Paying the price of uninsured perils

Paul Robertson explains how finding your block is unable to insure against perils such as flood can affect your service charge.

The unavailability of a policy that includes flood is a problem that is becoming more common for many blocks of flats. So what happens if flood cover is not available - and why do we have this emerging problem?

Regardless of your views in respect of climate change, it is hard to ignore the ever-increasing threat of flood in the UK. Insurers have recognised the problem and have acted accordingly by investing in ever more sophisticated models to enable them to understand flood risk.

Historically, flood mapping was based on traditional ordnance survey maps. However their datum (level above sea level) was probably never intended to provide accurate flood predictions. Modern technology and computer modelling has enabled this to be greatly refined and insurers have invested heavily in this technology. Coupled with the fact that the Environment Agency now has much more accurate mapping available it is now much easier to predict which areas are likely to be vulnerable to flooding.

Flood claims are extremely costly to insurers and it is no surprise that they wish to avoid them. For homeowners living in their own homes there is a government-backed scheme called Flood Re which acts as a reinsurer for flood perils, which is designed to safeguard the insurance industry against unaffordable levels of claims. So how does this work?

What is Flood Re?

Every homeowner purchasing insurance will effectively pay a levy which will accumulate £180 million per year towards the Flood Re scheme. Homeowners buying insurance for the homes in which they reside will be able to benefit from this, as the flood element of their policy will be reinsured by the scheme and the cost limited by their council tax band, thus making it more affordable for lower income households.

Buy-to-let properties are excluded for buildings cover and this is entirely understandable. It would not be appropriate for home owners (particularly those on lower incomes) to be subsiding the insurance arrangements of landlords. For the same reason blocks of four or more flats are also excluded, as the freeholder has the potential to earn from insurance commissions, lease extensions and ground rent. Blocks of three or fewer flats can be included if the freeholder lives in one of the flats and the policy is on a standard household form.

Are you covered?

So what happens if your block is unable to obtain flood cover? First it will become difficult to obtain mortgages on the flats. This will cause the market value of all the flats in the block to fall and possibly leave some flats owners in negative equity.

Second, you face the challenge of how to deal with a claim following flood damage where there is no flood cover in place. The outcome of this will depend on the lease.

Some leases will be specific. They will include a clause against the perils required to be insured which states “as is available in the London insurance market”. Effectively this lease form accepts that certain covers may not be available and it is common for leases that are considered in this way to also include a provision that uninsured events can be added to the service charge account. Where this happens, in theory, the cost of the repair can be added to the service charge account and each lessee will pay a contribution as per the percentage defined.

But as we all know, in reality life is often more complicated. The lease may not have these provisions and the freeholder may be in breach of the lease for not arranging cover that discharges the covenant to insure. Excuse the pun but this is where we are sailing into uncharted water. The real danger here is that if the freeholder is an RMC or RTM Co then it is likely to fail if the costs of the flood damage cannot be added to the service charge account. And if the costs of the damage are to be added to the service charge account then how is this compatible with the section 20 process?

An increasing number of flat owners are being faced with this challenge which is why a solution is needed. Watch this space for further details to follow in the next issue of Flat Living. 

Paul Robertson is MD of Midway Insurance and 1st Sure Flats Tel: 0345 370 2842