The Insurer and insured are the contracting parties; the insured being the body corporate represented by the trustees. Often, the managing agent is then representing the trustees as agent of the body corporate and the broker / insurance advisor will be tasked with engaging with the managing agent about the body corporate. This is where things can get a bit confusing.
The trustees should never be put in a position where they simply have to accept the policy “renewing”. Managing Agents or Portfolio Managers should never be placed in a position where they are forced to choose a policy or advise their trustee clients on which product to take . Alarmingly though, this is what often happens.
The scenario is: Trustees hold a meeting, at which a managing agent or portfolio manager is present. The trustees have asked the managing agents to bring along the policy renewal paperwork as well as check with the broker that the policy is competitive enough. At the meeting, a mere five minutes of the agenda is allocated to Insurance. The managing agent hands out the present renewal invite from the present insurer, plus two alternative quotes from other insurers. The trustees ask the managing agent portfolio manager “which one should we take?” The managing agent looks at the cheapest quote bearing a familiar name and suggests “this one, they are the cheapest and give a good service’”. Sound familiar? This is extremely dangerous.
Firstly, it is shocking how little attention is given to this very important area of responsibility. Yes, five minutes seems to be the norm for millions of rands of risk decision, yet an hour will be spent on discussing a dispute about problematic pets.
Trustees have a fiduciary responsibility, and yet cannot be expected to know about all about insurance. Managing Agents and Portfolio Managers are not normally licenced financial advisers and thus are breaking the law and taking huge risks by recommending any financial product. The financial advisor or broker must advise the client properly. In these circumstances, there are only 2 ways in which this can be done:
1. The broker advisor must attend the trustee meeting and provide clear and concise advice about the products offered and why the particular product is being recommended. Advisors can only do this effectively if they have an understanding of sectional title, and understand the particular needs of that body corporate, eg has a number of EUA swimming pools, on a slope with extensive retaining walls, thatch lapa, in a lightening belt etc. At such a meeting, the broker should present the quotes and analysis (preferably in writing), and the trustees should see to it that this is properly minuted.
2. Alternative to the broker attending a meeting, the broker needs to provide a detailed letter of advice (record of advice) which sets out the present policy information, compares it to alternatives and recommends one for the trustees to select for the ensuing year. Such a letter should include last year’s premium and rate compared to the following years proposed premium and rate, any reason for variance in rate, changes in excess structures, and claims history / claims ratio. The trustees are responsible to insure 3 main areas in terms of the rules 29.1 and 29.2 i.e. the buildings, liability cover and Fidelity Cover. These all need to be included under such advice.
This letter of advice should, in my opinion, be a standard procedure on policy renewal, whether or not the broker attends the meeting. After all, it stands as the fit and proper advice record provided by the broker for the year i.e. the professional advice provided by the licenced advisor.
Some 6 weeks ahead of policy renewal, the insurance advisor should be preparing this and at least two weeks ahead of renewal, the trustees should receive this “letter of advice” in order that the trustees meet or round robin their decision to renew or change insurers in line with the broker’s advice.
This advice letter or record of advice also saves the trustees time. If the letter is comprehensive yet concise and has taken account of the needs of the body corporate, the advice can very often be simply followed by the trustees with very little discussion needed.
So, the bottom line is that trustees and portfolio managers must insist on the written advice together with comparative analysis annually, and if your advisor does not provide this, find an advisor who will!s.
Mike Addison is the director of Addsure – www.addsure.co.za – specialist sectional title insurance brokers.
Article reference: Volume 8, Issue 5, Page 2