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Insurance and improvements in Sectional Title

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Insurance and improvements in ST

28 Aug 2014

The schedule of replacement values is one important aspect that trustees might not pay enough attention to.

Because different property types have different values, a property valuer is sometimes called in to work out the correct replacement values for the components that make up the scheme.

This issue was raised on a fully subscribed workshop held recently by IHFM for trustees covering insurance matters in sectional title schemes, says Michael Bauer, general manager of the property management company IHFM.

He says part of the prescribed agenda for the AGM is a detailed inventory list of all the insured sections in accordance with the sectional plan, broken down by the PQ (participation quota) factor. The units would be listed and the undivided shares of the common property, i.e. garages, carports, storerooms, etc, in this schedule. 

Because different property types have different values, a property valuer is sometimes called in to work out the correct replacement values for the components that make up the scheme. A complete home for instance, would have a higher value than a garage or storeroom per square metre, so the insured amounts should be worked out as such. The trustees might choose to have this done every three to four years, as there is a cost involved, which the body corporate will have to cover, says Bauer.

The valuer will look at the sectional plans, compare it to what is built, and measure up for himself to confirm that he has the right square meterages and sections. He will come up with a value for the different parts of the scheme and it is up to the broker or the managing agent to take this value and break it down into percentages of insured values according to the PQ.

Prescribed Management Rule 29 (1) (c) stipulates that before any AGM, the trustees must have the schedules reflecting their estimate of:

“(i) the replacement value of the buildings and all improvements to the common property; and

(ii) the replacement value of each unit (excluding the owner's interest in the land), the aggregate of such values of all units being equal to the value referred to in subparagraph (i) above, and such schedules shall be laid before the annual general meeting for consideration and approval in terms of rule 56.”

What often happens in practice is that owners or trustees want to reduce the insurance premiums payable and they lower the amount that the scheme is insured for, but this opens them up to negligence claims or a breach of fiduciary responsibility, i.e. personal liability, if something should happen and the buildings have been underinsured, says Bauer.

He says it must be remembered that the insurance value is replacement value, not market value. If owners have made improvements to their units and want the insured value to be higher to reflect these improvements, the body corporate will pay the insurance for the replacement of the standard unit, and the owner must take out additional insurance cover and pay an additional insurance premium. It is the owner’s responsibility to make sure the body corporate has the correct insured amounts in cases such as these. 

 

Author: Michael Bauer, general manager of IHFM

Submitted 29 Aug 14 / Views 4479