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It is now com­pul­sory for all com­mu­nity schemes to have fidelity in­sur­ance so they are cov­ered if their money is lost through theft or fraud com­mit­ted by a scheme ex­ec­u­tive or a manag­ing agent.

The re­quire­ment, in the reg­u­la­tions that gov­ern the Com­mu­nity Schemes Ombud Ser­vice (CSOS), will plug a gap­ing hole in most schemes’ in­sur­ance.

The reg­u­la­tions set out the min­i­mum re­quire­ments for such cover. It must in­sure the scheme against theft or fraud per­pe­trated by any per­son who has ac­cess to, or con­trol over, the scheme’s money. This could be a scheme ex­ec­u­tive (for ex­am­ple, a trustee), a scheme em­ployee, a manag­ing agent, or a per­son em­ployed by a manag­ing agency.

The min­i­mum level of cover must equal the to­tal value of a scheme’s in­vest­ments and re­serve funds at the end of its pre­vi­ous fi­nan­cial year, plus 25 per­cent of the scheme’s op­er­a­tional bud­get for its cur­rent fi­nan­cial year.

Mike Ad­di­son, a direc­tor of Addsure, a spe­cial­ist in­ter­me­di­ary in sectional ti­tle in­sur­ance, says com­pul­sory fidelity in­sur­ance is a wel­come de­vel­op­ment, be­cause very few schemes have this type of cover de­spite the fact that schemes are at a high risk of suf­fer­ing a loss.

Stan­dard in­sur­ance poli­cies for sectional ti­tle schemes in­clude very lim­ited cover against theft or fraud by the trustees and em­ploy­ees of the body cor­po­rate, but usu­ally ex­clude cover for theft or fraud by a manag­ing agent.

Un­der the Es­tate Agency Af­fairs Act, manag­ing agents must have a fidelity fund cer­tifi­cate is­sued by the Es­tate Agency Af­fairs Board (EAAB). How­ever, it is al­leged that the EAAB has been lax in check­ing whether all manag­ing agents are op­er­at­ing with valid fidelity fund cer­tifi­cates.

Even where an agency does have a fidelity fund cer­tifi­cate, own­ers and schemes are not fully pro­tected. The EAAB’s fidelity fund cov­ers only the prin­ci­pal, or owner, of the manag­ing agency, not his or her em­ploy­ees, and it cov­ers only scheme money held in the agency’s trust ac­count, not money held in ac­counts out­side the trust ac­count.

A fur­ther prob­lem with the fidelity fund is that, be­fore it will pay out, a claimant must first prove the va­lid­ity of his or her claim and demon­strate that he or she tried to re­cover the miss­ing funds. It could take years be­fore a claimant has ex­hausted the avail­able le­gal av­enues.

The CSOS reg­u­la­tions state that a fidelity in­sur­ance pol­icy must pay out within “a rea­son­able time”, and a pay­out must not be con­di­tional on le­gal ac­tion be­ing taken against the insured per­son.

Ad­di­son says in­sur­ers have al­ready de­vel­oped fidelity in­sur­ance poli­cies that con­form to the CSOS reg­u­la­tions. Schemes can ex­pect to pay pre­mi­ums of be­tween R2 000 and R3 000 a year for each R1 mil­lion of cover.

In terms of the new man­age­ment rules is­sued un­der the Sectional Ti­tles Schemes Man­age­ment Act, which took ef­fect yes­ter­day, fidelity cover is now a com­pul­sory item on the agenda of ev­ery an­nual gen­eral meet­ing of the body cor­po­rate.

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