The latest Insurance guide can be found at http://www.addsure.co.za/downloads

Introduction (Pages 1 - 4)

By Mike Addison

Foreword
Introduction
What trustees need to insure against
Buildings cover
How to deal with sectional title cover
Geyser cover
Contractors on premises

More about the author and Addsure at http://www.addsure.co.za/

Foreword by Professor Graham Paddock:

"Mike Addison is an expert on sectional title insurance who offers sectional title insurance cover, advice and training throughout South Africa. His background as a banker and financial adviser means that Mike has a rare combination of financial and legal experience and expertise in the field.

Addsure runs regular training programmes and strives to raise standards throughout the industry.

Paddocks is proud to be associated with Mike Addison and Addsure is its preferred supplier of sectional title insurance services.

Graham Paddock
March 2007"

Introduction

One of the most important responsibilities of the trustees is to ensure that the body corporate is adequately insured. All too often this very important area of risk is overlooked, or not enough attention given to it.

In my opinion, the arrangement of the insurance of buildings and the way this aspect of sectional title management is dealt with, is critical to avoiding huge personal losses, disputes and unhappiness.

I have attended many an Annual General meeting where this point is simply covered by presenting a schedule of replacement costs, which are then proposed and seconded; and then the meeting proceeds to the next point on the agenda.

All too often we find buildings underinsured by millions, simply because no recent valuation has been done; or trustees “estimate” replacement costs themselves by multiplying the area by a certain building cost per square metre without accounting for common areas, lifts, VAT, professional fees and demolition costs.

Most owners do not even attend the AGM if the block or scheme is running problem-free. Those in attendance also usually do not fully understand the insurance schedule. By approving the schedule, members / owners at the AGM may well – in their ignorance - be approving underinsured and/or inappropriately insured buildings.

This important area is actually quite easy to deal with - simply a matter of following a formal process and keeping informed, by dealing with specialists in the field or a better-informed managing agent.

This guide assists in equipping managing agents, trustees and owners to deal with this simple but important aspect in the sectional title environment.

What Trustees Need To Insure Against (Pages 5 -9)

Section 37 of the Act sets out functions of the body corporate. Some of these pertaining to the insurance aspect are set out below and include:
to insure the building or buildings and keep it or them insured to the replacement value thereof against fire and such other risks as may be prescribed;
to insure against such other risks as the owners may by special resolution determine;
subject to the provisions of section 48 and to the rights of the holder of any sectional mortgage bond, forthwith to apply any insurance money received by it in respect of damage to the building or buildings, in rebuilding and reinstating the building or buildings in so far as this may be effected;
to pay the premiums on any policy of insurance effected by it

It is important to understand that in terms of section 35 of the Sectional Titles Act, Management and Conduct rules shall provide for the control, management, administration, use and enjoyment of the sections and the common property. These rules are prescribed by regulation and may be substituted, added to, amended or repealed from time to time by unanimous resolution of the body corporate. (I’ll come back to this point a little later when discussing excesses.)

Insurance is “covered” or dealt with in more detail, by Management Rule 29

29. (1) (a) At the first meeting of the trustees or so soon thereafter as is possible, and annually thereafter, the trustees shall take steps to insure the buildings, and all improvements to the common property, to the full replacement value thereof, , subject to negotiation of such excess, premiums and insurance rates as in the opinion of the trustees are most beneficial to the owners, against-

(i) fire, lightning and explosion;
(ii) riot, civil commotion, strikes, lock-outs, labour disturbances or malicious persons acting on behalf of or in connection with any political organization;
(iii) storm, tempest and flood;
(iv) earthquake;
(v) aircraft and other aerial devices or articles dropped there from;
(vi) bursting or overflowing of water tanks, apparatus or pipes;
(vii) impact with any of the said buildings or improvements by any road vehicle, horses or cattle;
(viii) housebreaking or any attempt thereat;
(ix) loss of occupation or loss of rent in respect of any of the above risks;
(x) such other perils or dangers as the trustees or any holder of first mortgage bonds over not less than 25% in number of the units in the scheme, may deem appropriate.

(b) The trustees shall at all times ensure that in the policy of insurance referred to in paragraph (a) above-
(i) there is specified the replacement value of each unit (excluding the owner's interest in the land)-
(aa) initially [but subject to the provisions of subparagraph (cc)] in accordance with the trustees' estimate of such value;
(bb) after the first annual general meeting [but subject to the provisions of subparagraph (cc)] in accordance with the schedule of values as approved in terms of paragraph (c); or
(cc) as required at any time by any owner in terms of paragraph (d);
(ii) any 'average' clause is restricted in its effect to individual units and does not apply to the building as a whole.
(iii) there is included a clause in terms of which the policy is valid and enforceable by any mortgagee against the insurer notwithstanding any circumstances whatsoever which would otherwise entitle the insurer to refuse to make payment of the amount insured unless and until the insurer on not less than 30 days' notice to the mortgagee shall have terminated such insurance.

(c) 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.
(d) Any owner may at any time increase the replacement value as specified in the insurance policy in respect of his unit: Provided that such owner shall be liable for payment of the additional insurance premium and shall forthwith furnish the body corporate with proof thereof from the insurer.
(e) The trustees shall, on the written request of a mortgagee and satisfactory proof thereof, record the cession by any owner to such mortgagee of the owner's interest in the application of the proceeds of the policies of insurance effected in terms of rule 29 (1) (a).

(2) At the first meeting of the trustees or as soon thereafter as is possible, the trustees shall take all reasonable steps-

(a) to insure the owners and the trustees and to keep them insured against liability in respect of-
(i) death, bodily injury or illness; or
(ii) loss of, or damage to, property,
occurring in connection with the common property, for a sum of liability of not less than one hundred thousand rand, which sum may be increased from time to time as directed by the owners in general meeting; and

(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; and (refer to www.pima.co.za - Fidcure guarantee solution)

(3) The owners may by special resolution direct the trustees to insure against such other risks as the owners may determine.

(4) The owner of a section is responsible for any excess payment in respect of his or her section payable in terms of a contract of insurance entered into by the body corporate: provided that owners may by special resolution determine that the body corporate is responsible for excess payments in respect of specified damage (new rule 2008) See www.addsure.co.za and below on excesses.

Buildings Cover (Pages 9 - 13)

According to the Sectional Titles Act, “Building” means a structure of a permanent nature erected or to be erected and which is shown on a sectional plan as part of a scheme. A building though, according to the definition of a buildings policy wording is somewhat differently described. So, to be clear on what is being covered, we need to look at an actual sectional title policy and it’s definition of “buildings” :

“Buildings: Shall be deemed to include outbuildings and landlord’s fixtures and fittings therein and thereon including fitted carpets and lifts with all associated equipment, transformers, motors, boilers, air conditioning, standby generators and walls (except dam walls), gates, posts, fences (excluding hedges) and sporting/recreational structures including but not limited to swimming pools, tennis courts (including floodlights), sauna/spa baths/ jacuzzis and water pumps, pool machinery borehole motors and brick, tar, concrete or paved roads, driveways, parking areas, paths or patios all the property of the insured and situated as stated in the schedule. Unless otherwise stated in the schedule, the buildings and outbuildings shall be constructed of brick, stone, concrete or metal on metal framework and roofed with slate, tiles, metal, concrete or asbestos.”

This tells us quite a bit about what is being covered. It is clearly all fixed improvements made to the property over and above the land itself.
Basically, if it is part of the building, it is usually covered. By being part of, I mean it is a fixture - for example a fitted carpet, built in cupboard, light fitting etc. Contents are excluded. Contents should be covered by an owners personal / domestic insurance policy. The land is excluded. After all, if the buildings are totally destroyed, it follows that the land will still be left.

Some important points should be noted from the insurance policy definition.

Take for instance “…and situated as stated in the schedule.” The risk address i.e. the property itself will need to be correctly defined. If the buildings defined in a policy extend over to another property, or over a number of plots (or erven), take care to note all the erven as the insured properties, or at least to make sure that the address is clearly indicated.

Wooden structures or thatch need to be dealt with carefully. It cannot be assumed that wooden structures and thatch roofs will be covered – they are not according to the definition above. Non–covered items such as thatch need to be dealt with separately i.e. the body corporate trustees need to make it clear to the insurer that the additional risks need to be covered or added to the policy, even if for an additional premium.

However, note that the Sectional Titles Act definition is what is being referred to in prescribed management rules, so you will need to take extra care in respect of thatch, wooden structures etc whether or not they are shown on the sectional plan.
Most insurers apply a loading to the rate if a thatch lapa is bigger than 20sqm and closer than 4 metres to the building. Important - Owners with lapas need to refer to their brokers/insurance for advice and find out the underwriting requirements under their specific circumstances.

Defined Events

There are a few insurance products in the market, which have been specifically designed to suit the sectional title environment in South Africa. Corporate Sure (C-Sure Underwriting Managers (Pty) Ltd) and CIA (Commercial and Industrial Acceptances (Pty) Ltd) and are presently the leaders in the field of these products. They have moulded their policy wording to suit the Sectional Titles Act, particularly with reference to the provisions set out by Management Rule 29, detailed earlier. The defined events set out in one of these policies are summarized (more or less), as follows:

Damage by the perils described

1. Fire, lightening, thunderbolt, subterranean fire, explosion, meteorite
2. Storm, wind, water, hail or snow other than
a) that arising from its undergoing any process necessarily involving the use or application of water
b) wear and tear or gradual deterioration
c) loss or damage
(i) to retaining walls
(ii) caused or aggravated by
– subsidence or landslip
– the insured’s failure to make all reasonable precautions for the maintenance and safety of the property insured and for the minimization of any destruction or damage.
3. Earthquake
4. Aircraft and other aerial devices or articles dropped there from
5. Impact by animals, trees, aerials, satellite dishes or vehicles excluding damage to such animals, trees, aerials, satellite dishes, vehicles or property in or on such vehicles.
6. Theft (or any attempt thereat) accompanied by forcible and violent entry into or exit from such building, If any building insured or containing the insured property becomes unoccupied for 30 consecutive days, this item is suspended as regards the property affected, unless the insured before the occurrence or damage obtains the written agreement of the company to continue this extension. During the period of the initial vacancy of 30 consecutive days, the insured shall become a co-insurer with the company and shall bear a pro-rata proportion of any damage equal to 20% of the claim before deduction of any first amount payable.
(in short – there is theft cover for damage to the building where break-in or break-out occurs, however, when unoccupied, this cover may be limited or fall away)
7. Accidental damage to glass and sanitaryware etc is covered, yet chipping, scratching and other disfiguration is excluded.
8. Accidental breakage or collapse of radio or television aerials, satellite dishes, aerial fittings or masts.
9. Accidental damage including electrical or mechanical breakdown to pumps and machinery for swimming pools, boreholes, sauna/spa baths/Jacuzzis, automatic gates and garage doors in domestic use. The company shall not be liable for damage to property resulting from or caused by wear and tear, gradual deterioration, insects, vermin or any process of cleaning repairing altering or restoring, corrosion, erosion, deposit or scale, sludge or other sediment, chemical action or rust. The company’s liability shall usually not exceed R1,500 for any one event.
10. Bursting, overflowing or escape of water or oil from tanks, apparatus or pipes including any fixed water or oil-fired heating installation including damage to such tanks, apparatus or pipes but excluding damage as a result of wear and tear and gradual deterioration.

Burst Pipes (Pages 14 - 15)

In order to establish some clarity on the much-argued burst / leaking pipe issue, here is hopefully some explanation on this matter, which you can share with your fellow trustees and owners by looking at recent policy wording of CIA and C-Sure, which pertains to bursting of pipes:

CIA POLICY WORDING
Sudden and unforeseen bursting of water tanks, water apparatus (excluding geysers, which are more specifically insured under Section M - geyser Maintenance, and boilers) or water pipes, including damage
thereto, but excluding loss or damage to any property caused by or aggravated by;
a) wear and tear or gradual deterioration, rust, corrosion, mildew or damp,
b) subsidence and landslip,
c) the insured's failure to take reasonable precautions for the maintenance and safety of the property insured and for the minimization of any destruction or damage.

C-SURE POLICY WORDING
Sudden and unforeseen bursting, overflowing or escape of water or oil from tanks, apparatus or pipes including any fixed water or oil-fired heating installation including damage to such tanks, apparatus or pipes
but excluding all damage as a result of wear and tear and gradual deterioration.

So, quite clearly, a leak or drip or something "not sudden" would not be covered, specifically a leak caused by say a "pin-hole" or other deterioration over time.

TO SUMMARISE IN A NUTSHELL

1 ) BURST PIPE WITH RESULTING DAMAGE
Insurer should pay for the locating, repair of the pipe as well as the "putting back" e.g. re-tiling and replace any other "resulting" or "consequential" damaged areas e.g. ceilings damaged, carpet damaged etc.

2 ) DETERIORATED PIPE, SLOW LEAK, DAMP OVER TIME
Not an insurance claim - no sudden water damage, loss caused by deterioration.

3 ) DETERIORATED PIPE, BUT SUDDEN "COLLAPSE" OF PIPE - SUDDEN APPEARANCE OF WATER EG RUNNING, POOL OF WATER, FLOW OF WATER
Insurance will only pay for the consequential water damage eg the ceiling in flat below that was suddenly damaged. The location of the leak, the repair and the putting back of tiles etc - for the owner or if common property, the bcorps account.

Common water damage seen as maintenance issues, not insurance matters:
Bath traps leaking / dripping, shower waterproofing not working well, roots growing into waste pipes and causing damage over time, cracked drains, sealing (silicone beads) needing replacement, rising damp, roofing needing repairs etc.

See Persfin article wear and tear vs sudden loss - scanned www.addsure.co.za

Wider Cover under Sectional Title Policy (Pages 16 - 21)

In addition to the above defined events, some examples of the additional cover under the buildings section includes:

Accidental damage to public supply connections between the property insured (or for which the insured is legally responsible) and the public supply or mains.

Loss of rent – usually caused by the above defined events

Alternative accommodation

Architects and other professional fees

Cost of demolition and clearing

Fire extinguishing

Escalations during periods of insurance and reconstruction and design

Malicious damage

The policies offered also include other sections such as office contents, money, glass, fidelity, business all risks, accidental damage, public liability including trustees indemnity, employers liability, machinery breakdown and SASRIA (political riot) which is a separate coupon policy.

These can be understood better by looking at a brief summary of the cover provided by those sections:

Office Contents

This cover is normally added to cover up to say R20,000 of the contents of the office of the body corporate, security office or supervisors office. This would also usually cover the furniture, fittings documents and data processor. May also cover foyer furniture, laundry and clubhouse contents While there are limits, extensions etc applicable to this, this section provides some basic cover for office contents from most of the perils listed under the buildings section.

Money

Up to a certain limit, say R20,000, for loss or damage to money held by the body corporate. This would normally pertain to theft from the office safe, hold-up, theft while on the way to the bank etc, subject to certain exclusions.

Glass

This additional cover can be added to cover commercial glass such as shop fronts, entrance lobby glass, larger panes etc above normal domestic window glass. We always suggest to building owners / trustees to obtain a quotation to replace all glass shop fronts from a local glazier business and then insure accordingly.

Fidelity

This is additional cover against the loss of money or property stolen by an employee.
Thus, in your sectional title policy, you may be provided with say R20,000 or R50,000 cover – this essentially covers the body corporate should a trustee or employee be found to have stolen money and/or other property belonging to the insured or for which they are responsible. Under normal circumstances, the managing agent is NOT considered to be an employee.
The body corporate needs to check that they are also covered by the Estate Agents Affairs Board Fidelity Fund by ensuring that all arrangements with their managing agents and their banking and signing arrangements are in order and in line with legislation. This will involve checking the manner in which banking and signing is done. If in doubt, contact NAMA (National Association of Managing Agents) or a specialist sectional title legal consultant for further information. Additional cover may be needed – refer to PMR 29 (2) (b) above.

More about this at www.addsure.co.za and www.pima.co.za

Business All-risks

This section covers items on an all-risk basis, subject to certain exceptions. One would cover items that would be at risk for theft or outside the premises from time to time. Signage that can be “lifted”, flagpole and flags, gate motors, air conditioner motors, intercom systems, cameras, electric fence energizers, satellite dishes etc. This widens the scope to include theft without actual forced and/or violent entry to the premises. Body Corporate’s often cover items such as lawnmowers, weed-eaters etc. on this basis.

Geysers / hot water cylinders can also be covered under all risks on a slightly different basis, however, this method is not that popular since a few of the sectional title insurers now cover geysers more comprehensively without this additional cost.

Accidental Damage

This is defined as accidental physical loss or damage to the insured property at or about the premises, not otherwise insured up to the amount stated and subject to certain conditions and exceptions.

The insurers we work with tell us that they view it as the insured’s “safety net” and covers accidental damage which may “slip between the cracks” of the defined events listed earlier under “buildings”.

Picture of spilt paint only – not damaged awning

Liability

This is usually defined as damages which the insured shall become legally liable to pay consequent upon accidental death of, or bodily injury to, or illness of any person (hereinafter termed injury), or accidental loss of or physical damage to tangible property (hereinafter termed damage) occurring during the period of insurance in, on or about the property insured and arising from the insured’s ownership thereof and elsewhere within the territorial limits, where the insured is working in the course of the business.

This is fairly wide cover again subject to certain extensions, exceptions, conditions, etc. can be discussed at some length.

Prescribed Management Rule 29 sets out what the trustees need to cover and sets out a minimum amount of R100,000. In today’s terms, this amount is inadequate and, in my opinion should be no less than R10,000,000 with more the better.

An important extension is trustees indemnity which C-Sure, FPA and CIA include. Trustees need cover for they may be held personally liable for losses incurred by owners or other parties as a result of their negligent actions or decisions. Personally, I would never offer my services as a trustee unless at least R500,000 trustees indemnity cover was in place.

Employers Liability

Defined events – Damages which the insured shall become legally liable to pay consequent upon death of, or bodily injury to, or illness of any person employed under a contract of service or apprenticeship with the insured, which occurred in the course of and in connection with such person’s employment, by the insured within the territorial limits and on or after the retroactive date shown in the schedule; and which results in a claim or claims first being made against the insured in writing during the period of insurance.
NB Bodies Corporate should see to it that all employees are registered with the Workman’s Compensation Commissioner. The body corporate’s insurance cover is “over and above” the compensation received from the commissioner (Refer Coida).

Machinery Breakdown

Sudden and unforeseen physical damage to the insured machinery being air-conditioning plant, automatic gates, garage doors, boilers, electrical switchgear, escalators, hoists, lifts and transformers forming part of the buildings insured under the building section of this policy;

a) whilst it is at work or at rest;
b) whilst being dismantled for the purpose of cleaning, inspection and overhaul or removal to another position or in the course of these operations themselves or subsequent re-erection

subject to certain exceptions and conditions such as wear and tear, gradual deterioration, the first amount payable stated in the schedule.

SASRIA

SASRIA cover covers certain areas that are normally excluded under buildings cover. This type of cover was born out of historic unrest in the country during the late 1970’s and covers the events where damage is caused as a result of riot, lock-out, strike, bomb blasts etc. SASRIA cover is relatively cheap and issued on a coupon basis, Always check with your broker / authorized service provider that this cover has been issued. We often find buildings at risk without this cover, mainly with older policies. This cover is a requirement– prescribed management rule 29.1(a) (ii) refers.

Referring back to what trustees should insure against in terms of management rule 29, the insurance products specifically designed for the sectional title industry is strongly advised. All too often we see policies in force simply covering buildings, often with or without public liability cover, let alone the additional cover set out above.

Summary of Benefits Table (Page 22)

Addsure places most sectional title building cover with Corporate Sure (underwriting managers for Santam) and CIA (underwriting managers for Compass). Addsure also places with FPA (underwriting managers for Centriq), Abacus (underwriting managers for Mutual & Federal), Zurich, Santam, HIU, Acommod8/Natsure and Chartis (new agency pending).

The above table was based on a typical sectional title policy in 2008. Since then some underwring managers have increased liability cover and trustee indemnity, widened fidelity cover and some now offer limited subsidence and landslip cover.

These policies are designed to meet the requiremnts of PMR 29.

Your broker / adviser needs to understand sectional title. Is your body corporate insured by one of the aforementioned insurers?

Professional Indemnity Cover (Page 22)

We think that it is important that all professionals who deal with bodies corporate should disclose whether or not they hold professional indemnity cover. Insurance and Financial Advisors are obliged to disclose this – why not other professionals?
So, we think trustees would be doing the right thing asking whether their insurance broker, property valuer, attorney, auditor, safety consultant and managing agent have professional indemnity cover in place.
This cover is usually designed to protect the professional and their clients by indemnifying them to certain limits for losses resulting from their error or incorrect advice in their professional capacities. More about managing agent’s professional indemnity cover can be found on www.pima.co.za or from NAMA (National Association of Managing Agents).

Excesses (Page 23)

The excess is the first amount payable in respect of claims made. This is the amount that the insured pays towards the loss, or by my definition, “the uninsured portion.”
Usually R500 to R1,000 for the basic excess.
Geysers usually R1,000 with maximums where preferred plumbers not used
Higher excess if unit unoccupied for a period longer than 30 days
Higher excesses will apply to higher claimers
Recently, new sub rule 29.4 came into being which places the onus on the owner for any excess in respect of his or her section. Before this new rule, the body corporate would have paid the excesses for claims from an external source such as storm, wind, fire, break-in etc. The rule does provide for this by letting the owners choose by way of a special resolution, to determine which specified damage would be paid by the body corporate and not the owner under such circumstances. Addsure guides clients in this new important area, provides sample resolutions to client bodies corporate, holds regular workshops covering this aspect for trustees and managing agents and coaches client owners at general meetings when invited to do so.

Trustees may negotiate the excess structure . PMR 29. 1 (a) above …. subject to negotiation of such excess, premiums and insurance rates as in the opinion of the trustees are most beneficial to the owners, against……etc

Thus, the insertion of this clause in 2005 clearly mandates the trustees to manage the policy through negotiation of excess, premium and rate. Higher premiums may reduce excess and vice versa. If trustees are concerned about claims history and the impending impact of future premiums, higher excesses may thus be sought, of course, as long as this is, in the opinion of the trustees, most beneficial to the owners.
Reduction of excess or excess “buy-back” or “buy-down” may also be purchased via specialist sectional title financial services providers such as Addsure or Trafalgar Financial Services as examples.

This aspect, ie managing claims ratio, deciding upon correct excess and negotiating with the insurer form part and parcel of understanding the new rule 29.4. This is where a specialist insurance advisor really helps.

What if more than one section is damaged? See diagram / slide above. The R5,000 excess has to be proportionaly split between the owners in the same ratio as the cost of the damage per section. (see www.addsurediary.blogspot.com for workshops on this and other subjects).

See www.addsure.co.za for a scanned Personal Finance article on excesses

Determining Replacement Value (Pages 24 - 26)

The very first thing a trustee should do– determine the replacement value of the buildings by way of a professional valuation for insurance purposes.

Perhaps we should ask ourselves:
When last were the buildings valued?
How were these values presently stated on the existing policy, originally determined?

This is the area in which, in my opinion, trustees are most at risk in the way they carry out their duties. All too often I come across buildings insured for less than half their reinstatement value. If I am an owner, and an insurer pays out less than that required to repair the damage, due to lack of care in this regard – I will look to the trustees personally to make good any shortfall.

Obtaining a valuation is really quite easy – just go to the right valuer! There are plenty of qualified valuers out there, some more in tune to insurance valuations than others and some quite reasonable in their pricing. A simple block comprising say 20 to 30 units of the same quality and make up, with available plans and measurements should cost between R3,000 and R5,000. This valuation can then be updated every 2 to 3 years with the owners taking a view on escalated replacement costs for the year or two in between. Clients can obtain a list of Addsure approved valuers from Addsure's office eg, not all valuers fully understand how to set out the valuation for sectional title insurance needs, not all carry the necessary profesisonal indemnity insurance etc.

Small simplexes comprising say up to 3 or 4 units can, in my opinion, be looked at by the owners themselves, unanimously though (i.e. all owners must agree). I do not see the difference between a large house and a small complex of this nature. The managing agent can in most cases assist in the process. A specialist in sectional title insurance would be best qualified to guide the owners / trustees / managing agent in this regard.

Lets look at an example – a block of say 9 flats with 8 garages, common property etc.
The valuation would be requested by the trustees. The trustees may ask the managing agent to arrange this or arrange it themselves. The valuer would then visit the buildings to determine, among other things, the extent of the buildings, whether it matches the sectional plans, other improvements, condition, etc. A report would follow, accompanied by a valuation schedule setting out the replacement costs, breaking down certain elements for purposes of insurance.

See example above or as set out on page 26 in the hardcopy of the booklet, the Sectional Title Insurance Guide, second edition 2008.

More on the valuations and schedule at www.addsure.co.za

Schedule of Replacement Values (Pages 27 - 30)

Equipped with the valuation, the trustees should now be able to determine the various elements and account for additions such as covered balconies, swimming pools, wendy houses etc. It is also important to be able to split these and other common areas from individual units.

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:

R10,539,844

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.

Dealing with insurance at the A.G.M. (Pages 31 - 33)

Owners need to understand the schedule of replacement values as described and dealt with above and we feel that trustees and managing agents need to present the schedule to owners in an informative yet simple way. Owners need to account for their additional expensive fitted kitchens, undertile heating, air-conditioning units, expensive flooring etc. when considering their section’s sum insured.

This leads onto PMR 56 (b) where it is very clear that it is compulsory that the schedule of replacement costs be transacted at an annual general meeting

“The following business shall be transacted at an annual general meeting:
…………………………..(b) “the approval with or without amendment of –
(i) the schedules of replacement values referred to in rule 29 (1) (c); and…..”

I will go into a little more detail on how to deal with this at the actual meeting further on here.

The schedule of replacement cost should reflect similar figures to that shown on the actual policy of insurance. After valuation, provided not lower than the last agreed figures, the trustees should instruct the insurers to amend the cover accordingly. The body corporate should be dealing with an authorized insurance broker / advisor (licenced with the Financial Services Board (FSB)) who specializes in this particular field of insurance. The broker/advisor should provide the body corporate with an annual renewal invitation plus quotes from alternative appropriate insurers / product providers for consideration. The insurance company / product provider should also be one with a sectional title friendly policy. This should be done in line with the valuation although, in practice not always achieved! The insurance advisor / broker should be providing this annual information under cover of a written record of advice. (Addsure clients enjoy this as a matter of routine, usual business practice).

At the A.G.M. itself, it is important to present the insurance schedules and related information clearly and then, just as importantly, ensuring that what was said here is accurately minuted. I believe that it is here, at this stage of the A.G.M., that what is said and minuted, is what could make a huge difference whether trustees are being negligent or not; and whether owners were properly informed. At claim stage when what was minuted at the AGM could be critical!
Here follows an example of dealing with this section of the meeting:

Chairperson “We now move on to item 3 which reads ‘Approve, with or without amendment, the schedules of replacement values’. This refers to the insurance replacement costs of the buildings. Copies of the schedules of replacement values were included together with the notice of the A.G.M. I will refer to these schedules as we highlight some of the information to all owners. The schedules are set out in columns for ease of reference. The sum insured in the sum insured column which corresponds to your section number is the sum insured based on the basic unit, not yet renovated or further improved. A separate column reflects each section’s proportionate share of the common property. The common property is shown separately here (notionally only) so that an owner can better see the replacement value of his/her section as set out from the valuation.
The values were determined by taking last years valuation (done by a professional valuer) and escalating the figures by 12%. It has been suggested to the trustees that a professional valuation should be done at least every 2 to 3 years. If all owners agree, the trustees will arrange for this every 2 years. This is nothing to do with market value or bank’s value. It is the estimated cost to replace the buildings together with professional fee, demolition, VAT etc. Any owner may increase the value of their unit by instructing the trustees via the managing agents. This will be where the ‘additions’ column will be used. The additional cost will be borne by that owner. It is stated for the record that any owner who feels that their section is not adequately insured, whether because they feel the rate per sqm is too low or because they have added value by way of improvements, should straight away advise the trustees to increase the value of their unit accordingly. The trustees have placed the insurance cover with X Insurance Co because they are one of two insurers specializing in wider cover for the sectional title environment. The policy number and excesses are stated on the policy. The claims procedure and a copy of the policy document is held by the managing agent, a copy of which is available upon request. A copy of the policy document (wording) as well as the most recent valuation is with us here tonight, should anyone here wish to take a look at them.
After this information is provided, the chairperson asks the floor that a member propose that the the insurance schedule to be accepted and that all owners thus accept the buildings replacement cost as stated in the schedule subject to individual requests in the additional column from time to time. The motion to accept the schedules is proposed, seconded and the motion carried.

It is then most important to minute this section properly so that the minutes clearly reflect that the chairperson stated the way in which the replacement cost of the buildings were determined and that all owners agree. It should be noted that the chairperson explained the additional sum so that no owner can claim that they were not aware of, or did not understand the insurance schedule and/or how the values were determined. It should be noted that the geyser options were tabled and be minuted as to which option was decided upon.

More on dealing with insurance ahead of the A.G.M. can be found on http://www.addsure.co.za/ or Personal Finance magazine http://http.persfin.co.za/index.php?fSectionId=709&fArticleId=4857283

Addsure specialises in preparing schedules and assiting clients properly present these and other matters such as the new excess rule and fidelity cover at general meetings.

Addsure clients also have access other meeting resources and expert input.

The Paddocks Learning "Law of Sectional Title Meetings" course is an excellent course which equips the learner with in depth knowledge and background to the legal aspects of sectional title meetings. See www.paddocks.co.za.

Claims Procedure (Pages 33 - 35)

The trustees via the managing agent should manage claims. An insurance broker with experience in sectional title insurance matters can assist greatly when claims arise.

An example of a claims procedure (should be amended to suit individual body corpoarte needs):

Body Corporate of XYZ
Procedure : Claiming from Insurance

1. Report an incident / event to the body corporate (contact the managing agent on tel 011 123456) immediately and ask that your claim / possible claim be registered without delay. This must be done within 30 days otherwise the claim is prejudiced.
2. Obtain a claim form from the managing agent and complete this with as much information as possible. Include SAPS case number if applicable and copies of quotes (always 2 quotes) to repair damage / loss. Send this completed and signed claim form to the managing agent as soon as possible. Say two trustees or one trustee and the managing agent (if authorized to do so) should sign claim forms on behalf of the body corporate. Damage from within sections should also be signed by the owner.
3. If urgent that the damage be repaired immediately, try to get the managing agent to obtain authority to repair or get one of the trustees to use their discretion to authorize repair. Retain all salvage for assessment purposes.
4. Obtain opinion from the managing agent in respect of excesses, who would be liable etc so that there is no argument about who has to pay the excess when the contractor needs to get paid.
5. The insurance company will pay a claim (if accepted) less excess. The owner from whose unit the loss emanated may well need to carry this – depending on the management rules of that body corporate.
6. The claim will be paid directly to the body corporate (the insured) or the contractor repairing damage, depending on the express wish of the body corporate.
7. The individual owner should work via the managing agent or trustees.
8. If such a claim is repudiated, and the owner disagrees with such decision, the individual owner should write to the body corporate stating such and requesting that the trustees take up his disagreement with the insurer, asking that the claim be reconsidered. If the trustees agree and the insurer maintains their position, the trustees have recourse via the ombudsman for short term insurance.
9. Should the trustees disagree with the owner i.e. agree that the claim remain repudiated, the trustees may advise the owner who then would have to follow the dispute resolution process with the body corporate.

The owners should receive a copy of the claims procedure including the procedure to follow should they wish to dispute a claim, or dispute a claim repudiated by the insurer.

The body corporate has the insurable interest, i.e. is the insured as far as the insurer is concerned. Any dispute from an owner’s point of view would need to be taken up by the body corporate on that owner’s behalf. If the body corporate disagrees with that owner, it is my opinion that the dispute is then between the owner and the body corporate, not the individual owner and the insurer. The trustees do need to maintain control in the interests of all owners, however, the individual needs to be aware of his/her rights and the procedures to follow when he or she feels wronged.

More about insurance claims can be found at www.addsure.co.za on the Claims Page or a scan of an article published in the First Quarter 2009 issue of Personal Finance magazine on www.addsure.co.za

Questions and Answers about insurance and claims can be found on the forum section of www.sto.co.za and www.sectionalforum.co.za.


Acknowledgement: Cartoon above by Colin Daniel of Personal Finance www.persfin.co.za
From an article written by the author of this blog

Geyser Cover (Pages 35 - 36)

Hot Water Cylinders / geysers form part of the building. If damaged by one of the events defined, that hot water cylinder is covered.

We all know that geysers rarely, if ever, burst! They “pack up” and when this happens and there is no drip tray, quite a bit of damage can result! Strictly speaking, insurers should pay for the resulting “water damage” only under such circumstances and leave the geyser for the owner to replace. It has become standard procedure, however, for plumbers to report “burst’ geysers and as such insurers do pay the claims. Most insurers have adopted this standard, including bank insurers for normal domestic policies. The way around this has been for insurers to apply compulsory excesses.

In the past, sectional title policies often carried sliding scale excesses, which many felt was the fairest way to deal with this issue. Under this scenario, geyser excesses were structured according to its age. A new geyser would carry an excess of say R500, but a nine year old geyser’s excess would be 75% of it’s cost of say R3,000.

Another option was to insure a geyser, without excess, on an all risks basis. On this basis, the insurer agrees to replace the geyser if it becomes irreparable, almost treating insurance as a means of financing the inevitable loss. Depending on the average age of the geysers in the block, this method could be very attractive indeed. For each owner to pay R25 per month extra for this cover where the geysers are all 10 years or older, this could be a viable option..

The various insurance companies and underwriting managers are competing and introduce new innovative products and enhancements from time to time. More recently, the fixed geyser option, geyser excess buy backs, free excess options and so on are being offered. Some of the main sectional title underwriting managers offer geyser maintenance and emergency all hour call centre numbers for geyser bursting / repairs. It is up to the trustees to check with their insurance advisors / brokers / managing agents that the most appropriate options are offered to the body corporate and changes are brought to trustees attention from time to time.

Geyser / Hot Water cylinder replacement and resulting damage from leaking cylinders have more recently been identified as the largest claims cost driver by far. We predict a lower level of cover for geysers in future. More about geysers on http://www.addsure.co.za/ and Persoanl Finance Article downloadble from http://www.addsure.co.za/

Acknowledgement - The cartoon above by Colin Daniels, Personal Finance Magazine.

Article by the autor of this blog.

Contractors On Premises (Page 37)

All owners must be made aware that, where they engage the services of a contractor to do repairs or improvements to their section of the building, where they are working on that part of the building, cover technically ceases for the time that work is being done in that area. The contractor should provide proof of contractors all risk / liability cover and the owner is responsible for this.

The trustees are responsible in the same way to ensure that contractors engaged by them have such cover. Any owner, engaging the services of a contractor on site, should be providing the trustees with a copy or proof of such cover.

It is my opinion that trustees who give permission for contract work without insisting on proof of such cover, could be acting negligently.

Likewise, to engage the services of an informal worker to carry on tasks such as painting, repairs etc, one should ensure that all risks are properly considered. Who pays when a 20 litre tin of paint falls 2 storeys onto a luxury motor vehicle?

Trustees should ensure that there is a formal procedure and/or set of rules in place, which all owners should be aware of, as far as contract work in and about their sections is concerned.

Bodies Corporate should be very aware of the OHS Act and safety compliance when dealing with contractors around the buildings, particularly, common property. Trustees and Managing Agents not heeding to this legislation could be criminally liable should a worker be hurt or fatally injured on site and these statutory requirements / aspects not dealt with properly.

Note: It is suggested that a safety consultant be engaged to discuss the needs of your body corporate. See http://www.facebook.com/group.php?v=info&gid=39332812330

Disclaimer and Copyright (Pages 38 - 40)

Acknowledgements

Andre De Waal, Managing Director CIA, and Wentzel Van Der Merwe, Claims Manager, CIA for editing, suggestions and ongoing input in insurance matters. http://www.cia.co.za/

Graham Paddock and Judith van der Walt, Paddocks Consulting – for consultation and input on sectional title insurance matters from time to time. Also, providing a platform through various courses and seminars through which this booklet and its contents has reached many professional sectional title managing agents and property managers. http://www.paddocks.co.za/ http://www.sto.co.za/

To the professional managing agents throughout South Africa who form the firm base on which the body corporate industry relies.

Dr Gerhard Jooste of NAMA (National Association of Managing Agents) who has spends so much time promoting the more professional Managing Agent. http://www.namasa.co.za/

Copyright Michael Addison 2005 and 2008 (hardcopies) and 2010 (electronic versions).
PO Box 963 Milnerton 7435 Cape Town South Africa telephone +27 +21 5515069 info@addsure.co.za

First published in 2005
Second Edition published in 2008

Online version published in 2010

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or my any means, electronic, mechanical, photocopying, recording, scanning or otherwise, without the prior written permission of the copyright owner

Hardcopy DTP and design : Leigh Design

Disclaimer: The contents of the this publication, both electronic and hard copy, are used, read and acted upon entirely at the risk of the reader. The guide is intended for South African sectional title living and the insurance aspects aimed at the trustee and interested sectional title owner.