Why a body corporate should not neglect fidelity insurance

Changes to the Sectional Titles Schemes Management Act 8 of 2011 (STSMA) on 7 October 2016 made fidelity insurance compulsory for bodies corporate. This means that the body corporate must insure itself against the potential loss of its funds by way of fraudulent or dishonest conduct by the trustees, managing agent or anybody who has access to these funds.

Before the Act

Prior to the changes in the Act, fidelity insurance was optional and frequently declined by schemes due to the additional cost required. Another reason schemes declined fidelity cover was that the trustees expected their managing agent to have their own fidelity insurance cover in place to protect the body corporate against any financial misappropriation.

The decision to obtain fidelity cover is taken by the members in the scheme and not by the trustees. This important decision is taken at a general meeting.

Taking responsibility

Although all managing agents should have their own fidelity insurance in place for any misappropriation of funds by their employees, it is not their responsibility to insure a body corporate.

Trustees generally rely on their appointed managing agent to assist and advise them on matters relating to the Sectional Title Act and the STSMA, including advising on the amount of fidelity insurance required. It is important for trustees to familiarise themselves with the various Acts so they are aware of their body corporate obligations and responsibilities. Trying to pass all responsibility to the managing agent does not release trustees from their fiduciary duty to protect the body corporate and comply with the rules of the STSMA.

Arranging fidelity cover

Fidelity insurance cover can be arranged through an insurance broker who deals with the body corporate’s insurance. The additional fidelity cover can be part of the insurance policy for replacement values, or can be issued as a separate policy for fidelity cover.

There have been cases where bodies corporate lost enormous amounts of money due to mismanagement because they did not have fidelity cover. Adding this important item on the agenda of a general meeting ensures that members decide on this critical issue every year and it prevents unnecessary financial hardship for the scheme and its members.