Floods: Why Are Flats Treated Differently

FPRA has been working with The British Property Federation; The Royal Institute of Chartered Surveyors; The Association of Residential Managing Agents; The Leasehold Knowledge Partnership, and many others, to try and get the Water Bill amended.

As usual, the Government hasn't considered the implications of its flood insurance proposals for flat owners.

As I write this article, homeowners are still reeling from the effects of flooding in various parts of the country. Fortunately, very few of the FPRA's members were affected on this occasion, but we have been involved with other organisations in lobbying the Government to ensure that leaseholders are not disadvantaged by proposals currently being put forward to deal with flood insurance cover.

If you haven't been following this story you may now be asking why leaseholders should be disadvantaged? To put this in context, the insurance industry agreement with the Government to provide insurance cover in flood risk areas recently came to an end. The industry has now negotiated with the Government to create 'an insurer of last resort' called 'Flood Re' following the same framework as the terrorism scheme which is called 'Pool Re'. The Water Bill is going through Parliament at the moment to provide the setup.

So far so good, until you look into the detail. The scheme covers all residential properties except –can you guess – yes, they've excluded leasehold properties apart from those with three flats or less.

They have in fact, excluded a few others, as follows:

  • The entire private rented sector;
  • Small and medium-sized enterprises ( SMEs);
  • Housing association homes;
  • Council homes; and
  • Properties in council tax band H.

The apparent logic behind this is that if you live in a leasehold property, you have to arrange your insurance ollectively. The insurance industry counts this as 'commercial' cover not residential and as leasehold blocks are therefore businesses, they should be able to make your own arrangements and negotiate their own deals.

This completely ignores the reality of leasehold in the twenty-first century. A great many blocks are now owned or managed by the lessees who, admittedly, sometimes use an agent to manage aspects such as insurance. The latest Government figures show that leasehold property management arrangements broadly break down as follows:

  • 33% self-managed by lessees
  • 14% managed directly by landlord
  • 14% managed by a landlord who appoints a managing agent
  • 33% managed by lessees who appoint a managing agent

So if these figures are correct (also a subject for debate), only 28% of the market is actually in the commercial bracket used by the insurance industry.

FPRA has been working with The British Property Federation; The Royal Institute of Chartered Surveyors; The Association of Residential Managing Agents; The Leasehold Knowledge Partnership, and many others, to try and get the Water Bill amended. It's interesting that so many different groups have joined together because the proposals are so blatantly unjust.

The FPRA is frequently in contact with various Government departments and organisations, including the financial Conduct Authority, to try and achieve a culture change in the way the insurance industry treats leasehold properties. We have a member on a large north east London estate where it is estimated that the freeholder and its agents (all overseas), generate over £600,000 in excessive and unjustified extra charges for insurance and particularly, terrorism insurance. Most of the properties are standard terraced properties built as a ground floor flat and a first floor flat. If they were houses, terrorism cover would be automatically included in their insurance policies and not be levied as an extra charge.

In all fundamental ways these homes are no different from terraced houses, yet the insurance industry counts them as commercial, not residential and therefore, they are subject to extra charges. Why should this be the case - and will the new Flood Re arrangement be another opportunity to charge them extra? The whole thing is distorted. It really needs the Association of British Insurers and its members the stop and have a general re-think about how they treat the leasehold sector. In all my years working with the FPRA, the ABI has never replied to any correspondence sent to them on this issue. I leave you to draw your own conclusions.

As I write this, the Water Bill legislation has not been finalised (see page 17 for more on its progress to-date) but with so many holes in a major piece of legislation, the question that needs answering is this. What will it take for the Government and the insurance industry to automatically and as a norm, treat leaseholders fairly?

Bob Smytherman is Chairman of the FPRA

The Federation of Private Residents' Associations can be contacted: via its website at: www.fpra.org.uk