Bodies Corporate: Insurance Excess

Obtaining proper insurance cover is one of the most essential duties placed on trustees of bodies corporate and great care should be taken in performing this duty.

Bodies Corporate: Insurance Excess Payments

Obtaining proper insurance cover is one of the most essential duties placed on trustees of bodies corporate and great care should be taken in performing this duty.

By Alistair Lomas-Walker
Lomas-Walker and Associates
aglomas@iafrica.com

Obtaining proper insurance cover is one of the most essential duties placed on trustees of bodies corporate and great care should be taken in performing this duty.

As a sectional titles practitioner I am often faced with alarm and disbelief from my body corporate clients when I tell them that a body corporate is not entitled to claim the insurance excess from an owner on behalf of whom a claim has been made under the body corporate’s insurance policy.

The following comments are applicable to bodies corporate which are governed by the statutory Management and Conduct Rules, unamended. It is open to a body corporate to amend or substitute its management rules and to include a rule requiring owners to reimburse the body corporate for insurance excesses. It is unlikely that many bodies corporate will have such an amended rule in place due to the fact that a unanimous resolution would be required.

In terms of section 37 of the Sectional Titles Act (Act No. 95 of 1986) the body corporate shall:

  1. ‘… insure the building or buildings and keep it or them insured to the replacement value thereof against fire and such other risks as may be prescribed;’ (section 37(1)(f));
  2. ‘… insure against such other risks as the owners may by special resolution determine;’ (section 37(1)(g));
  3. ‘… pay the premiums on any policy of insurance effected by it;’ (section 37(1)(i)).

Management rule 29 prescribes various risks against which the trustees are required to insure. The subject of the insurance is the building/s and common property, which in effect means the body corporate, is required to insure, to the replacement value, each and every owner’s section.

A standard query we get from trustees goes something like this:

‘Mr & Mrs Careless keep flooding their sectional title unit and, over the last three years, we have had to put in four claims with the body corporate’s insurers. Surely, due to Mr & Mrs Careless’ continual negligence in leaving their taps running, the body corporate should be entitled to claim the excess payments from them?’

Unfortunately for the body corporate the answer is a resounding ‘No’ although, of course, it is up to the body corporate’s insurers to repudiate any claim, in which case Mr & Mrs Careless would have no claim against the body corporate but could look to their own insurers had they been sensible enough to obtain personal insurance on top of the body corporate insurance.

There are a number of arguments that support our opinion some of which are as follows:

  1. In terms of section 39 of the Act and rule 29 of the Management Rules trustees are required to insure the buildings and common property. Section 37(4) of the Act specifically states that the body corporate shall ‘be deemed to have an insurable interest‘ in the subject matter of any insurance taken out in terms of the Act and rules. The legislature has inserted this provision because of the anomalous nature of sectional title ownership (each owner owns his section plus an undivided share in the common property) and the purpose of section 37(4) is to give certainty and make it absolutely clear that the body corporate is entitled to insure property belonging to the owner i.e. the sections.
  2. Section 37(1)(a) and 37(1)(b) of the Act direct the body corporate to recover insurance premiums through the levy fund. As the insured, it is up to the body corporate to lodge claims under the insurance policy and, just as the body corporate is liable for premiums, so would the body corporate be liable for any excess payable to the insurer. The contract of insurance is between the body corporate and the insurer.
  3. Consideration of the concept and nature of sectional title ownership confirms that excesses must be paid by the body corporate. In paying levies each month, owners are effectively paying a portion of the insurance premium and, likewise, when body corporate excesses are paid from the levy fund then each owner is paying a pro rata share of that excess. On behalf of the body corporate/owners the trustees will have negotiated a certain premium/excess structure with the insurance company and where premiums are set at a lower rate the body corporate’s fund would have benefited from such lower premiums and it is therefore the body corporate which would have to pay the negotiated excess.
  4. Section 45 of the Act allows individual owners to take out their own insurance notwithstanding the fact that the body corporate has taken out insurance. However, the effect of section 45 is that it is incumbent upon the body corporate to claim on its policy where there is damage to an owner’s section. Although an owner may have decided to take out his own insurance in order to protect his interests in cases where he feels that the insurance policy of the body corporate is inadequate, it is the body corporate’s policy that must pay out first. It is only where the body corporate’s insurance does not pay out sufficient funds or repudiates a claim that an owner’s insurer is bound to entertain a claim.
  5. Rule 29(1)(d) provides that, where an owner has requested the trustees to increase the cover on his unit then he will be liable for any resulting increase in the premium payable on the body corporate’s policy. In cases where owners have elected to increase their insurance on the body corporate’s policy, rather than take out their own insurance, then we submit that an owner may be liable to contribute a pro rata share of any excess payable in the event of that owner making a claim under the body corporate’s policy.
  6. The fact that damage to property may be caused by the negligence of an owner is irrelevant. The whole purpose of insurance is to insure against negligence. All members are really the insured under the body corporate’s policy and by the doctrine of subrogation the insurance company is stepping into the shoes of the insured/negligent owner. The insurer then makes good the damage or pays out and then, if it feels the damage was due to the negligence of a third party (i.e. not the insured), then the right to sue that third party would vest in the insurer. A negligent owner is insured under the Body Corporate’s insurance policy and cannot be sued by the insurance company or by the body corporate for acts of mere negligence. This is the specific reason for insurance and it would be absurd if either the insurance company or the body corporate could sue the owner – this would defeat the whole purpose and principle of insurance in the first place.

GEYSER DAMAGE

We have seen it argued, in some quarters, that management rule 68(1)(vii) makes owners responsible for insurance excesses in cases where an insurance claim is made because of geyser damage. This rule states that an owner shall maintain the hot water installation serving his section ‘…notwithstanding that such appliance is situated in part of the common property and is insured in terms of the policy taken out by the body corporate’.

We are not of this view. We believe that this rule is merely placing a duty on owners to maintain the hot water installation, nothing more.

The insured is still the body corporate (and therefore all the members/owners). The body corporate’s insurance policy already covers certain items which it is the responsibility of an owner to maintain, for example the very section itself! To follow the argument that owners should pay the excess for geyser claims to its logical conclusion one would then have to say that owners would also have to pay the excess for any claims made for damage to their sections and to any other items covered, such as fixtures and fittings! To reiterate, the body corporate’s levy fund is liable for insurance premiums and owners have contributed to such funds in order to obtain insurance for damage to hot water installations, geysers and other items. The excess should be paid out on the same basis.

However, if the insurer were to repudiate a claim for damage to a hot water installation on the grounds that such installation was not properly maintained then it would be up to the owner himself to claim on his own insurance policy (if he has one) and/or to make good the damage himself.

CONCLUSION

Obtaining proper insurance cover is one of the most essential duties placed on trustees and great care should be taken in performing this duty. There must be full disclosure to owners of the insurance situation so that owners are not in a position to point fingers at the trustees for under-insuring the buildings, or failing to insure fixtures and fittings. At each annual general meeting the trustees should point out to owners that they are entitled, in terms of section 37 of the Act and management rule 29, to direct the trustees, by special resolution to insure against any further risks which are not specifically listed in management rule 29.

It is essential that trustees, before each annual general meeting, confirm through their brokers and/or insurance companies that the body corporate’s policy complies with the provisions of the Act and rules and, at each such meeting, owners should be informed of their rights to protect their own interests by requesting further insurance cover under management rule 29(1)(d) or under their own insurance policy.

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