Community insurance 101 for body corporates and homeowners’ associations

Data from the 14,000 communities managed by property management software company WEconnectU, shows that 20-30% of property owners in sectional title schemes and homeowners’ associations (HOAs) are currently behind on their levies – and the resulting cashflow shortage is making it difficult for the HOAs and the sectional title body corporates (BCs) to effectively maintain the commonly-held assets that they are responsible for. Instead, they are prioritising payments for power and municipal services where this is their responsibility, and insurance.

Ria Furriel, community insurance partner at King Price Insurance, says that this prioritisation of available funds is necessary as HOAs and BCs are legally required to maintain insurance for every areas, physical buildings, and structures open for communal use by the residents living in a complex or estate. “The danger is that, even though insurance premiums may be paid up to date, some claims may be declined due to an asset being claimed for not having been maintained as it should. An insurer will require that lifts, escalators, HVAC systems, generators, pumps, etc. are maintained in accordance with the manufacturers’ requirements, and in line with a comprehensive maintenance agreement.”

HOAs and BCs should believe insurance for material damage to the common property, and liability, at the very least. ‘Material damage’ covers the loss of, and damage to physical assets such as buildings, boundary walls, security entrances, club houses, tennis courts, roads, transformers, and bulk infrastructure services for water and electricity. It should include cover for the likes of flame, lighting strike, hail, windstorm, burglary, and malicious damage. Public liability covers incidents that cause damage or injury, which happen on the common grounds and for which the HOA or BC may be liable; directors’ and officers’ liability for wrongdoing by the HOA or BC that affects unit owners; and employers’ liability for legal liability to employees of the HOA or BC.

There is also a legal requirement for HOAs and BCs to gain sufficient fidelity insurance to cover every the funds they hold, including the reserve funds. This protects the HOA or BC against fraudulent activities that may see their funds being misappropriated by executives or staff of the HOA or the BC’s trustees, or their managing agents.

Furriel explains that an HOA is administered as a non-profit company and is governed by the Companies Act. The HOA generally owns the roads and other common property, and must maintain and insure these areas. It’s common for bigger HOAs to gain their own, exclusive-use sub or mini-substations installed by the local authority but they are responsible for material damage to, and the maintenance of these assets, and are entirely responsible for insuring them. Although HOAs aren’t legally required to execute building valuations, it is advisable to enact regular valuations, to ensure that the common property and assets are adequately insured.

In a sectional title community, which is governed by the Sectional Title Management Schemes Act, the body corporate is responsible for the maintenance and insurance for the exterior of the homes, as well as the common areas of the complex or estate. In addition, they must enact a buildings valuation at least every three years.

Owners in an HOA own the erf (the actual land) as well as the house that is built on it, and are thus responsible for maintaining and insuring their own buildings, as well as paying the related municipal fees. Sectional title owners are responsible for maintaining the interiors of their units, but the actual units (inside and out) are covered by the BC’s insurance policy. In both cases, the owners – or the tenants, if the owners rent out their units – bear the insurance responsibility for their home contents.

Furriel advises that community insurance policies should be reviewed annually, and updated when major additions or alterations affect the insured value. “HOAs and BCs should always partner with an insurer who has custom-built a product that adheres to the legislative framework that they are governed by, and which caters for their needs. You should also scrutinize for an insurer who can bring the entire value chain – including managing agents and service providers such as plumbers and electricians – together seamlessly to manage and expedite claims in the most cost-effective manner possible.”

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