Viewing the Buildings Insurance Policy & Challenging the Cost
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.
Failure to comply without good reason is a criminal offence subjected to a fine of £2,500 on conviction.
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.
Note: Referred to in Sections 15.10 and 15.11 of the RICS Service Charge Residential Management Code.
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.
Many leaseholders also don’t have any provision in their leases to allow them to obtain their own buildings insurances, or for other leaseholders to club together to purchase it. 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.
Whilst responsible landlords can use this to produce a discount for their leaseholders, and they openly state the commission they receive, some disreputable landlords 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 does it work?
- 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’.
- The leaseholders then divide the cost amongst them, unaware of the disproportionate fee the landlord has included.
Leaseholders pay 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 is no legal obligation to disclose insurance commissions, far too many aren’t disclosing!
However should this be surprising considering that leases were designed as a money-making document? Many freeholders are professional investors, so having been given the right to make money from the lease by creating a profit margin when arranging insurance, obviously they are going to take it!