A community scheme may well have a separate fidelity or commercial crime policy from the main policy. I refer to the scheme’s main policy as usually, this policy will include buildings, property owner’s liability as well as fidelity.
This separate policy – fidelity or commercial crime – may come up for renewal at a different time or date.
Our recommendation is that these policies align with the main policy’s renewal date where possible to avoid any duplication of cover, and also to ensure that the scheme receives overall insurance advice together at the same time for the trustees to consider as a whole.
Note that a standard buildings or commercial policy typically has a fidelity section by default, but the policy wordings applicable to these sections are usually out of step with CSOS Regulation 15.
We suggest that managing agents ensure that the scheme’s broker has considered the legislation in all respects before dispensing advice.
By default, the policy will renew with the same figures or slightly increased sums insured, unless instructed otherwise. We do suggest advising the “required amount of fidelity cover for the new year” after applying the formula:
The total of:
(a) the community scheme’s investments and reserves at the end of its last financial year; and
(b) 25% of the community scheme’s operational budget for its current financial year.
In other words:
The amount of cash, savings, and liquid assets the scheme has + 25% of its annual expenses.
The respective annual general meeting can then decide if this amount of cover is sufficient.
The scheme should alternatively advise their broker that they have placed the fidelity cover elsewhere so that the broker can ensure that the policy is not renewed.
During the year, especially after having confirmed or agreed to adjust fidelity sums insured at annual general meetings, the community scheme should advise the brokers so the figures can be adjusted without delay.
What is fidelity cover?
Fidelity guarantee, fidelity cover or fidelity insurance is essentially insurance against losses occurring as a result of fraud or dishonesty.
Commercial crime policies are similar but offer wider cover, usually including an element of computer crime cover.
Why is the Property Practitioners Regulatory Authority (PPRA) cover not enough?
A managing agency should also protect itself by way of additional fidelity cover.
The PPRA’s Fidelity Fund Certificate is not purchased by the body corporate but rather by the managing agent. It only covers funds held in trust by the managing agent and pertains to the particular managing agent covered. Most standard buildings policies include a fidelity section but this cover is usually very limited and traditionally excludes fraud by the managing agent.
Being reimbursed for a claim via the PPRA is also a long affair as the claim is only finalised once the principals and the managing agent are sequestrated and liquidated, and the remaining outstanding sum is claimed. This process usually takes a number of years.
It is one of the reasons that CSOS requires that a fidelity policy should pay up early.
What about computer crime – is it a requirement?
It is not called for as a requirement but Addsure advisors recommend products that include an element of computer crime cover.
Is it okay to rely on the managing agent’s policy in terms of CSOS Sub Regulation 15.(5)?
Presently, sub-regulation 5 alludes to an alternative cover arrangement but, in our view, this is an error in the regulation and should be ignored as an option. We have recommended to the CSOS board that this sub-regulation be deleted as this option exposes community schemes to great risk.
We feel that a managing agent cannot purchase cover to protect its clients against themselves as they are potentially the cause of the fraud or dishonesty. They can only purchase cover to protect their funds – and in some cases their clients’ funds for which they are responsible – against losses caused by their staff but not against the dishonestly of the principal/owner of the managing agency.
Another argument against this regulation is that a larger managing agent with, for example, 1 000 schemes under its management may be responsible for R100 million and more. In this case, a policy or R10 million will only partially cover the risk.
About fidelity insurance: CSOS Regulation 15 in layman’s terms
Watch a related video: What managing agents need to know about fidelity and risks
Author: Mike Addison
Addsure is a leading sectional title insurance broker. Get fit and proper advice from advisors who understand sectional title.