News article courtesy of Mirfin
Bodies Corporate Must Adapt to These Insurance Changes The insurance landscape for sectional title schemes is undergoing significant changes due to escalating claims and shifting global risks caused by changing weather patterns and civil unrest. These developments present challenges for trustees, owners, and managing agents alike.
The following key developments are critical for community scheme stakeholders to be aware of:
Premium Increases - Due to a surge in claims from extreme weather events such as storms, floods, and fires, as well as power-related issues, insurance companies have dramatically increased premiums for sectional title schemes. What used to be a manageable rate of 0.05% of the insured value has now spiked to as much as 0.15%. These changes mean that schemes are facing steeply rising costs to maintain adequate coverage.
Increased Excesses - Not only are premiums rising, but excess amounts on claims are also increasing. It’s important for sectional owners to understand that the excess on a claim must be covered by the individual owner responsible, not by the body corporate. Higher excesses can make unexpected repairs more costly for owners.
Insurance Cancellations - Schemes with poor maintenance practices risk having their insurance policies cancelled. Insurers are paying close attention to the upkeep of properties, and without proof of regular maintenance, such as roof repairs and waterproofing, insurers may choose to cancel coverage. This can leave a scheme vulnerable to significant financial risk, highlighting the need for diligent maintenance records and reporting.
How to Avoid Cost Increases
Insurance companies are increasingly scrutinising sectional title schemes’ preventative maintenance and risk mitigation practices. Trustees must ensure that a well-documented 10-year maintenance plan is in place and that the scheme has a sufficient Reserve Fund. Proper maintenance, including timely repairs to roofs and waterproofing, will not only keep insurance costs in check but may also be a prerequisite for maintaining insurance coverage.
Furthermore, the importance of an accurate replacement valuation cannot be understated. A professional valuer is responsible for ensuring that the body corporate is adequately insured, meaning that if the body corporate suffers major damage in an insurable event, the valuer can be held accountable if the insurer finds that the body corporate is underinsured. However, if the appointed valuer does not have the necessary indemnity cover in place, the financial liability falls squarely on the trustees.
Many valuers circumvent their professional liability by incorporating a safety margin into their replacement estimates, resulting in over-insurance for the body corporate by, say, 20%. Add to this the annual 10% escalation at policy renewal, and the body corporate could easily find itself overpaying on insurance by up to 40% at the end of the mandatory 3-year valuation cycle. This over-escalation can be easily mitigated by appointing a reputable valuer with an excellent track record whose valuations are backed by adequate professional indemnity cover of at least R20 million.