Challenging the Cost
In essence the law provides that freeholders don’t necessarily have to purchase the cheapest insurance available, as long as it is within the market norm and meets the lease terms. So, like service charges and those of administration charges the buildings insurance premiums must reasonable.
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!