business operation such as food preparation, manufacturing, or equipment servicing, it may introduce significantly higher risks.

Potential hazards include:

• Increased fire risk, due to combustible materials such as oils, fuels, gas, paints, packaging and chemicals.
• Explosion risk from materials like sawdust or fine spice particles.
• Higher liability exposure from customer foot traffic and deliveries, especially in commercial spaces.
• Structural impact risks from heavy machinery or stock storage loads beyond residential specifications.

Failure to disclose these factors may lead to a policy being voided or claims being rejected, as the insurer has not agreed to cover the additional heightened risk. To ensure adequate coverage, policyholders must inform the insurer of any changes in occupancy.

Residential versus commercial insurance policies

Standard sectional title insurance policies are typically structured for residential use. When occupancy shifts from residential to commercial, the policy wording, risk rating, and premium structure may change significantly. For example, a commercial scheme may see increased claims risks due to:

• Higher traffic volume at access points, leads to greater security concerns.
• Increased risk of liability claims due to customer interactions on-site.
• Fire and explosion risks from commercial stock or operational activities.

Low-risk home-based businesses

Not all work-from-home scenarios pose additional risks. For example, if a resident works as a bookkeeper and merely uses part of a section as an office with standard computer equipment, no additional risk is introduced. However, if the resident runs a business involving production, stock storage, or frequent client visits, the insurer must be notified.

The role of professional insurance advisors

Occupancy risk is a critical factor in sectional title insurance, and failure to disclose changes in usage can result in significant financial loss. Trustees and owners should seek guidance from a qualified insurance advisor with expertise in sectional title schemes to ensure that their policy accurately reflects the actual risk exposure.

By taking a proactive approach, schemes can avoid coverage disputes, ensure compliance with policy conditions, and protect the financial well-being of all stakeholders.