How the lack of an insurance valuation leads to averaging

The elected trustees of a body corporate have a fiduciary duty to ensure that the body corporate is adequately insured. This is underlined by Sectional Titles Schemes Management Act No. 8 of 2011, rule no. 23 which prescribes that:
“A body corporate must obtain a replacement valuation of all buildings and improvements that it must insure at least every three years and present such replacement valuation to the annual general meeting.”
Who will enforce this rule and ensure that the body corporate has sufficient cover?
It is important to consider that an insurance claim is subject to averaging by the insurer if the body corporate is found to be underinsured. Averaging means that the insurer utilises its right to reduce the claim payout in accordance with the rate of underinsurance.
For example: A kitchen fire causes considerable damage to one of the units and a claim for R400 000 is lodged with the insurance carrier. Such a claim – being relatively minor – should be settled quickly as the body corporate’s insurance cover is worth R15 million – right? Wrong.
The insurer normally starts off by assessing the merit of the claim. For this task, they appoint a loss adjustor to assess the damage and check if the body corporate has adequate cover. After inspecting the fire damage, the loss adjuster determines that the claim is justified but advises the insurance company to pay out only R300 000.
Why is this?
The answer is simple: The loss adjuster found that the true replacement cost of all units and common property areas adds up to R20 million, including demolition costs, rubble removal, professional fees and VAT. However, the body corporate is covered for only R15 million which means they are under-insured by 25%. For this reason, the claim is also reduced by 25% and the owner is left with a shortfall of R100 000.
In this case, the trustees failed to fulfill their fiduciary duty, therefore they can be held personally liable for the insurance shortfall suffered by the owner of the damaged unit.
By foregoing the legally required replacement cost valuation and simply escalating last year’s sum insured by 10% to save the body corporate the valuation fee of approximately R2 800, the trustees acted negligently and thereby – unknowingly – ceded their indemnity cover.
On the other hand, if the trustees produced a professional valuation as the basis for the sum insured of R15 million, the body corporate can reprimand the valuation provider about the shortfall in insurance payout.