Sectional title insurance needs and requirements can generally be divided into three main categories: buildings cover, liability cover, and fidelity cover.
Additional options such as trustee indemnity, excess buy-back, and other specialised extensions may also be considered, depending on the scheme’s circumstances.
Understanding the legal framework
Under the Financial Advisory and Intermediary Services (FAIS) Act, authorised financial services providers (FSPs) and their representatives are required to deal with clients in line 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 (as amended).
The Code requires a record of advice that reflects the basis on which advice was given, and in particular:
- A brief summary of the information and material on which the advice was based;
- The financial products that were considered; and
- The product or products recommended, with an explanation of why the selection is likely to satisfy the client’s identified needs and objectives.
A provider, other than a direct marketer, is also expected to give the client a written copy of this record of advice.
How this typically plays out in sectional title practice
When trustees consider the scheme’s insurance renewal, the matter is often discussed at a trustee meeting under an agenda point such as “Insurance.”
The trustees may meet alone or with the managing agent present.
In most cases, the insurance advisor or broker is not present, yet the trustees are expected to make a decision.
Unless the managing agent is an authorised FSP, they are not permitted to advise on product selection or recommend a particular insurer or policy, as that would be irregular and non-compliant.
The most appropriate way for trustees to make an informed decision is to request written advice from a qualified broker.
That advice should be clear, easy to interpret, and supported by comparative documentation such as full quotations.
The managing agent’s role
A managing agent is not an insurance agent unless licensed as a financial services provider.
They may, however, act as a transient agent, delivering or presenting the broker’s written advice to the trustees.
When doing so, they should take care not to influence the trustees’ decision or steer them toward a particular outcome.
Such influence could be inconsistent with both FAIS and Section 58 of the Property Practitioners Act, which prohibits property practitioners (including managing agents) from influencing the appointment of a particular broker or insurer.
The standard of written advice
When a body corporate receives written insurance advice, it is reasonable to expect the following:
- Recognition of prescribed needs – confirmation that the advice takes into account buildings, liability, and fidelity cover.
- Reflection of options considered – a comparison of quotations and supporting schedules showing which products were reviewed.
- Clear statement of advice – a concise summary explaining which product is recommended and why it is regarded as suitable for the scheme’s needs.
If this advice is circulated before the meeting, trustees are able to reach an informed decision efficiently and with confidence.
The minutes may record the outcome, for example:
“The trustees resolved to renew the insurance cover with XYZ Insurance as advised in Addsure’s letter of advice dated 15 June 2016.”
A copy of the broker’s letter of advice should be attached to the minutes, and a copy or extract from the minutes can be provided to the broker as confirmation of the trustees’ decision.
In summary
The scheme’s insurance broker is expected to provide written advice each year that meets the FAIS Code of Conduct requirements.
The trustees need to deal with this advice correctly, retaining both the record of advice and the decision that followed.
The managing agent should not provide insurance advice or influence the appointment of a broker or insurer unless appropriately licensed, and should remain mindful of Section 58 of the Property Practitioners Act.
Written advice remains the cornerstone of compliant sectional title insurance.
Ensure that it is properly prepared, understood, and retained.
Author: Mike Addison
Addsure is a leading sectional title insurance broker. Get fit and proper advice from advisors who understand sectional title.