Advice and Opinion

Fidelity cover for sectional title scheme or HOA run schemes should be included

In the general day to day management of a sectional title scheme or HOA run estate, the trustees should never usually allow either the managing agent or one trustee complete control of funds without transactions being cross-checked by another person. This “four eyes” principle protects funds from being misappropriated or mismanaged because each decision or transaction involving the scheme’s funds would need two people to release or approve it, says Michael Bauer, general manager of IHFM property management company.

Allowing one person unfettered access to the scheme’s funds could open it up to loss through fraud or dishonesty, he said. In the day to day running of a sectional title scheme actions such as signing quote acceptance, signing an invoice, processing payment, and loading beneficiaries, etc., should always be done by two people, so that there is complete transparency.

There is one rule that is often overlooked with regard to insurance in a scheme, said Bauer, and that is Prescribed Management Rule 29 (2) (b), which directs trustees at some point to discuss at the Annual General Meeting the amount of fidelity cover that is needed for the scheme to protect it in case something does go wrong or an incorrect decision is made that causes money loss.

It states, “(2) At the first meeting of the trustees or as soon thereafter as is possible, the trustees shall take all reasonable steps …. (b) to procure to the extent, if any, as determined by the members of the body corporate in a general meeting, a fidelity guarantee in terms of which shall be refunded any loss of moneys belonging to the body corporate or for which it is responsible, sustained as a result of any act of fraud or dishonesty committed by any insured person being any person in the service of the body corporate and all trustees and persons acting in the capacity of managing agents of the body corporate;”

While sectional title trustees will not be held responsible for bad decisions or loss, unless it is gross negligence, directors of HOAs should have cover as they are effectively directors of a company and are responsible for what happens within that company, said Bauer.

“While you don’t want to over-insure and pay money out unnecessarily, you do want to be sure that if something goes wrong there is some form of insurance cover to protect the scheme’s finances,” said Bauer. “Trustees must take reasonable steps with regard to internal control of the financial management and fidelity cover or they will not have done their jobs properly.”