Levy guarantee policy - Solving liquidity problems for body corporates

Brokers can now offer body corporates an insurance solution to their growing cash flow problems with the introduction of the Stilus “new era” insurance policy, which guarantees the payment of members’ levies.

The sectional title market is growing substantially and this trend can be expected to continue in the coming decades, creating new opportunities for brokers and insurers.

Significant challenges

Owners in body corporates are habitually poor payers, particularly in the lower and middle income market, and the problem has worsened due to the economic conditions. Normally, around 10% of owners could be expected to fall into arrears with their levies, but today the average has moved up to 25%.

Because body corporate budgets are prepared on a break-even basis, these increasing levy arrears have resulted in many body corporate failing to meet their financial commitments. They are unable to borrow funds to resolve their cash flow problems, because they do not own any assets which can be utilised to provide security to the banks.

Far-reaching consequences

body corporates are responsible for paying municipalities for the services they provide to residents, including water, electricity, refuse and sewerage. Municipal charges are generally the first to remain unpaid when financial difficulties are experienced by bodies corporate.

But another, and far more serious, problem arises when body corporates experience cash flow problems – the inability to fulfill their mandate to maintain the exterior and common areas of the properties. As the properties deteriorate they become less and less attractive for tenants and owners. A downward spiral sets in where the poorly maintained properties lose value to the detriment of all the investors and residents, and the problem of levy arrears becomes even more pronounced.

Smart solutions

Body corporates can now insure their levy payments through Stilus to protect their cash flows.

Michael Garvin, marketing manager of Stilus comments that the premium payable by body corporate is modest and well worth the price to ensure they can meet their budgeted expenditure commitments. “When owners default on the payment of their levies, Stilus steps in and pays the body corporate within 10 days of a claim being made. The defaulting owners are then handed over to the insurer’s collecting attorneys at no cost to the body corporate.”

Stilus can only be obtained through registered insurance brokers and is underwritten by Santam.

Strategy for the future

Brokers can add additional value to their body corporate clients by proposing the following strategy suggested by Garvin to ensure body corporate are viable and successful in future.

In terms of the Sectional Titles Act, when annual levies are raised by trustees of body corporate, the levies are in fact payable in advance. However, it has become an accepted practice to apportion and pay the levies monthly during the year.

Garvin proposes that, in future, body corporates insist that when a member’s levy goes into default for over 30 days, the defaulter’s levy for the balance of the entire year becomes due and payable. In this scenario, the Stilus insurance policy will pay the defaulter’s levy for the full year to the body corporate which will eliminate further cash flow problems. The trustees of body corporates can go even further and plan maintenance programmes for a period of, say, five years with confidence, knowing that the payments of their members’ levies are guaranteed and body corporates financial commitments will be met with a Stilus levy guarantee.