Several new insurance requirements have just been introduced for Sectional Title and other community housing schemes, and could mean additional costs for owners who are already facing levy increases to cover the establishment of proper reserve funds.
However, says Andrew Schaefer, MD of leading national property management company Trafalgar*, appointing the right managing agent could make all the difference.
The three new insurance provisions are:
• Fidelity insurance. In terms of the new Community Schemes Ombud Services (CSOS) Act, all community housing schemes must ensure that there is fidelity insurance in place to covering the balance of their reserve fund at the end of the previous financial year plus 25% of its operational income (administrative fund) for the current year. This applies to all sectional title bodies corporate, home owners’ associations, share block companies, retirement schemes and housing associations and is primarily intended to safeguard them against fraud on the part of anyone dealing with the scheme’s funds, which could include its own executives, the managing agent or contractors.
• Subsidence cover. This provision applies only to Sectional Title schemes and is included in the new Sectional Title Schemes Management (STSM) Act. Limited subsidence cover is typically provided by most Sectional Title insurance policies which arguably fulfils the Act’s requirements, noting that full, unrestricted subsidence cover would entail a more stringent underwriting process and significantly higher premiums.
• Updated insurance valuations. This also applies only to Sectional Title schemes, and means that they will have to pay for a professional insurance replacement valuation every three years to ensure that they are adequately insured. This provision of the STSM Act is intended to eliminate the risk of under-insurance and the application of the “average” rule where any claim would be reduced by the proportion of a building’s under-insurance.
It is important to note that property replacement values are different to sale or market values and include construction costs, professional fees, demolition costs, rubble removal and alternative accommodation costs. In other words, the insurance cover needs to provide for all contingencies if the buildings in the scheme should need complete replacement.
Clearly, compliance with these new requirements could mean significant extra costs for homeowners in community housing schemes – especially where professional services may be required to validate a policy. But there may be some relief for schemes that are clients of reputable managing agents such as Trafalgar, which already has the above provisions covered for the schemes it manages.
“To start with,” says Schaefer, “Trafalgar has existing fidelity insurance which provides cover of R20m per claim, and the CSOS Ombud has confirmed that this is sufficient to cover the community schemes we manage, provided that the funds remain within the trust environment and body corporate savings accounts controlled by Trafalgar. This fidelity insurance is already included in our standard monthly management fee and means that our schemes do not have to incur any additional cost to immediately be compliant with the new legislation.”
In addition, all Sectional Title insurance policies that are brokered by Trafalgar Financial Services (TFS) contain limited but sufficient subsidence cover to comply with the new requirement.
And finally, he says, an initial professional insurance replacement valuation is provided free with all new TFS insurance policies, “and after the initial valuation TFS has engaged the services of independent valuers who have agreed to offer replacement valuations at significantly reduced rates based on the TFS relationship and volumes.”
Issued by the Trafalgar Property Group
For more information contact
Andrew Schaefer on 011 214 5228
Or visit www.trafalgar.co.za
*Trafalgar currently has more than 80 000 residential properties worth more than R65-billion under management in more than 1200 community housing schemes around SA.