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.