Who Places Buildings Insurance?
The persons responsible for placing buildings insurance varies from development to development. 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 (promise) by the landlord to take over the management company’s responsibilities in the event that it fails.
If the 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’.
The lease should also contain a covenant (promise) 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.
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.