Trustee Liability When Body Corporate Underinsurance Strikes: What Every Trustee Must Know

When a body corporate member suffers financial loss due to claim averaging or rejection resulting from underinsurance, they naturally seek ways to recover their shortfall. For elected trustees, this reality creates a significant exposure that many don't fully understand until it's too late. The legal framework places clear responsibilities on trustees, and failing to meet these obligations can result in personal financial liability.

The Fiduciary Duty of Trustees

Elected trustees carry a fiduciary duty to ensure comprehensive insurance cover for their schemes. This isn't merely a suggestion or best practice; it's a legal obligation. When an affected member experiences financial loss due to inadequate insurance, they have grounds to pursue legal recourse against the trustees who failed in this duty.

Understanding the Chain of Responsibility

When underinsurance causes a claim shortfall, a predictable sequence of events typically unfolds. Trustees initially refer the matter to the valuer appointed to determine the estimated total replacement cost for insurance purposes. If the valuer cannot successfully defend their valuation against the insurance company's assessor, attention shifts to the valuer's professional indemnity insurer, who bears liability for financial damages incurred through their client's professional duties.

In theory, the aggrieved body corporate member stands a reasonable chance of recovering the shortfall amount, provided the final party in this liability chain maintains adequate cover or possesses sufficient funds for reimbursement. However, two scenarios commonly test this theoretical framework.

Scenario One: Insufficient Professional Indemnity Cover

Consider what happens when the appointed valuer holds insufficient professional indemnity cover or, worse, maintains no cover at all. In this situation, the financially damaged homeowner can legitimately pursue the trustees for failing to verify adequate professional indemnity cover before appointment.

When trustees present this matter to their own indemnity insurers, they may receive an unwelcome surprise. The insurer may refuse the claim if evidence shows the trustees acted negligently in their appointment process. At this point, trustees face personal liability for the financial loss suffered by the body corporate member, a situation that can result in prolonged, painful proceedings for everyone involved.

The key issue here is due diligence, or rather, the lack thereof. Trustees who appoint valuers without verifying their professional indemnity cover amounts and validity expose themselves to claims of negligence. When this negligence is proven, personal liability becomes almost inevitable.

Scenario Two: Failure to Obtain Professional Valuation

The second scenario represents an even clearer case of trustee liability. When trustees fail to obtain a professional valuation entirely, they directly violate the Sectional Titles Schemes Management Act No. 8 of 2011, specifically Prescribed Management Rule 23. This rule explicitly requires valuations at least every three years.

By disobeying this legal requirement, trustees act in bad faith and demonstrate gross negligence. This scenario typically results in open-and-shut cases against trustees personally. There's no ambiguity, no room for interpretation; the law clearly states the requirement, and trustees who ignore it face the consequences.

Many trustees attempt to avoid valuation costs by simply escalating the previous year's sum insured by an arbitrary percentage. While this approach might seem pragmatic and cost-effective, it creates enormous personal risk. Without a current professional valuation supporting the insured value, trustees have no defence when underinsurance emerges during a claim.

The Role of Portfolio Managers and Managing Agents

Given these substantial risks, portfolio managers carry responsibility for educating trustees on the legal aspects of body corporate insurance. They must advise trustees on essential attributes to seek in valuers and provide guidance on appropriate budget allocation for valuations. This education shouldn't be optional or provided only upon request; trustees must demand this vital guidance from their managing agents as part of a comprehensive scheme management.

Managing agents who fail to alert trustees to these obligations and risks do their clients a significant disservice. Proper scheme management includes ensuring trustees understand their personal exposure and the steps necessary to protect themselves while fulfilling their duties.

Body Corporate Underinsurance - Practical Risk Mitigation for Trustees

Trustees can take several concrete steps to protect themselves from personal liability:

First, always obtain professional valuations within the legally required timeframes. Don't view this as an optional expense; consider it essential protection for your personal assets.

Second, conduct thorough due diligence when selecting valuers. Request documentation of professional indemnity insurance, verify cover amounts are appropriate for your scheme's size, and check professional qualifications and references.

Third, maintain comprehensive records of your decision-making processes. Document the valuers you considered, the criteria used for selection, and verification of their credentials. These records demonstrate diligence if questions arise later.

Fourth, ensure your trustee liability insurance is current and adequate. While this cover may not protect against gross negligence, it provides important protection for other aspects of trustee responsibilities.

Serving as a body corporate trustee involves significant responsibility and potential personal risk. Understanding these risks and taking appropriate protective measures isn't just good practice; it's essential for safeguarding your financial future. The relatively modest costs associated with proper valuations and due diligence pale in comparison to potential personal liability exposure. Make informed decisions, follow legal requirements, and protect yourself while serving your community.