Buildings Insurance: Challenging the Cost and Viewing the Policy
Many of the larger landlords 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.
Other less honest freeholders 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 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!
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.
It appears that it is still not a legal requirement for commission payments to be disclosed but 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.
Leaseholders are entitled under s30a of the Landlord and Tenant Act 1985 (rights of tenants with respect to insurance) and any leaseholders paying a service charge which includes an amount payable either directly (or indirectly) for buildings insurance, under the Schedule to this section 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.
Within 6 months of receiving the summary, leaseholders (or the Secretary) may request that the managing parties arrange access to where the policy is held (which cannot be charged for) where they can a) inspect the full policy and associated documents such as proof of payment and b) take copies and extracts. Compliance is required within 21 days from the day on which the notice is received.
Alternatively leaseholders can request (in writing) for them to be sent or to be made available for collection. It should be noted that if this option is taken then a ‘reasonable’ fee can be charged under administration charges and the policy holder must respond within 21 days of receipt of the request.