Sectional title is quite unique in a number of ways. When you split up a building with imaginary lines like borders of a country, it makes sense that the building and all improvements to common property needs to be insured as a whole. The Sectional Titles Scheme Management Act 8 of 2011 (STSM Act) has regulations and supporting management rules that set out some important duties, responsibilities, and procedures to follow as a matter of course.
With regard to claims, Section 3.(1)(j) of the STSM Act is quite clear in that the proceeds of any claim should be applied to the reinstatement of the damage caused.
It states: “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.”
Section 17 deals with the total destruction of the building, which would thus be the exception.
It can be deduced that:
- Owners should not receive cash in lieu of damages. In instances where the body corporate agrees to settle owners in cash from the claim proceeds, proof of reinstatement should be provided by the owner to the body corporate.
- Trustees should not automatically set off damages claims proceeds against outstanding levies before repairs are dealt with.
These two points are often raised. Owners with limited cash flows are usually tempted to use claim proceeds towards settlement of their own debts or financial priorities than repair their section. Some people would rather live with old damaged carpets, soiled ceiling and damaged cupboards, and use the money for something else. This should be discouraged as failure to repair damages will bring down the overall value of the building. Owners have a duty to repair their sections and the Act requires claim proceeds to be used for the purpose intended. This is sometimes difficult to manage but we often see well-managed schemes only paying owners when proof of payment to contractors is provided or the schemes pay contractors directly.
Where owners are in arrears with levies or in dispute with fines, trustees are tempted to hold back payments or set off claim proceeds against levies owed. This is understandable but setting off payments should only be applied if the owner has already had the repair done and already settled the contractor.
Remember, an owner always has rights and needs to be treated fairly but any insurance claim issue is a matter for the trustees. The trustees are the elected representatives of the owners, and the insurance arrangement and claims are a function of the body corporate. The owner has a financial interest but dealing with the claim they take the role of witness and should assist in proving the claim.
Then there is the matter of the excess: The owner would usually pay the excess where there are damages to his or her section, but this depends on the specific rules of the body corporate.
In conclusion, claim settlements should always be paid to the body corporate’s bank account (preferably, the premium paying account) by default. This way, the body corporate has a financial record of all claims paid as well as control over the disbursements thereof. This enables the body corporate to manage the excess aspects and properly record the transactions. It also greatly reduces the risks associated with cybercrime.
Author: Mike Addison
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