Buildings insurance is a legal requirement and usually a condition of taking out a mortgage. It covers what are 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 or their managing agent who are responsible for arranging and insuring the building on one policy.
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 addition it can also cover:
- 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.
- Property Owners Liability: This will provide insurance against legal liability for the loss, damage or injury suffered by a third party arising from ownership of the property. For example this would cover a situation where a tree branch falls onto a non-residents car;
- Employers Liability: This will provide insurance against legal liability by any employees in any relation to the building, for example a porter, window cleaner or gardener;
Engineering Insurance Policies
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.