Advice and Opinion

A look at the importance of insurance in sectional title schemes

On any sectional title property scheme, one of the body corporate’s most important responsibilities is to ensure that the buildings in their development are not only insured but insured to the right value – giving full coverage of the entire scheme. “This”, says Tony Clarke, Managing Director of the Rawson Property Group, “is often not the case, particularly when sectional title schemes run into financial trouble. At that stage, he says, this basic body corporate trustee duty – of ensuring that the scheme is properly insured – is often one of the first duties to be neglected”.

“In an efficient, well run sectional title development”, says Clarke, the body corporate’s trustees will, as required by law, present to all members well before the annual general meeting an insurance schedule in which the full value of the buildings (including all improvements to them) is clearly tabulated. This schedule will reflect the replacement value of each unit in line with what is known as the participation quota, i.e. the amount of space that the unit occupies in relation to the development as a whole.

“Assessments for insurance purposes have to be done at least once a year”, says Clarke, because of the many factors which influence them, e.g. building costs, security costs, rates and taxes, are always subject to inflation and insurance increases will therefore be inevitable. “However”, he says, “as these outlays are paid for by the members’ monthly levies they are entitled in law to query them and in fact to reject them, should they deem them to be inequitable.”

Clarke says that one of the most common mistakes made by body corporate members is to think that the comprehensive nature of the insurance on the property also covers the contents of the units – but this is not so. Members must take out their own personal insurance for their own personal items.

“Quite frequently”, says Clarke, “the owner of a unit will spend quite significant sums on improving his unit and may well then feel that the insurance arranged by the body corporate is insufficient. In these situations the owner is entitled to demand increased insurance cover – but he will have to pay for it himself.”

“Some sectional title schemes’ insurance arrangements run badly awry”, says Clarke, and when this happens this is usually due to the ignorance of the trustees or to the inefficiency of the insurance agent. In these situations the insurance arrangements may fail to meet the statutory requirements of sectional title schemes, e.g. access for municipal fire engines or the fire fighting equipment in the development itself.

“As indicated, a number of sectional title schemes end up with policies that are in fact inadequate because the insurance cover is insufficient. In the worst case scenarios”, says Clarke, the trustees, faced with cash shortfalls, may actually drop their insurance altogether. This is not only illegal but of course will have disastrous consequences should things go wrong in the development, e.g. should it be badly damaged by fire.

“The fact that some sectional title developments do end up with no or inadequate insurance”, says Clarke, “can often be attributed to the poor attendance by members at the annual general meetings. All too often, he says, it is presumed that the trustees know their job and are diligent when in fact this is far from being the case. Attendance at annual general meetings is, therefore, a responsibility that members should not shirk.”