Why some bodies corporate neglect fidelity cover

(Updated 24 January 2025)

Ten years ago, circa 2014, there was a noticeably different attitude toward fidelity cover, and various factors contributed to its neglect. At the time, it was merely an agenda item to be considered at the AGM, with owners having the option to decline the cover. Since it was not mandatory, it was often completely overlooked.

Where we where

Some managing agents found it awkward to suggest that the body corporate purchase insurance to protect against potential fraud by the managing agent themselves. When the topic was raised, owners would often dismiss the suggestion, insisting that the managing agent should pay for it. As financial advisors, we frequently received calls debating this very point.

Additionally, there was a widespread misconception that the EAAB Fidelity Fund (now the PPRA) provided sufficient coverage in such cases. Some took cold comfort in the fact that their policies included a minimal amount of fidelity cover, though, in reality, both options offered little meaningful protection for schemes.

Where we are now

Fast forward more than a decade, and compulsory fidelity cover has become standard practice, as set out in Regulation 15 of the Community Schemes Ombud Service Act 9 of 2011 (CSOSA).

Unfortunately, despite this requirement, some schemes still tend to overlook fidelity cover. In some cases, they mistakenly believe they have full coverage without fully understanding the sub-regulations of Regulation 15. While the managing agent or trustee may have some knowledge of the requirements, the insurance broker or insurance company may not, leading to critical gaps in cover.

We have identified eight key reasons why certain schemes continue to have inadequate or non-compliant fidelity cover:

1. Lack of communication between the managing agent and the insurance broker

• Brokers are not always informed by managing agents of the specific requirements outlined in CSOSA Regulation 15.
• Some brokers lack familiarity with community scheme legislation, rules, and regulations.
• Brokers are often not provided with up-to-date information, such as budgets and financial statements, which may be needed for advising on the minimum required sum insured. While managing agents may establish this amount, brokers must understand it to ensure proper coverage.

2. Incorrect agenda items at AGMs

• Insurance items under Prescribed Management Rule 17 (PMR 17) are often incomplete, with references to liability and fidelity frequently omitted.
• Items related to PMR 23(6) and PMR 23(7) are sometimes mentioned, but if the chairperson (often a layperson) does not understand that these refer to liability and fidelity, they may be glossed over or ignored entirely.

3. Outdated policy wordings

Some building policies still provide “old-style” fidelity cover, commonly found in commercial policies. These wordings often fall far short of the required cover, and many schemes unknowingly rely on them, leaving themselves largely uninsured against the more significant risks.

4. Reliance on managing agents’ policies

Some schemes depend on their managing agent’s policy, which often provides limited coverage that fails to meet the statutory minimum sum insured amount requirements for all schemes under their management.

5. Underwriting information gaps

Many policies are subject to specific underwriting information, such as managing agent details and insurability. This information is often not provided, particularly when schemes change managing agents, leading to a false sense of security among owners.

6. Policy oversight when changing brokers

When a new broker is appointed, they may focus solely on the buildings policy, overlooking the separate fidelity policy. As a result, premiums may go unpaid, and coverage can lapse without anyone realising.

7. Lack of auditor oversight

Not all auditors thoroughly check for fidelity cover compliance, further increasing the risk of omission.

8. Overdue AGMs leading to overdue fidelity cover

In schemes where AGMs are overdue, fidelity cover often becomes overdue as well, as little attention is given to updating the sum insured between AGMs.

Ensuring compliance with fidelity cover requirements is crucial to protect the financial integrity of community schemes. Proper communication, regular policy reviews, and an understanding of the regulatory landscape are essential to avoid costly gaps in coverage.