Sectional title insurance and the advice process

Since the introduction of the CSOS (Community Scheme Ombud Services) Act, the STSM (Sectional Title Scheme Management) Act, and relative rules and regulations, the insurance advice process in the sectional title environment is now even more important.

The body corporate is the insured and the trustees need to be certain that they have arranged the best and most appropriate cover available.  A high standard of advice and service is paramount.

Sectional title insurance needs and requirements can be divided into three main categories i.e. buildings cover, liability cover and fidelity cover.

Additional needs such as general liability cover, levy guarantee cover, excess buyback, certain vehicle cover and so on can be considered additionally but the first three categories are dealt with in that order in the sectional title scheme prescribed management rules and at annual general meetings.

In conjunction with community scheme legislation, trustees should be aware that in terms of FAIS legislation, an advisor or broker is obliged to deal with their client in accordance with the General Code of Conduct for Authorised Financial Services Providers and Representatives. Published under Board Notice 80 in Government Gazette 25299 of 8 August 2003 and as amended.

Here is the paragraph pertaining to Record of Advice:

 (1) A provider must, ……. maintain a record of the advice furnished to a client …, which record must reflect the basis on which the advice was given, and in particular-

(a) a brief summary of the information and material on which the advice was based;

(b) the financial products which were considered;

(c) the financial product or products recommended with an explanation of why the product or products selected, is or are likely to satisfy the client’s identified needs and objectives; and

(2) A provider, other than a direct marketer, must provide a client with a copy of the record contemplated in 9(1) in writing.

Usually, when trustees in sectional title schemes consider their insurance for the following year, it is at a trustee meeting when insurance is being discussed. The trustees may be meeting alone or together with a portfolio manager and the insurance advisor is rarely. Those present are expected to make a decision. The portfolio manager, unless they are authorised financial services providers themselves, cannot advise on product selection or even suggest which product to select as this would be highly irregular. Only a licensed authorized financial advisor may dispense insurance advice, particularly in respect of product selection.

Therefore, the only way for decisions to be made under advice from a suitably qualified advisor is have written advice which can be circulate, in summary with supporting documentation and tabled.

The managing agent cannot act as insurance agent unless registered as a financial services provider but acts as a post office by delivering the advice to the trustees, by presenting the broker’s written advice.

Therefore – considering all of the above – we can summarise the standard of written advice one should expect from an insurance advisor as follows:

a) It should briefly mention the prescribed needs (buildings, liability and fidelity) confirming that the advice has accounted for these. This would be the basis on which the advice was given per (1)(a) above.

b) It should in summary, compare quotations, with the full quotations separately provided, i.e. meet the needs to reflect the products which were considered per (1)(b) above.

c) The actual advice should be there. It is suggested that the advisor should clearly state the advice in summary form so as to explain which product should be selected and why.

With this tabled at the trustee meeting, especially if circulated to the trustees ahead of the meeting, trustees are able to reach a decision based on the clear advice provided.

The minutes of that meeting refer to the letter of advice, e.g. “The trustees resolve to renew the insurance cover with XYZ Insurance as advised in Addsure’s letter of advice dated 16 October 2017”.

A copy of the letter of advice must be attached to the minutes of the trustee meeting or even included with the minutes and simultaneously, a copy of the minutes can be sent to the broker as confirmation.

This important FAIS legislation, coupled with the clear requirements of the CSOS and STSM Acts, regulations and prescribed rules, place a burden of responsibility on the financial advisor and trustees. The managing agent is not excluded from the responsibility but rather a key party in the process.

Unless a registered FSP themselves, the managing agent must ake great care not to be finding themselves in a compromised position by providing financial advice where not permitted or authorised to do so or providing intermediary services where this is also prohibited in terms of FAIS (Financial and Intermediary Services) legislation. The importance of the role of the specialised insurance advisor is key here.

Trustee check list

  1. Have the trustees appointed an experienced sectional title specialist insurance advisor?
  2. Do the trustees receive a Letter of Advice (LOA) with comparative quotes and written advice ANNUALLY on policy renewal to a standard as set out above?
  3. Are the annual policy renewal decisions properly recorded in the minutes of trustee meetings?
  4. Are the trustees following the advice provided and complying with the prescribed minimum covers?

 

Author: Mike Addison

Contact Addsure – The Leaders in Sectional Title Insurance – to get fit and proper advice from advisors who understand sectional title. Contact us in Johannesburg on (011) 704-3858; in Durban on (031) 459-1795 and in Cape Town on (021) 551-5069