A new Insurance cover for blocks of flats and apartments has hit the Uk in 2012. “Lessees Fixtures and Improvements” covers accidental loss or damage to leaseholders’ fixtures and improvements.
Why is it therefore imperative for Residents’ Management Companies (RMC)to have the new Lessees Fixtures and Improvements’ policy. There are three aspects which must be taken into account to accurately answer this question (1) As a condition of your Lease (2) Costs and (3) Reality.
Your Lease
Your Lease will impose on your Residents’ Management Company the requirement to Insure your building on the site insured to their replacement value.
The insurance must be for the full cost of replacing the building or improvements with new materials.
The “definition” of Building” in your Lease may be written in a number of ways, however is interpreted as a “fixed structure”, not specifically state that proprietors’ fixtures and improvements are a fixed structure and not necessarily the concern of the RMC. However as lessees’ fixtures and improvements are a fixed structure, it would appear logical that such should be insured under the buildings insurance. It would be a nightmare if the individual flat owners attempted to insure the inner structures of the flat.
Valuation
The legislation in the UK do not stipulate that a valuation should be obtained. This however is the most efficient method for the individual leaseholders and Residents’ Management Companies to help discharge their liability, to ensure the selected sum insured represents the full replacement value.
Liability of the Residents’ Management Company
In the event of the underinsurance following a major loss, your committee members could be sued for:
a) Breach of Duty.
The Acts stipulate that the building must be insured for its full replacement value; therefore the onus is on the members of the Management Company to obtain the correct advice from the available professionals and/or consultants.
b) Negligence.
The members must show due care, skill and consideration in the performance of their duties as a member of the Management Company.
Liability of Leaseholders
The individual Directors of the Residents’ Management Company have an unlimited financial obligation imposed to the conduct and operation of the Company.
Any shortfall resulting from underinsurance must be met by the Residents’ Management Company. Therefore the entire personal assets of theDirects and Officers are exposed in the event the selected sum insured does not represent the full replacement value.
Costs
To appreciate the cover, convenience and peace of mind afforded by this type of insurance policy, we compare the premium against the cost a valuer would charge to complete a full inspection of the fixtures and improvements contained in an individual unit.
From our experience (which is drawn from reading valuation reports and in discussion with professional valuers) valuations can vary between an ‘in-depth costing’ of the building and what is commonly referred to by valuers’ as a ‘drive-by valuation’. An in-depth costing would include inspection and reporting on all internal fixtures and improvements, noting the type of materials, whether they were still available, the cost to replace the materials and the labour costs involved. The valuer would need to write a brief report on each flat.
A valuation, although not compulsory, should be otained once every three years. The premium to insure the owner’s fixtures and improvements for a sum insured amount of fifty thousand pounds(£50,000) per unit is minimal.
Reality
It is most difficult for a valuer to arrange to inspect several units on a specific day, or on a day in which the flat owners or tenants are on site at the same time. It simply does not happen and therefore typically, valuers make the common assumption that all the units are the same as the one or two units which they have been able to inspect. This situation is a major exposure in establishing the correct values.
If this occurred, the Residents’ Management Company would have to meet the shortfall between the selected sum insured and the actual replacement value. The Residents’ Management Company, depending on their instructions to the valuer, would attempt to sue the valuer for the shortfall. Such action could take years to finalise, which would result in a significant delay to the reinstatement of the building, resulting in a substantial cost increase.
The other downside is the value which is identified as the cost to replace the fixtures and improvements is valid for and only reliable on the day of inspection. An owner can implement major improvements one week after the valuation. If the insurance company is not advised to increase the sum insured in line with the increase in the cost of improvements, the required protection is not achieved.
Summary
There are five main points that summarise this article:
- The Residents’ Management Company have a legal obligation to insure the building for its full replacement value.
- In the event of underinsurance, the Residents’ Management Company can be sued for breach of duty and/or negligence.
- The individual leaseholders have an unlimited financial obligation in regard to the conduct of the Residents’ Management Company.
By obtaining a lessees fixtures and improvements extension to yur insurance policy:
a) The individual leaseholders has complete protection: and
b) The Residents’ Management Company meets the obligations of the Lease.
