Two common mistakes that often happens with exclusive use area additions

Jan 21 2019

The Schedule of Replacement Values (SRV) needs to be prepared by the body corporate for each annual general meeting. In terms of PMR 23.(4), it must show:

  1. The replacement values of the buildings and all improvements to the common property; and
  2. The replacement value of each unit excluding the member’s interest in the land included in the scheme; the total of such values of all units being equal to the value referred to in sub-rule 4(a).

This follows Prescribed Management Rules (PMR) 23.(3) which compels a body corporate to attend to a valuation at least every three years. Clearly, this schedule is based on a valuation and is something that the body corporate needs to attend to.

PMR 23.(1) (b) states that the insurance policy must specify a replacement value for each unit and exclusive use area excluding the member’s interest in the land included in the scheme. It further provides that any member may request that the replacement value specified for that member’s unit or exclusive area be increased.

Mistake 1

For this reason, many managing agents rely on the policy schedule that
sets out these figures. Some policies even incorrectly refer to it as a participation
quota (PQ) schedule in the policy. This is often seen as the “official
schedule” when this is not true. Ahead of AGMs, some managing agents may simply
copy this schedule from the policy and send it out as the SRV (Schedule of
Replacement Values) – this is incorrect.

What should happen – ahead of the AGM – is that the managing agent
should prepare a draft schedule of replacement values (no matter what is in the
policy already) based on the most recent valuation plus escalations, and present
this fresh document at the AGM. Once approved at the AGM, this schedule must be
sent to the insurer who will update the policy to match the approved document
from the AGM. The schedule on the policy is an endorsement to the policy (not a
PQ schedule), setting out allocated unit sums insured. This endorsement must
then match the body corporate’s approved SRV.

Part of a good broker’s advice and service process should be to assist
the managing agent or body corporate in preparing this schedule and ensuring
that the insurance policy reflects the same.

Mistake 2

As PMR 23.(1) states that the insurance policy must specify a replacement
value for each unit and exclusive use
a common mistake is to add the value of the exclusive use area as an
additional improvement and incorrectly increase that unit sum insured.

An exclusive use area is common property; therefore, it must be added as
a separate line item under common property. If necessary, a separate list of
EUA improvements can be added or defined on a separate sheet but the actual
value of an EUA improvement – being common property – is proportionally shared
between all the unit owners. It is only an estimate of the additional premium
which is recovered by way of an EUA contribution by the owner or member
enjoying its use.

This is better illustrated by comparing these examples.
As can be seen, even small EUA values can cause skewed sums insured. A large
item could affect average.

Technical issues like this should be dealt with by the managing agent –
supported by a professionally done valuation – and with input of an experienced
insurance advisor or broker.

Author: Mike Addison

Addsure is South Africa’s leading sectional title insurance brokerage. Obtain
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.

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