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:
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.
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.