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Professional indemnity insurance: Who is responsible to ensure that your scheme is protected?

Professional indemnity insurance cover is issued to provide insurance cover for a service provider in case their clients suffer financial loss, injury or property damage resulting from the negligent act, error or omission of the service provider while working for their client.

Trustees’ responsibility

While a community scheme does not need this kind of insurance, it does remain an important consideration for the trustees or directors when contracting service providers to perform tasks for, or on behalf of, the scheme.

By ensuring that the relevant service provider has an active professional indemnity insurance policy in place, the scheme is assured that if the service provider causes financial loss to the scheme, the scheme may expect to be compensated for their loss.

With the demands being made on community schemes to comply with specific requirements of the CSOS and STSM Act legislation, the trustees are obliged to enter into contractual agreements with a number of professional service providers. These include managing agents, auditors, property valuators, and possibly engineers and various construction industry contractors.

The responsibility of valuers, building contractors and engineers

In terms of current legislation, the trustees are obligated to obtain insurance for the full replacement value of the scheme property. Furthermore, the legislation compels them to do so under the advice of a professional valuator.

What then happens if the valuator makes an error or provides poor advice in his determination of the replacement value? When the insurer applies average to a claim and the property owner is found to be under insured despite following the advice of the valuator, who then bears the responsibility for the property owners’ financial loss?

Similarly, if a construction industry contractor is appointed to provide detailed advice or complete a particular development or improvement of the property, and this process leads to a financial loss for the property owner due to the poor advice or error of the contractor, who then carries the responsibility for the financial loss? Engineers are often called on to confirm the stability of retaining walls in order to secure insurance thereof. The trustees should be asking whether the engineer is protected by professional indemnity in the event that his advice and approval proves to be incorrect and the insurer repudiates a possible claim.

Depending on the circumstances of the contract, the professional party may require insurance other than professional indemnity. A building industry contractor for example should carry a contract works policy to protect against damage caused to scheme property by him while on site. Ultimately, the trustees need to ensure that the community scheme and its representatives are protected by the appropriate insurance held by the parties with which any contractual arrangement is entered into.

Self-managed schemes

Where a community scheme is self-managed, insurance cover such as professional indemnity is seldom acquired. This has the potential for significant loss to the scheme if the administration department is the source of an error or omission that ultimately leads to a financial loss for the scheme.

In conclusion: It is vital that the trustees, as the appointed representatives of the scheme, ensure that every reasonable precaution is taken to protect not only themselves but the entire scheme from any potential financial loss due to the negligence of any other party contracted by them.

Author:  Bruce Gibson

Addsure is South Africa’s leading sectional title insurance brokerage. Obtain fit and proper advice from advisors who understand sectional title. Contact our head office, Cape Town (021) 551 5069 who will put you directly in touch with one of our nationwide advisors.