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Trustee liability in the event of underinsurance

When a body corporate member suffers a financial loss due to an averaged or refuted claim as a result of under-insurance, the member is likely to seek alternative ways to recover the shortfall.

Elected trustees have a fiduciary duty to ensure comprehensive insurance cover and the affected member may consider seeking legal recourse against the trustees.


Chain of responsibility

On their part, the trustees will refer the matter to the valuer, appointed to determine the estimated total replacement cost for insurance purposes. Should the valuer be unable to represent his valuation against the insurance company’s assessor, the matter will be brought to the attention of the valuer’s professional indemnity insurer who is liable for financial damage incurred by their client in performing his duty as a valuer.

Theoretically, the aggrieved body corporate member will have a good chance of recovering the amount by which they were short-paid due to under-insurance, provided that the last party in the liability line is adequately covered or has sufficient funds to reimburse the claimant.

However, the following scenarios will put this theory to the test:

Scenario 1:  The appointed valuer holds insufficient professional indemnity cover or nothing at all.

In this case, the financially damaged homeowner can take the trustees to task for not ensuring that the valuer has adequate professional indemnity cover. At this point, the trustees may present the matter to their own indemnity insurance but their insurers may very well refute the claim if it can be proven that the trustees acted negligently. If so, the trustees will be held personally liable for the financial loss suffered by the body corporate member. This may result in prolonged and painful proceedings for all parties concerned.

Scenario 2:  The trustees failed to obtain a professional valuation.

This will be an open-and-shut case as the law clearly prescribes that a valuation must be obtained at least every three years according to the Sectional Titles Schemes Management Act No. 8 of 2011, rule no. 23. In disobeying the law, the trustees have acted in bad faith and in gross negligence.

Therefore, it is imperative that portfolio managers educate the trustees on the legal aspects of body corporate insurance. They should also advise the trustees on the attributes to look for in a valuer and how to budget for a valuation. Moreover, the trustees must demand such vital guidance from their managing agents.

Download Mirfin's Sectional Title Insurance Valuations brochure.

 

Read the next blog: What the sectional title law says about valuations.