Buildings insurance is a legal requirement and a condition of taking out a mortgage. Leases usually require leaseholders to contribute towards the cost of insuring the building in one of two ways: either by the cost being included in the service charges or within a separate area of ‘insurance rent’.
Like service and administration charges, the premiums must reasonable under s19(1) of the Landlord and Tenant Act 1985.
This particular area of legislation requires that any interim service charge must be ‘reasonable in amount’ and under s19(1)(b) a cost that relates to expenditure that has already been made must have been ‘reasonably incurred’.
What Does Buildings Insurance Cover?
Buildings insurance will cover the fabric of the building (the roof, foundations, load bearing walls, gardens, landings, and stairways) and can also cover other permanent fixtures outside, such as gates, fences, drives and swimming pools. It will also cover any necessary repairs and redecoration to the interior of a flat as well as fixtures such as shower trays and baths (but the latter is a bit of a grey area).
It will generally cover against ‘specific risk’ such as fire, flood, malicious damage, water leaks etc and extends to all areas of the building (including individual flats) as well as the following:
- Contents of Communal Areas: This can include items such as carpets;
- Trace & Access Cover: An important element because investigating the cause of a leak for example may involve stripping a kitchen to find and then repair a pipe;
- Accidental Damage to Underground Services and Cables: This insures gas, electricity, oil or water, as well as sewage pipes but does not insured against wear and tear;
- Emergency Repairs: Many policies cover the cost of temporary work.
- Legal Expenses: If this type of policy is issued solely in the name of the freeholder than this may not defend the management company;
- Lift Insurance: The law requires lifts to be inspected every 6 months by an approved ‘competent authority’ and appropriate reports to be held as confirmation. It is also common to cover lifts against sudden and unforseen damage which can be extended to cover other machinery such as electric gates and automatic entrance doors. Cover is also subject to VAT at the current rate.
- Terrorism Insurance: Terrorism cover is not automatically included unless it is requested. Since January 2003, it has been offered on an ‘All Risks’ basis including damage caused by nuclear, biological and radiological attack and is designed to reflect the perceived danger of contamination caused by terrorist activities i.e. the fall-out from a ‘dirty bomb’.
- Public Liability Insurance: Flat owners, occupants, managing agents and freeholders all need to be protected from being held financially responsible for damage to the block and to persons. For example if a visitor to the property sustains injury after a trip or fall by slipping on a wet surface, they could possibly claim for compensation against the policyholder under the public liabilities section although of course, negligence would have to be proven.
This is not technically considered as insurance but most highly regarded firms will provide this additional cover.
The most common covers available under engineering insurance policies are:
- Own Surrounding Property: Cover applies to boiler and pressure plant and covers damage to own surrounding property following the plant exploding due to internal pressure;
- Breakdown, Explosion and Collapse: This covers pressure plant for breakdown, explosion and collapse;
- Sudden and Unforeseen Damage: Provides cover for risk including accidental damage, operator error, frost damage, leakage, cracking, fracturing and ingress of foreign bodies.
This cover aims to dovetail with the property cover to ensure that as many eventualities as possible are covered and it is recommended that this insurance be considered if you are not confident that the service charge budget can cover the costs of unplanned emergency repair work.
One excess that appears in almost all policies applies to damage caused by subsidence, heave or landslip and this is usually a specific amount.
The insurer might also offer a policy for a higher excess if it thinks there’s a greater risk of a claim being made- such as when a building requires insurance but it already has existing problems (something that happened with our block before we took over management then freehold ownership).
Alternatively a higher excess can be requested in order to obtain a lower premium.
Damaged Contents Owned By Residents
What buildings insurance does not cover is the the replacement of damaged contents owned by residents (except in certain circumstances). This should be covered by individual contents insurance (see below).
WHO INSURES THE BUILDING?
Buildings insurance must be the responsibility of the freeholder, the resident management company or the managing agent acting for the freeholder.
If the responsibility to insure falls to the managing agent acting on behalf of the freeholder (and they also handle any other any other insurance-related matters that makes them meet the definition of a ‘regulated activity’) then the Financial Conduct Authority (FCA) requires them to be regulated. The type of insurance regulations covered (and the reason why managing agents fall into the net) are as follows:
- Arranging insurance and choosing the best quote (with the former as a given as most leases don’t allow leaseholders to obtain their own buildings insurances, or for other leaseholders to club together to purchase it);
- Advising the leaseholders (who are the clients) to include recommending a particular insurance company;
- Dealing with the administration which includes placing the insurance and ensuring the premium is paid to the insurance company (or broker). It also includes the provision of documentation during the conveyancing process to lenders and solicitors.
How Agents Become Authorised and Regulated
There are a number of ways in which a managing agent can become authorised and regulated which are as follows:
- Directly authorised and regulated by the FCA which provides a wider scope but as would be expected, incurs a larger cost;
- Act as an appointed representative of the broker who takes responsibility for their conduct rather than it be directly controlled by the FCA but will likely involve dealing with the principle broker;
- By being a member of an organisation such as ARMA or the Royal Institution of Chartered Surveyors (RICS).
Challenging the Cost
In essence the law provides that insurance doesn’t have to be the cheapest available, as long as it is within the market norm and must be effected in accordance with the lease terms. Leaseholders wishing to challenge the cost of insurance must obtain evidence in the form of ‘like for like’ quotes. Where there is evidence that costs are not reasonable, it is recommended to attempt to resolve the dispute by discussion or mediation. If this is not successful, leaseholders can ask the First Tier Tribunal (Property Chamber) to determine the insurance charge.
This leaves most larger landlords to purchase insurance cover in bulk and direct from the insurer. They then sell it on to the leaseholder through a brokerage set up for the purpose and responsible landlords will use this to produce a discount for their leaseholders. They will also state any insurance commission they have received.
Others however will use the broker procedure to produce insurance costs up to 100% above what the leaseholders could obtain in the market themselves by purchasing a policy that contains a ‘kickback’ or commission from the insurer. They also do not declare what percentage they receive.
So how do they do it?
- The insurance broker, authorised and regulated by the FSA charges the managing agent or landlord £1,121 for buildings insurance;
- The broker levies IPT (Insurance Premium Tax) at 5% at a cost of just over £56, which is paid to Revenue and Customs;
- A demand for £2,768 is sent by the landlord to all of the leaseholders under the heading ‘Property Insurance’ and leaseholders then divide the cost amongst them, unaware of the disproportionate fee the landlord has included.
This results in leaseholders paying an inflated insurance bill whilst the landlord ‘earns’ nearly £1,600 for doing nothing except protecting his asset which the law says he must do anyway!
The Department of Communities and Local Governments has yet to propose to include details of these commissions paid as part of the service charge expenditure. The Royal Institute of Chartered Surveyors also appear to be failing to crack down on these commissions so, because there are no legal obligations to show insurance commissions, far too many aren’t disclosing!
VIEWING THE POLICY
Any leaseholders paying a service charge which includes an amount payable either directly or indirectly for insurance, under the Schedule to s30a of the Landlord and Tenant Act 1985, they can request (in writing) a summary of the current insurance policy. They are entitled to see the policy and any associated documents at the office or request that copies be sent to their home address, or be made available for collection from the office.
If they are members of a recognised Residents Association, the Secretary can request it on their behalf. It must be provided within 21 days from the day on which the request is received by the landlord.
The summary must show:
- The amount for which the property is insured;
- The name of the insurer;
- The risks that the policy insures against.
Facilities To Inspect The Full Policy
Within 6 months of receiving the summary, leaseholders (or the Secretary) may request that facilities be available whereby they can not only inspect the full policy and associated documents but they can take copies and extracts. Compliance is required within 21 days from the day on which the notice is received.
The managing parties will need to arrange access to where the policy is held (which cannot be charged for). Proof of payment must also be made available for inspection. Alternatively leaseholders can request (in writing) for them to be sent or to be made available for collection.
Note: if the latter option is requested then a ‘reasonable’ fee can be charged under administration costs and the policy holder must respond within 21 days of receipt of the request.
Should a claim need to be made, the role of the Claims and Loss Adjusters can be read here.