A Watertight Approach to Flood Insurance

With the Environment Agency citing that one in six homes in England are at risk from various forms of flooding, flood insurance has become a much debated topic of late. 

In the third of a series of articles penned by trainees of MJP Conveyancing as apart of the Company's ongoing training programme, Beth Slaughter writes:

Whilst Britain was battered by strong storms earlier this year, the conveyancing industry became inundated with concerns over the availability and affordability of flood insurance for homeowners. With the Water Bill currently passing through Parliament, this article indulges the national obsession with the weather, analysing the current political position as to flood insurance in relation to leasehold property, as well as what issues a potential purchaser of a leasehold property should be wary of when entering the leasehold property market.

Until June 2013, there existed an agreement between the UK government and the insurance industry which permitted individuals to obtain flood risk insurance for their properties even though they might be located in a high risk area and, in exchange, the government promised to maintain its spending on flood defences. This ‘Statement of Principles’ was only ever intended to be a temporary measure and has been criticised for its restriction of customer choice – insurers are only committed to their existing customers and new insurers can decide to whom to offer flood insurance and, additionally, the Statement does not guarantee affordable insurance premiums or manageable excesses for homeowners. The Water Bill Act 2014 has posed an opportunity for the government to turn the tide on the current approach to flood insurance, ensuring that it remains widely affordable and available – this is manifest in their Flood Re proposal, which is due to come into force in 2015. In essence, Flood Re provides that all buildings insurance will carry a levy that will be used to subsidise flood claims from high-risk households, thus reducing the premiums homeowners have to pay. Unfortunately, as currently defined, Flood Re will exclude buildings cover for flood insurance within a variety of sectors including council homes, the private rented sector, and, notably, leasehold properties.

With respect to leasehold properties, it is usually the responsibility of the Freeholder – or Management Company – to insure the building; they, in turn, pass this cost on to the leaseholder through their management charges. Insurance providers thus dub leasehold property to be ‘non-domestic’ and protection under the Flood Re scheme as it currently stands would be void. It has been argued that the decision to exclude leasehold property from Flood Re is politically motivated, as it prevents homeowners subsiding businesses, however, this is a fallacy, as it is the leaseholder themselves that would ultimately suffer. Ironically, the ‘floodgates’ argument has also been cited as a reason for the narrow delineation of property in Flood Re, as expanding the scope of the government’s proposals would push up the levy on all households; as a spokesman for the Association of British Insurers states: ‘Excluded properties should still get insurance, it’s just the cost won’t be capped. Flood Re is designed to focus on areas where the lack of affordable and available cover is most acute. We have to draw the line somewhere’. Both the British Property Federation (BPF) and the Council of Mortgage Lenders (CML) strongly oppose Flood Re as currently defined; the Director General of the CML note that they ‘find it difficult to believe that the original policy intention was to exclude a whole swathe of residential property from the stated aim of ensuring that affordable flood insurance continued to be available across the market’.  

The potential purchaser of a leasehold property has much to consider in respect of flood risk insurance. Under the Law Society regulations, when buying a property a Conveyancer should make the client aware of the potential flood risk to some properties; though conveyancers cannot compel a client to carry out an environmental search and a flood search, these are strongly recommended. Purchasers should note that their legal advisors can report to them on the search results, but cannot comment on any specialist issues which arise in the search – such concerns should be referred to a surveyor. Further information regarding the prevalence of flooding in any given area can also be obtained free-of-charge on the Flood Agency website – http://www.environment-agency.gov.uk/homeandleisure/floods/  - however, visitors to this site should note that it only records flooding in relation to river or sea level changes, and does not provide information about a specific property, whereas specific searches draw on more detailed data. It is for these limitations that purchasers should not solely rely on this website.  

As aforementioned, it is usually the case with leasehold properties that the Freeholder – or Managing Agent – arrange the insurance policy for the building. Purchasers should request a copy of the insurance policy and provide the same to a specialist broker who will be able to advise them as to the adequacy of the cover. Caution should be taken that the policy is sufficient for the particular building in question, incorporating both the internal and external elements of the building. Insurance might notionally cover a building for flood damage, but with heavy caveats – excesses may be large and there may be particular exclusions. Indeed, if flooding becomes an uninsured risk, the leaseholder may be liable to make good any damage depending on the wording of the lease.

Finally, as the CML demands flood insurance as standard, considerable increases in insurance premiums and excesses could affect the affordability – and even viability – of mortgages. The Law Society notes that lenders are increasingly likely to investigate the flood risk of a property when undertaking a valuation and may impose requirements on the mortgagee as a result of their findings. Difficulties in obtaining mortgages and insurance may impact of the saleability of leasehold properties, reducing the number of potential purchasers and purchase price alike. 

Purchasers should consider that if a property is in a high risk flood zone, it does not necessarily that they should not purchase the property; the purchase price could be re-negotiated to allow monies to be invested in flood resistance measures on the property, such as non-returning valves and self-raising barriers.

 With an estimated five million leasehold properties in England and Wales and approximately 840,000 thought to be at risk of flooding, issues surrounding the accessibility and affordability of flood insurance is no small matter. As Ian Fletcher, the Director of Policy at BPF, notes: ‘every property that is occupied is somebody’s home and investment. Flood doesn’t discriminate between freehold and leasehold…and it is of small comfort having contents cover if the building itself is left uninhabitable’. Perhaps the Government will rescue thousands of leaseholders in an eleventh hour amendment to the Water Bill; if not, individuals are best to err on the side of caution when buying leasehold property so that they are not submerged under spiralling insurance premiums.

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk