Buildings insurance is a legal requirement and usually a condition of taking out a mortgage. It covers what re known as the common areas, i.e. any areas not owned by leaseholders. These common areas consist of 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 such areas are owned by the freeholder and it is usually they who are responsible for arranging and insuring the building on one policy that covers these common areas.
If the Resident Management Company is required to insure the building and the common parts then it has to have a legal right to enter the property granted to it. Unless that right is granted by way of a lease of the common parts, the company must be made up of the leaseholders of the building who will then be able to instruct their managing agent to insure the building. If it is not then the lease should contain a covenant by the landlord to take over the management company’s responsibilities in the event that it fails.
The lease should also contain a covenant by the freeholder or management company that enables them, (at the request of leaseholders), to enforce the ‘covenant to insure’ against any other leaseholders that don’t pay. This covenant will usually however be subject to the leaseholders agreeing to be responsible for any cost incurred by them or the management company in taking enforcement action.
If insurance is placed by the managing agent then there are significant restrictions administered by the Financial Conduct Authority (FCA) that whilst allowing varying levels of involvement in insurance matters, such involvement requires agents to keep to those restrictions. If the agent also handles any other insurance-related matters that meet the definition of a regulated activity then the FCA requires them to be regulated.
The type of insurance regulations covered (and the reason 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 get their own buildings insurances, or for other leaseholders to club together to buy 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 few 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 instead of it being 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).
Regardless of who places the insurance, it will be the leaseholders who pay for it, either by the cost being included in the service charges or within a separate area of the lease as ‘insurance rent’.
All sources of income and benefits to the managing agent arising out of the management of buildings insurance should be declared to the client and to the leaseholders and should only be retained in return for a service of value. These may include insurance fees (including commissions) which should only be kept by the informed consent of the client. The amount of the income should be declared annually with the year-end service charge accounts.
WHAT ELSE DOES BUILDINGS INSURANCE COVER?
As well as covering the common areas, buildings insurance also generally covers 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 each flat as well as fixtures such as shower trays and baths but the latter is a bit of a grey area. In addiction it also covers:
- Contents of Communal Areas: This can include items such as carpets;
- Trace & Access Cover: An important element because investigating the cause of a leak 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 proper 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 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 show 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 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 give 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 if the plant explodes 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 make sure 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 cheaper policy for a higher excess if it thinks there’s a greater risk of a claim. such as a poor claims history, location, method of constructions or other existing problems
These difficulties may be reduced by insuring a landlord’s portfolio under one policy, effectively spreading the insurers’ risk. There is likely to be a contrary effect on ‘low-risk’ properties within the portfolio too.
Where an insurance claim is as a result of a negligent act by the leaseholder, the lease should state whether the excess can be recovered from the leaseholder or whether the lease allows the excess to be paid from service charges.
Should a claim need to be made, the role of the Claims and Loss Adjusters can be read here.
If any flats are required to be insured individually this makes the lease to that flat defective. Separate policies do not cover the common areas but despite this, insurers are still offering a separate policy, which is known as dual insurance. When the leaseholder discovers two insurance charges, they will not be able to get a refund from the freeholder because the freeholder has adhered to their own covenant in the lease, that of insuring the building. It may also prove somewhat difficult to get a refund from the broker for the separate policy.