About a year ago, the new community scheme legislation (Community Scheme Ombud Services Act and Sectional Title Schemes Management Act together with relative rules and regulations) were brought into effect. This resulted in most schemes arranging fidelity cover as required by the new rules and regulations.
Your scheme may have a standalone policy which means that there is a fidelity policy on its own that is not part or a section of a buildings policy or a section of a community scheme policy. The scheme may also be benefitting by being part of a managing agent group scheme but – for purposes of our exercise – we will deem such arrangement to be treated as a standalone policy.
Community schemes who insured themselves appropriately at the time will now be facing renewal options as follows:
Option 1: Add cover to existing buildings policy
We suggest that, where possible and where the same financial advisor is engaged, the policy is incorporated into the building’s material damages policy as a section thereof. This is not recommended where compliance is not yet achieved as some insurers have not yet updated their fidelity wordings.
Option 2: Renew current stand-alone policy
Where the current material damages policy or buildings policy does not comply in terms of its fidelity section, the stand-alone policy must be selected.
By default, the policy will renew with the same figures or slightly increased sums insured, unless instructed otherwise. We do suggest advising “required amount of fidelity cover for new year” after applying the formula:
The total of:
(a) the community scheme’s investments and reserves at the end of its last financial year; and
(b) 25% of the community scheme’s operational budget for its current financial year.
In other words:
- The amount of cash, savings and liquid assets the scheme has + 25% of its annual expenses.
- The respective annual general meeting can then decide if this amount of cover is sufficient.
- The scheme should alternatively advise their broker that they have placed the fidelity cover elsewhere so that the broker can ensure that the policy is not renewed.
During the year, especially after having confirmed or agreed to adjust fidelity sums insured at annual general meetings, the community scheme should advise the brokers so that the figures can be adjusted without delay.
What is fidelity cover?
Fidelity guarantee, fidelity cover or fidelity insurance is essentially insurance against losses occurring as a result of fraud or dishonesty.
Why is the Estate Agents Affairs Board (EAAB) cover not enough?
A managing agency should also protect itself by way of additional fidelity cover.
The Estate Agents Affairs Board’s Fidelity Fund Certificate is not purchased by the body corporate but rather the managing agent. It only covers funds held in trust by the managing agent and pertains to the particular managing agent covered. Most standard buildings policies include a “Fidelity Section” but this cover is usually very limited and traditionally excludes fraud by the managing agent.
Being reimbursed for a claim via the EAAB is also a long affair as the claim is only finalised once the principals and the managing agent are sequestrated and liquidated, and the remaining outstanding sum then claimed for. This process usually takes a number of years.
It is one of the reasons that CSOS requires that a fidelity policy should pay up early.
What about computer crime – Is it a requirement?
It is not called for as a requirement but Addsure advisors recommend products that includes an element of computer crime cover.
Is it okay to rely on the managing agent’s policy in terms of CSOS Sub Regulation 15.(5)?
Presently, Sub regulation 5 alludes to an alternative cover arrangement but – in our view – this is an error in the regulation and should be ignored as an option. We have recommended to the CSOS board that this sub regulation be deleted. This option exposes community schemes to great risk.
We feel that a managing agent cannot purchase cover to protect its clients against himself or herself being the cause of the fraud or dishonesty.
Another argument against this regulation is that a larger managing agent with, for example, 1 000 schemes under its management may be responsible for R100 million and more; therefore, a policy or R10 million will only partially cover the risk.
Read more about bodies corporate and fidelity.
Addsure’s Sectional Title Insurance Guide contains a lot of useful information for trustees and owners, including on fidelity.
Author: Mike Addison, Addsure
Contact Addsure – The Leaders in Sectional Title Insurance – for fit and proper advice from advisors who understand Sectional Title. Contact us in Johannesburg (011) 704-3858; Durban (031) 459-1795; Cape Town (021) 551-5069