This month Paul Robertson explores how insurance policies can fall foul of section 20 which is particularly relevant given the recent Corvan ruling.

It would be easy to overlook how an insurance policy could fall foul of section 20. Given that the block insurance is one of the largest items on most service charge accounts the normal focus is to whether the premium has been reasonably incurred. Following the recent court of appeal decision on Corvan (Properties) Ltd v Abdel-Mahmoud sharp focus is being paid to any other types of agreements that could constitute a qualifying long-term agreement, limiting the maximum due from any lessee to £100 in any one period. The Corvan case was in relation to a management agreement however some insurance policies contain clauses that would almost certainly be interpreted by tribunal in the same way.

The obvious way to fall foul would be to extend an insurance policy beyond 12 months to move the renewal date. As it is not uncommon for this to be requested how should you deal with such an eventuality? Simply renew for a 12 months term and then have a short term policy issued i.e. for a month as opposed to requesting a 13 month policy.

Less obvious is the practice of long term agreements, premium stability or premium rebates, all of which can fall foul of the principles laid out in Corvan. 

But what are these practices and how do you spot them?

A long term agreement on an insurance policy is simply an undertaking by the insured that in exchange for committing to remaining with an insurer for a fixed period (normally either three or five years) then the insurer will discount the rate (normally between 5% to 15%). Whilst such agreements don’t actually commit the insurer to have to offer renewal it is hard to argue that the intent of such an agreement is to insure for more than 12 months.

Premium stability clauses can be combined with long term agreements or operate in isolation but in essence the premise is that the insurer will maintain the rate being charged if the insured continues to remain with the insurer for a fixed period of years, subject to the claims experience not exceeding certain parameters. Again the inference of such a clause is that the insurance policy is intended to run for a period of more than 12 months.

Premium rebates are deals that offer the insured an incentive to renew if their claims experience is below a certain threshold. Essential they refund a proportion of the previous years premium (typically three months after renewal) and are offered over a defined number of years. Most of these are constructed in such a way that it would be difficult to argue they are not intended to form long term contracts

The good news is that these are normally easy to spot as they are written on the insurance schedule. If you encounter such practice then you should look very closely and consider if it constitutes a qualifying long-term agreement. If so unless you have dispensation or have consulted then tribunal could rule that each lessee is only liable to pay £100 per term.

Make sure you read the lease

My other example illustrates how important it is to read the lease as demonstrated in the case of Denise Green v 180 Archway Road Management Ltd [2012] UKUT 245 (LC). The following is an extract from my book – Robertson’s insurance principles for leasehold flats:

This case was heard by the Upper Tribunal in respect of whether the insurance rents were recoverable from the service charge account because Ms Green was not named on the policy.

The covenant to insure required the policy to be in joint names and was badly drafted as each of the leases issued required the policy be in the name of just the freeholder and each lessee, despite the fact that multiple leases had been issued in this format. It then inferred that this should be a single policy by describing how the premium should apportioned. This made the intent of the covenant impossible to achieve, as a single policy would be issued in the names of the landlord and all of the lessees.

To resolve this, the broker placed the policy in the name of the freeholder and noted the interest of each of the lessees, thus apparently overcoming the defective lease. However, at a later date the policy was re-issued and contained a general interest clause which automatically noted all lessees and their respective mortgage lenders. The Upper Tribunal accepted the years in which Ms Green’s interest had been specifically noted but refused to accept that the years where the policy relied on the general clause were discharging the lease. They also refused to allow the insurance premiums for these years to be recovered as insurance rent under the service charge account.

This case is particularly important as it stresses the need to get the insuring party correctly defined in cases where the lease states that the policy should be in joint names – common in tri-partite leases. Best practice for an RTM that has assumed the insurance responsibilities on a lease previously held in joint names is to continue to insure in joint names.

There is a further argument that where an RTM has adopted the landlords responsibilities to insure it would be best practice to note the interest of the landlord.

If you want to understand the subject better then you may wish to consider reading my book – Robertson’s insurance principles for leasehold flats. It is now in print and available to order at www.1stsureflats.com/book-release

Paul Robertson is Managing Director of  1st Sure Flats and Midway Insurance. Email: [email protected] / Tel: 0345 370 2848.