When Trustees Pay the Price: Understanding Personal Liability in Underinsurance Cases

When Trustees Pay the Price: Understanding Personal Liability in Underinsurance Cases

The role of a body corporate trustee carries significant responsibility, including ensuring adequate insurance cover for the scheme. What many trustees don't realise is that they can face personal financial liability when underinsurance occurs, even when trustee liability cover exists. Understanding how this happens is crucial for anyone serving in this capacity.

The Scenario That Creates Personal Liability

Consider a typical situation that unfolds across communities in Durban, Pretoria, and Cape Town with alarming regularity. Despite insurance valuations being viewed as an unwanted expense, obtaining professional valuations every three years is legally mandated and essential. When trustees attempt to save costs by skipping valuations or selecting the cheapest valuer without proper vetting, they unknowingly set a dangerous chain of events in motion.

A Case Study in Consequences

Imagine a body corporate that proceeds with a valuation, selecting its valuer based purely on the lowest quote without verifying qualifications, experience, or professional indemnity insurance adequacy. The valuer provides a replacement cost calculation, and the body corporate establishes its sum insured accordingly, let's say R15 million for this example.

Six months later, disaster strikes. A unit suffers extensive fire damage, and the owner lodges a claim for R2 million. The insurance company appoints a loss adjuster to investigate. During their assessment, the adjuster discovers the complex's true replacement value is R25 million, and the body corporate is underinsured by 40 per cent.

Applying the averaging principle, the insurer pays only 60 per cent of the claim: R1.2 million instead of the full R2 million. The affected owner faces an R800,000 shortfall and, understandably frustrated, seeks legal advice.

The Recovery Chain Reaction

The owner's attorney pursues the body corporate for the shortfall. The body corporate, in turn, seeks recovery from the valuer for providing flawed professional advice. In this scenario, the valuer made a straightforward calculation error, a mistake with expensive consequences.

Here's where the situation becomes critical. The valuer holds professional indemnity insurance, but only for R1 million. After R400,000 goes toward legal defence fees, only R600,000 remains available for payout. This leaves a R200,000 gap that the body corporate must recover elsewhere. If the valuer lacks personal funds and faces insolvency, the recovery chain reaches its final link: the trustees personally.

Why Trustee Liability Cover May Not Help

Many trustees assume their trustee liability policy provides complete protection. However, insurers can legitimately decline personal liability claims when trustees demonstrate gross negligence, specifically, appointing an inadequately insured valuer without conducting due diligence.

The Critical Calculation Trustees Must Understand

Professional valuers performing insurance assessments for residential complexes and commercial buildings should maintain professional indemnity cover of at least 10 per cent of the property's replacement value, with an absolute minimum of R20 million. This threshold accounts for the reality that a significant portion of indemnity cover addresses the valuer's defence costs before any compensation payments.

Therefore, a complex with a R100 million replacement value requires a valuer holding substantially more than R5 million in professional indemnity insurance. Selecting a valuer with insufficient cover, regardless of attractive pricing, creates unacceptable risk for trustees personally.

The Fiduciary Duty Framework

Trustees bear a fiduciary duty to ensure comprehensive scheme insurance. This duty extends beyond simply arranging cover; it includes verifying that professionals appointed to determine insured values carry adequate protection themselves. This verification protects the body corporate and shields trustees from personal liability exposure.

Protecting Yourself as a Trustee

The temptation to save the body corporate relatively small amounts, sometimes as little as R500 to R1,000, by appointing cheaper, less qualified valuers can expose trustees to catastrophic personal financial risk. Given that trustees typically serve with minimal or no compensation, accepting such risk for marginal cost savings makes no sense.

When selecting valuers, trustees should request and verify:

• Current professional indemnity insurance certificates

• Confirmation of cover amounts relative to the scheme's size

• Professional qualifications and relevant experience

• References from similar-sized schemes

• Membership in recognised professional bodies
  

Taking Action

Trustees must approach insurance valuations as critical risk management exercises, not grudge purchases to be minimised. The modest difference in cost between properly qualified valuers and budget alternatives pales in comparison to potential personal liability exposure.

Remember: trustees work hard managing schemes for little compensation. Don't leave your financial future in the hands of an underqualified valuer selected purely on price. Protect yourself by ensuring proper due diligence at every step of the insurance process.