Before every annual general meeting, the Trustees must ensure that insurance
schedules are prepared. The schedules should reflect their estimated replacement value of the buildings and the improvements to the common property, such as walls, swimming pools etc. The replacement value of each unit should be reflected.
Any owner, who feels that their unit is under-insured, may at any time and by
arrangement with the trustees, have the replacement value in respect of his or her
unit increased. In particular, owners who have themselves made improvements or additions should increase their sums insured. Any additional premium charged for this will usually be for those owners accounts.
I often see this point debated – who should do the schedule?
The insurance company will provide an insurance schedule, based on the sum insured. If the insurance company is provided with the participation quota (pq), then an insurance schedule will accordingly be set out. This insurance schedule is then often “adopted” as the schedule of replacement costs, however, this method has some serious flaws.
Actually per , PMR 29.(1)(c) reads
“ Before every annual general meeting, the trustees shall cause to be prepared schedules reflecting their estimate of -
(i) the replacement value of the buildings and all improvements to the common property; and
(ii) the replacement value of each unit (excluding the owner’s interest in the land), the aggregate of such values of all units being equal to the value referred to in subparagraph (i) above,
and such schedules shall be laid before the annual general meeting for consideration and approval in terms of rule 56.”
The trustees should see to it that a schedule of replacement costs is calculated by working from the valuation schedule. It is the trustee’s responsibility to see to that this is done as stated above; but this can be delegated to the managing agent who usually prepares this schedule. An experienced insurance advisor can also be of great assistance with this. (Addsure will naturally assist managing agent clients and self managed compexes with these).
This schedule should reflect the following, in order to be useful and understood by owners:
1. It should clearly and simply set out the replacement cost of the buildings at a given time as well as escalations
2. Indicate how these were determined e.g. from valuation dated April 2008
3. Reflect the common area and it’s value
4. Show in columns, the owner’s unit value as well as the value including the owner’s share in the common property.
5. A column for additions or additional value that an owner may wish to add.
See schedule example above
Now one can see the danger here if this example insurance policy schedule was simply“adopted”. Say it was simply accepted that the insurance company’s schedule of dividing the total sums by the respective pqs was accepted , then for example:
Flat Section 2 x PQ (0.0940) = R990,745
Garage Section 10 x PQ (0.0169) = R178,123
This compares somewhat differently to our suggested improved method of splitting columns:
Flat Section 2 is R871,416 + common area portion R197,190 = R1,068,606
Garage Section 10 is R53,089 + common area portion R35,494 = R1,068,606
So, our suggested method works better for 2 main reasons
1) An owner has a better idea of the replacement value of his or her flat without the costs of lifts, common areas added
2) Lower cost sections such as garages are not over insured and flats not underinsured – more accurately laid out
I have seen this difference far greater where, by stripping away the common areas and lifts, the unit sums insured were actually half that stated. Also, if one exaggerates the difference between cost of garages vs. cost of flats, the difference i.e. the underinsurance / over insurance ratio can be huge.
This does not mean that you as trustee MUST do it this way – this just illustrates how important it is to show the owners how values are determined, so that there can be no problems at claim stage.
Addsure clients enjoy the luxury of this being done annually for them, automatically and correctly.
More about the schedule of replacement costs can be found on www.addsure.co.za and more backround reading at Persfin on http://http.persfin.co.za/index.php?fSectionId=709&fArticleId=4857283
Addsure clients can obtain a cd with samples, templates and further information from Addsure directly.