Following the amendment to community scheme property legislation, most community schemes had to comply with the requirement for appropriate fidelity guarantee insurance. Specialist community scheme property insurers have presented CSOS-compliant fidelity insurance to meet the new requirements in conjunction with accepted insurance industry cover offerings.
In policy wording updates, one of the leading insurers in the issuing of community scheme fidelity insurance made changes to their policy wordings to clarify the intent of the cover regarding who is insured and who is not. This has raised some interesting and important considerations relating to community scheme fidelity insurance.
To achieve greater clarity and understanding, it is important to first understand certain basics of fidelity insurance cover.
1. CSOS regulation – in terms of regulation 15(1) “every community scheme must insure against the risk of loss of money belonging to the community scheme or for which it is responsible, sustained as a result of any act of fraud or dishonesty committed by any insurable person.”
2. The cover – the fidelity guarantee insurance policy provides indemnification for financial loss suffered by the insured against various perils listed in the policy wording. These perils include theft of money, extortion, computer crime, and fraudulent funds transfer.
3. The insured – is the party to whom the cover is granted – i.e., the scheme (body corporate, share block, or HOA). The fidelity cover is in place to protect the rights and interests of the insured.
4. Other parties – such as the managing agent and other service providers; they are independent entities who are contracted to perform certain functions for the insured. Under standard fidelity insurance cover, these other parties are not included within the definition of insurable persons, but under the extended CSOS-compliant fidelity cover, they are included as insurable persons.
5. Insurable person – is defined in line with the CSOS legislation and includes scheme executives, employees or agents of the scheme, and a managing agent, including their staff acting under their direction, all of whom have access to and control of the scheme’s money.
Recent updates introduced by some insurers to their fidelity policy wordings have been made to clarify the fact that the fidelity policy is not in place to cover losses or incidents suffered by the managing agent or other contractors employed by the scheme.
Managing agents should be aware that the body corporate’s fidelity cover does not cover their risks but protects the body corporate against the managing agent’s employees’ fraud or dishonesty. If a staff member of a managing agent causes a body corporate to lose money through an act of fraud or dishonesty, the insurer may choose to recover the scheme’s claimable loss from the managing agent. For that reason, managing agents should ensure that they have suitable and sufficient insurance protection for their businesses.
We do not recommend that community schemes rely on the alternative as suggested in CSOS Act sub-regulation 15. (5) as there are too many risks attached to this in our view. We have recommended to the authorities that sub-regulation 15. (5) be removed.
Author: Bruce Gibson
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