Many people redecorate or renovate their properties, particularly when they first acquire them. Renovations may significantly increase the value of the property so the question is, what can owners, who have upgraded their sectional title property, do about making sure that it remains adequately insured?
The Sectional Titles Act, 95 of 1986 (“the Act”) requires that the body corporate insure the buildings to full replacement value against fire and other risks that are prescribed. Those risks are listed in prescribed management rule (PMR) 29. A point that is not always clearly understood is that this building insurance policy covers the sections as well as the common property portions of the buildings. The rule goes on to detail the processes that the trustees must follow regarding this insurance. Among them, in preparation for the annual general meeting where the owners approve the insurance schedules, are the establishment of the replacement values of each section and an annual review of the insured amounts. This means that any increase in value of a unit, as a result of a renovation, must be accommodated in the insurance policy. However, when the replacement values are being established, not every section is inspected and its replacement value individually assessed. A standard value is established according to the original level of finishes in the building.
What if the renovation is completed months before the AGM? Is there a period when the renovated section is underinsured? If there were a disaster during that period, such as a serious fire, would a claim consequently be subject to averaging?
There are two courses of action an owner might take:
PMR 29 allows an owner to ask the trustees to increase the insured value of his or her section at any time. Of course, the owner is obliged to pay the resultant extra premium and provide proof of that payment to the body corporate. As the scheme’s insurance costs are paid from the administrative fund, the proportion that each owner pays for building insurance is determined by the participation quota of their sections. This means that if an owner increases the insured value of their section, they have to continually pay the extra amount of the premium. So as time goes by, a portion of each owner’s levy payment goes toward the building insurance cost and, in practice, any owners who have increased the value of their sections above the standard are billed for the extra premium due.
The second option available to owners who have increased the value of their sections above standard is to take out their own private building insurance on their sections. That means that a section can be double insured, but it does not mean that an owner can get a double pay-out in the event of a claim!
Section 45 of the Act allows owners to take out an additional building insurance policy even though the section is covered by the body corporate’s policy. But when it comes to claims, that private insurer is only liable to pay under certain conditions, and they are, if the event that lead to the claim is not one of the risks covered by the body corporate’s policy, if the event is covered by the body corporate’s policy but for some reason the body corporate’s insurer does not pay the claim and finally, if the insurer does pay but for some reason the body corporate does not use that money to make good the damage to the section.
Averaging is an inevitable consequence of people deliberately underinsuring their property and PMR 29 specifically instructs the trustees to negotiate a policy in which averaging does not apply to the whole building, just to individual sections that are underinsured. It’s up to individual owners to avoid the potential financial loss by making sure their sections are insured to full replacement value.
Article reference: Paddocks Press: Volume 09, Issue 12, Page 2.
Anton Kelly is an extremely knowledgeable specialist Sectional Title and HOA teacher and consultant. Having been the lead teacher on all the Paddocks courses for the last 5 years, Anton lives and breathes Sectional Title and HOA law, all day every day. There are not many issues he hasn’t come across before.
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