Cash Settlements for Property Damage in Sectional Title: What Owners Need to Know

When property damage occurs in sectional title schemes, many owners wonder whether they're entitled to receive cash instead of having repairs completed. The straightforward answer is no, and understanding why this is the case is important for all scheme owners.

The Legal Framework

According to South Africa's Sectional Titles Schemes Management Act, insurance payouts must be used to repair or rebuild damaged buildings. This legislation specifically mandates that any insurance money received for damages, unless there's total destruction of the building, must be applied to the repair and reinstatement of the property.

In plain language, this means insurance payouts go directly toward fixing damage, not for cash distribution to individual owners. This isn't an arbitrary rule; it serves several critical purposes that protect everyone's interests.

Why This Requirement Exists

Collective Protection

The legislation ensures insurance policies serve their intended purpose: funding repairs for insured damage. If individual owners could receive cash instead, there's a significant risk they might use funds elsewhere, leaving damaged property unrepaired.

This would unfairly shift the burden of financing individual needs onto all other owners, while shared property deteriorates. The body corporate holds the insurance for the benefit of all owners collectively, not for individual financial needs.

Mortgage Bondholder Security

When an owner has a mortgage on their property, the mortgage bondholder (typically a bank) also has an interest in the insurance policy. They need assurance that the property remains well-maintained and secure, protecting their investment.

This rule ensures prompt repairs following damage, safeguarding the lender's security. In situations where cash settlement might be considered, it would actually be more appropriate for the bondholder to receive funds rather than the individual owner, as they hold the primary security interest.

Preventing Misuse of Insurance Funds

This legislation also prevents bodies corporate from applying insurance payouts to unpaid levy debts instead of making necessary repairs. By directing funds specifically to reinstatement, the Act ensures property is restored, benefiting all owners rather than addressing financial issues unrelated to the actual damage.

This protection is particularly important in schemes where some owners have outstanding levies. Insurance money must fix the damage it was paid out for, not solve other financial problems.

Cybersecurity Considerations

In our digital age, requiring insurers to pay directly to the body corporate's premium-paying account provides additional security against cybercrime. Since insurers already have the correct account details on record, there's reduced risk of cyber theft, an increasingly common problem in insurance transactions.

If payments were made to individual owners, this would multiply the opportunities for fraudulent account manipulation and cyber criminals to intercept payments.

Administrative Efficiency

When insurers pay the body corporate directly, it significantly simplifies administration. The body corporate can then handle payments to contractors or, if an owner has already paid for repairs, reimburse that owner. This process ensures clear and consistent record-keeping, which may prove important for future reference.

Having a single payment to one entity, rather than potentially dozens of payments to individual owners, reduces administrative burden and potential errors.

Property Damage in Sectional Title and the Practical Implications for Owners

If Your Section Is Damaged:

• The body corporate's insurer will assess the damage

• Once approved, funds go to the body corporate

• The body corporate arranges repairs through approved contractors

• If you've already paid for repairs yourself, you can be reimbursed

• You cannot request cash instead of repairs

  
  

If You've Already Paid for Repairs:

• Keep all receipts and documentation

• Submit a claim to the body corporate

• Once the insurance payout is received, you'll be reimbursed

• The body corporate acts as the intermediary, not the insurer

  
  

If You Want to Upgrade During Repairs:

• Insurance covers restoring the property to its previous condition

• If you want upgrades beyond restoration, you'll pay the difference

• This must be arranged with the body corporate and contractors

• Insurance won't pay for betterments or improvements

  
  

Special Circumstances

There are very limited circumstances where alternative arrangements might apply:

Total Destruction - If the building is destroyed, different rules may apply regarding fund distribution, but this is exceptional and would be handled according to specific legislative provisions.

Uninhabitable Sections - If damage makes your section uninhabitable, you may have alternative accommodation cover, but this is separate from the building repair payout.

Minor Cosmetic Damage - For very minor internal cosmetic damage to your section, you might arrange and pay for repairs yourself, then seek reimbursement, but the principle remains: insurance money goes toward repairs, not cash in hand.

Questions to Ask Your Body Corporate

• What is our claims process?

• Who are our approved contractors?

• How long does the claims process typically take?

• What happens if I need temporary accommodation during repairs?

• Can I be reimbursed if I arrange repairs myself?

• What documentation do you need from me?

  
  

The Bottom Line

While it might seem appealing to receive cash instead of repairs, the legal requirement that insurance payouts be used for reinstatement provides crucial protections. This approach safeguards all owners' interests, protects mortgage bondholders' security, prevents fund misuse, reduces cyber risks, and simplifies administration.

Understanding these requirements helps set realistic expectations and ensures everyone recognises that sectional title insurance exists to protect and restore the collective property, not to provide individual cash payments. This framework might sometimes feel restrictive, but it ultimately serves the greater good of maintaining property values and protecting all owners' investments.

If you have concerns about how insurance claims are handled in your scheme, raise them at general meetings or with your trustees. Transparency in the claims process benefits everyone and ensures the system works as intended, protecting your shared investment in your sectional title property.