Shielding Real Estate Investors from Public Liability

Martha invited her Chama to her apartment for their monthly meeting. All went well until the watchman rang the door bell and, informed her of an incident in the parking in which one of her guest's car had been damaged. Jamila was shocked when she saw the cracked windshield. The Security Team took details of the incident. Being late Sunday evening, Jamila reported the matter to her Insurance Agent; who processed the claim on Monday morning.

The Tenant

Jamila's Insurance Agent, Beatrice, smiled when she saw Jamila's call logo; She had just signed off on her Domestic Package Policy, a month ago. Her tone, however, suggested that she was not happy. She narrated her incident, as Beatrice took notes.

Beatrice: "Jamila, you remember the day you requested me to cover the windscreen at the free cover limit of KShs 30,000 whereas the valuation was at KShs 90,000?" Jamila recalled her written instructions which she issued when she had an urgent medical bill to pay and, she was trying to save money knowing she would save KShs 5,000, even when Beatrice had explained the risk of under-insurance.

Beatrice: "The Insurance Company will pay KShs 10,000 only?! However, Excess Protector had been loaded and so you don't have to pay any excess."

Value of Asset at Risk = KShs 90,000
Windscreen Free Cover Limit = KShs 30,000
% of Loss covered by Insured = (90,000 - 30,000)/90,000 x 100% = 66.67%
Amount payable by Insurer = KShs 30,000 x 66.67% = KShs 20,000

Pin-Drop Silence! For sometime, Jamila contemplated the mahamri dough she had left to rise as the children loved them. She couldn't hold the thought for long as she pondered her next move.

Beatrice: "Jamila, are you okay?! You know you can sue the owners of the Apartment Block for negligence! Talk to Mildred, she can pursue the case on your behalf. It will not hurt your friendship with Martha"

The Property Manager received the report on Monday morning, and examined the wall and the photograph. He immediately sat down to send an email to the Chairperson of the Residents' Association to inform them of the incident. The Chairperson sent an email to Jamila, copied to the Property Manager.

Dear Jamila,

We have received the report from the Property Manager. Since the wall tile was from the wall under your apartment's sitting room window, your Landlord is liable. The Contractors' were paid last month, after clearing all outstanding issues raised during the Retention Period, therefore, we're unable to claim from them.

The Landlord

Jamila quickly responded, copying her Landlord's daughter, Sinaipei, as the old man had retired in Maralal.

Dear Sinaipei,

Please find the email from the Property Manager. The wall tile was on a common area and, you will recall the presentation, 6 months before, by the Insurance Agent, Beatrice, during the joint "owners-and-tenants" meeting, who had proposed insurance covering liability for damage. Various quotations had been presented to the Property Manager for approval and, funds were available from Service Charge paid by residents. The wall tile is from a common area so I don't understand why, you, the Landlord are liable.

Sinaipei, like her father, was quick-witted and immediately called her lawyer who had arranged for the transfer of title, off-plan, during the Pre-Sale Phase.

Sinaipei's father had sold some Boran cows (insured?!) from his ranch and, bought the house. He repeated this cycle to investment every three years and, had a wide-spread property portfolio across the country, including a second row property in Ukunda, with cottages, where he was currently on vacation. As with most under-insured Kenyans, he only had insurance cover over his motor vehicles.

The Real Estate Investors!

Having realised their mistake, the Property Holding Company sought an "Out-of-Court Settlement", in order to save on court filing fees and ancillary expenses. The fifty apartments' service charge of KShs 7,000 per month was sufficient to meet the settlement. It was a big lesson.

Beatrice, the Insurance Agent, was called in to make a presentation to the Apartment Block shareholders.

The Insurance Quotations for Fire were based upon income over a 12 month period and Valuation of the apartments.

Service Charge Income per month = KShs 7,000 x 50 units = KShs 350,000
Service Charge Annual Income = KShs 350,000 x 12 = KShs 4,200,000
Management Expenses @ 10% = KShs 420,000
Rental Income per month = KShs 100,000 x 50 units = KShs 5,000,000
Annual Rental Income = KShs 5,000,000 x 12 months = KShs 60,000,000
Taxation @ 30%

Value of the Apartments = KShs 20,000,000 x 50 units = KShs 1,000,000,000
Insurance Premium Levy of 0.125% = KShs 1,000,000 x 0.125% = KShs 1,250,000
Add Insurance Training Levy 0.2% = KShs 1,250,000 x 0.2% = KShs 2,500
Add IP HCF Levy 0.25% = KShs 1,250,000 x 0.25% = KShs 3,125
Add Stamp Duty KShs 40 = KShs 40
Premium Payable = KShs 1,255,665

*IP HCF - Insurance Policy Holders Compensation Fund

There will be:

Payment plans
Discounts
Riders

to sweeten the deal!

Somebody will say, "Surely, that is a lot of money". What if the claim was in respect of life or lives lost?

What does this premium cover? For a sum insured with nine zeros!

We're not yet through! Can you can now see how much money is saved?

Try costing each item above, just a fictitious number, get the total, and divide by the number of "willing-and-able" apartment shareholders; as you may have "willing-but-unable" pensioners, living out their retirement on their pension!

There are Endorsements which may need to be added to your policy based upon your declarations and, preferences

Riot and Strike, such as if you're apartment block is in the vicinity of a University or Slum
Standard Explosion, such as if there is a Gas Tank for the restaurant on serviced apartments
Special Perils
Hazardous Goods Warranty
Petrol and Mineral Oil, such as diesel or petrol stored for the back-up generator
Electrical
Bush Fire
Earthquake and Volcanic Eruption exclusion, and Excess of say 2% and, please check the maximum!
Political Risks Exclusion
Terrorism Exclusion
Pollution / Contamination Exclusion

Summary

Most Real Estate Investors, in Kenya, do not have Insurance over the Buildings. They are exposed to huge claims, as a result of the "culture of under-insurance".

Both Nairobi and Mombasa have experienced significant property developments over the last 10 years. The skyline is transforming yet again, with lifts being put in into apartment blocks of upto eight floor, previously unheard off. Its now a viable Real Estate Investment to increase the number of floors given the price of the land but, the risks will increase.

With the trend in increasing the number of floors, the Owners and Tenants of apartment blocks are exposed to greater risks, which they need to quantify when they make their Real Estate choices.

Lets face it! Everybody's ideal property investment is a "prestigious address"?! But, what are the "Hidden Costs"?

Who doesn't want to own a property with a "Prestigious" Address?

At a minimum, the following policies should be arranged:

The Owner: Fire Insurance Policy over Buildings. Workmens Compensation under WIBA can be added for the employees;
The Tenant: Fire & Burglary Policy over Contents which also covers Domestic Helps;
The Property Holding Company: Fire & Burglary Insurance, to cover Public Liability in common areas such as the gym, playground and swimming pool and specialised equipment such as submersible pumps and communication & security equipment.

All Characters mentioned here are fictitious and bear no resemblance to any person or entity, living or dead.
First Liberty Insurance Agency and its officers are not liable for any Errors and or Omissions in this article.
Any images used may not be our own and are only used for Educational Purposes. Those that are ours are copyrighted.
First Liberty Insurance Agency ("First Liberty Kenya") is an Independent Insurance Agency and does not operate as a "Tied Agent" or "Captive Agent".

Shielding Real Estate Investors from Public Liability