Why different types of insurance risk must be disclosed

Over the past two weeks, we dealt with the use of sections for short term rentals. This week we focus on differences between residential and commercial use.

In addition to residential sections, some body corporate complexes also consist of offices or other small retail outlets. This in itself does not pose any problem for insurers. The problem arises where a retail outlet engages in some form of trade which increases the insurance risk. The determining factor is the position of the insurers and how they should deal with a claim arising from such an increased risk.

Consider this example: A complex consists of residential units, consulting rooms, a chemist, a clothing outlet and a furniture outlet. These are all risk types that are acceptable in terms of sectional title insurance cover. Sometimes the commercial sections may carry a higher premium than the residential sections. At some stage, the furniture outlet decides to also manufacture furniture. This now becomes a woodworking risk which is classed by insurers as a high fire risk that must be surveyed by the insurer before providing cover. Based on the results of the survey, insurers will probably impose a number of safety measures, an increased claims excess and an increase premium rate – depending on the level of risk and the individual insurer.

Section 13 (1) (e), (f) and (g) of the Sectional Title Schemes Management (STSM) Act deals with the aspect of occupation change and it requires an owner to inform the body corporate of any changes. The higher fire risk will certainly impact on the other owners and trustees must therefore, take great care to allow such a change in occupation. For the trustees, it will be important to seek advice from the brokers or insurance advisor before allowing the change.

What happens if these procedures are not followed?  All insurance policies contain two clauses known as the (i) “Misrepresentation, Mis-description and Non-disclosure Clause” and the (ii) “Suspension of Cover Clause”. Using the example above and where insurers are not informed of the change in risk – especially where the activities of the risk does not comply to statutory requirements – the insurers have the right to repudiate any claims arising from such a unit. Note that in terms of the “Breach of Conditions Clause”, the repudiation will only apply to the unit in question, not to the other units as well. However, despite this clause, the risk still imposes on the safety and well-being of the other owners.

Our recommendation is that where units are used for any purpose other than residential units, the trustees or managing agents should try to ascertain themselves of the exact nature of the activities carried on in such sections and to discuss this with the insurance brokers or insurers. We understand the challenges and often practical impossibilities but when aware of such activity, we should disclose additional risks.

 

Author: Rian Pienaar, 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