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’.
Buildings insurance covers the structure, roof, the land the building stands on, foundations, load bearing walls, gardens, landings, paths, gates, fences, drives, stairways, and any other outbuildings. Inside it covers the plant rooms, lift motor rooms, and meter cupboards, all of which are collectively known as the common areas.
Buildings insurance generally cover against ‘specific risk’ such as fire, flood, malicious damage, water leaks etc and extends to all areas of the building (including any necessary repairs and redecoration to individual flats as well as fixtures such as shower trays and baths (but the latter is a bit of a grey area). It also covers 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 top-end 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 fit in easily with the property cover to ensure that as many eventualities as possible are covered. It is recommended that this insurance be considered if the service charge budget may not be able to 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 ARRANGES BUILDINGS INSURANCE?
The freeholder is usually responsible for arranging and insuring the building on one policy that covers the structure, the common areas and other other communal facilities. It will comprise part of the service charges so if any flats are required to be insured individually this makes the lease to that flat defective. Separate policies do not cover these areas but despite this, insurers are still offering individual policies for each individual flat. This is known as dual insurance and occurs when a purchaser is sold an individual policy that is not required when the building is insured on the one block policy. This is something that should be clarified during the conveyancing process, before the mortgage is finalised. When this is later discovered, leaseholders will not be able to get a refund from the freeholder because they have adhered to their own covenant to insure. It may also prove somewhat difficult to get a refund from the broker for the separate policy.
If insurance is the responsibility of the managing agent then unless the right is granted by way of a lease of the common parts, the resident management company (comprised of the leaseholders) will be able to instruct the agent to insure the building. If the agents also handles any other insurance-related matters that makes the 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 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 the Association of Residential Managing Agents (ARMA) or the Royal Institution of Chartered Surveyors (RICS).
Should a claim need to be made, the role of the Claims and Loss Adjusters can be read here.