Trustees are guided by the Community Schemes Ombud Services Act (CSOS Act) and the Sectional Title Schemes Management Act (STSM Act) when it comes to insurance and related aspects of a sectional title scheme. The regulations to these Acts control aspects of the community scheme and may be amended from time to time.
The Sectional Titles Scheme Management Act Regulations include prescribed management rules and conduct rules which can be amended by the agreement of owners under various types of prescribed resolutions.
The Acts along with its insurance rules and regulations should be considered together. For example, CSOS Regulation 15 pertaining to fidelity insurance must be considered in conjunction with STSM Act Prescribed Management Rule 23.7 when trustees need to deal with arrangement of fidelity insurance efficiently. It is for this reason that the Sectional Title Insurance Guide is so useful to insurance advisors, trustees and managing agents.
We also recommend Key Word Access, the Acts, rules and regulations in indexed format.
Let’s look at the legislation which impacts insurance itself:
Community Schemes Ombud Services (CSOS) Act
15 (1) Subject to sub-regulation (5), every community scheme must insure against the risk of loss of money belonging to the community scheme for which it is responsible, sustained as a result of any act of fraud or dishonesty committed by any insurable person.
(2) For the purposes of sub-regulation (1), “insurable person” means any-
(a) scheme executive;
(b) employee or agent of a community scheme who has control over the money of a community scheme;
(c) managing agent; or
(d) contractor, employee or other person acting on behalf of or under the direction of a managing agent,
who in the normal course of the community scheme’s affairs has access to or control over the monies of the community scheme.
(3) The minimum amount of the fidelity insurance cover required in terms of sub-regulation (1) is the total value of-
(a) the community scheme’s investments and reserves at the end of its last financial year; and
(b) 25 per cent of the community scheme’s operational budget for its current financial year.
(4) The insurance cover referred to in sub-regulation (1) must
(a) provide for payment of a loss by the insurer to the community scheme within a reasonable period after reasonably satisfactory proof of the loss has been furnished to the insurer; and
(b) not require that criminal or civil proceedings be taken or completed against the insured person before payment is made under the insurance policy.
(5) A community scheme is not obliged to obtain fidelity cover for an insurable person if that person has delivered to the community schemes written proof that-
(a) the monies of the community scheme are covered by fidelity insurance that complies with the requirements of sub-regulations (3) and (4); and
(b) the insurer concerned has noted the community scheme’s interest in the application of the proceeds of the policy and undertaken not to cancel or withdraw cover without giving the community scheme at least 30 days written notice.
Presently, sub regulation 5 alludes to an alternative cover arrangement; however, this is an error in the regulation in our view and should be ignored as an option. We have recommended to the authorities (CSOS board) that this sub regulation be deleted. This option exposes community schemes to great risk.
The Sectional Title Scheme Management (STSM) Act
Functions of the body corporate
(h) to insure the building or buildings and keep it or them insured to the replacement value thereof against fire and such other risks as may be prescribed;
(i) to insure against such other risks as the owners may by special resolution determine;
(j) subject to section 17 and to the rights of the holder of any sectional mortgage bond, forthwith to apply any insurance money received by it in respect of damage to the building, in rebuilding and reinstating the building or buildings in so far as this may be effected;
(k) to pay the premiums on any insurance policy effected by it;
Insurance by owners
(1) Notwithstanding the existence of a valid insurance policy effected by the body corporate pursuant to the provisions of section 3(1)(h), an owner may obtain an insurance policy in respect of any damage to his or her section arising from risks not covered by the policy effected by the body corporate.
(2) This section does not limit the rights of an owner to insure against risks other than damage to his or her section.
Other risks to be insured against
Insurance Other Risks
Other risks against which a body corporate may insure, in terms of section 3 (1)(h) of the Act, are—
(a) lightning, explosion and smoke;
(b) riot, civil commotion, strikes, lock-outs, labour disturbances or malicious persons acting on behalf of or in connection with any political organisation;
(c) storm, tempest, windstorm, hail and flood;
(d) earthquake and subsidence;
(e) water escape, including bursting or overflowing of water tanks, apparatus or pipes;
(f) impact by aircraft and vehicles; and
(g) housebreaking or any attempt thereat.
Prescribed Management Rules
23.(1) The insurance policies of the body corporate in terms of sections 3(1)(h) and (i) of the Act
(a) must provide cover against —
(i) risks referred to in regulation 3;
(ii) risks that members resolve must be covered by insurance; and
(iii) risks that holders of registered first mortgage bonds over not less than 25 per cent in number of the primary sections by written notice to the body corporate may require to be covered by insurance;
(b) must specify a replacement value for each unit and exclusive use area, excluding the member’s interest in the land included in the scheme; provided that any member may at any time by written notice to the body corporate require that the replacement value specified for that member’s unit or exclusive use area be increased;
(c) must restrict the application of any “average” clause to individual units and exclusive use areas, so that no such clause applies to the buildings as a whole;
(d) must include a clause in terms of which the policy is valid and enforceable by any holder of a registered mortgage bond over a section or exclusive use area against the insurer notwithstanding any circumstances whatsoever which would otherwise entitle the insurer to refuse to make payment of the amount insured, unless and until the insurer terminates the insurance on at least 30 days’ notice to the bondholder; and
(e) may include provision for “excess” amounts.
23.(2) A member is responsible —
(a) for payment of any additional premium payable on account of an increase in the replacement value referred to in sub-rule (1)(b);
(b) for any excess amount that relates to damage to any part of the buildings that member is obliged to repair and maintain in terms of the Act or these rules, and must furnish the body corporate with written proof from the insurer of payment of that amount within seven days of written request.
23.(3) A body corporate must obtain a replacement valuation of all buildings and improvements that it must insure at least every three years and present such replacement valuation to the annual general meeting.
23.(4) A body corporate must prepare for each annual general meeting schedules showing estimates of —
(a) the replacement value of the buildings and all improvements to the common property; and
(b) the replacement value of each unit, excluding the member’s interest in the land included in the scheme, the total of such values of all units being equal to the value referred to in sub-rule 4(a).
23.(5) On written request by any registered bondholder and the furnishing of satisfactory proof, the body corporate must record the cession to that bondholder of that member’s interest in any of the proceeds of the insurance policies of the body corporate.
23.(6) A body corporate must take out public liability insurance to cover the risk of any liability it may incur to pay compensation in respect of—
(a) any bodily injury to or death or illness of a person on or in connection with the common property; and
(b) any damage to or loss of property that is sustained as a result of an occurrence or happening in connection with the common property, for an amount determined by members in general meeting, but not less than 10 million rand or any such higher amount as may be prescribed by the Minister in any one claim and in total for any one period of insurance.
23.(7) A body corporate must take out insurance for an amount determined by members in general meeting to cover the risk of loss of funds belonging to the body corporate or for which it is responsible, sustained as a result of any act of fraud or dishonesty committed by a trustee, managing agent, employee or other agent of the body corporate.
23.(8) A body corporate, authorised by a special resolution of members, may insure any additional insurable interest the body corporate has —
(a) in the land and buildings included in the scheme; and
(b) relating to the performance of its functions, for an amount determined in that resolution.
The 2016 rules and regulations will certainly need some tweaking and we expect amendments in due course.
Noticeable omissions include “loss of occupation or loss of rent” in respect of insured events and the preamble in previous PMR 29.(1)(a) which included “subject to negation of such excess, premiums and insurance rates as in the opinion of trustees are most beneficial to the owners”
We also feel that “subsidence” should have been excluded from being compulsory and that “accidental damage” should have been brought in.
We recommend that these omissions are borne in mind and still considered. Where subsidence is not covered, all owners should be made aware and the insurance brokers advice in this regard properly noted.
Author: Mike Addison, Addsure
Contact Addsure – The Leaders in Sectional Title Insurance – for fit and proper advice from advisors who understand Sectional Title. Contact us in Johannesburg (011) 704-3858; Durban (031) 459-1795; Cape Town (021) 551-5069