Millions may face flood insurance problems

The recent storms have exposed gaping holes in flood defences - but property owners are warned that there are also gaping holes in the planned scheme to provide all homeowners with affordable flood insurance cover.

This is likely to leave millions of owners facing massive increases in insurance premiums, or even finding that they cannot get cover at all.

Last year the government agreed with the insurance industry to set up a scheme called 'Flood Re'. The idea is that all owners will pay a small additional sum on their premiums, which will go towards covering homes which would otherwise be uninsurable.

Initial figures suggested that less than 10,000 high-value homes would be excluded from Flood Re. But as more details of the scheme are being revealed it now appears that not thousands but millions of residential properties will be excluded in the scheme, including:

• New-build homes constructed after January 2009;
• The entire private rented sector, i.e. Buy-to-Let properties;
• Leasehold flats and retirement properties;
• High-value homes in council tax band H.
• Homes owned by councils and housing associations.

Apparently the reason for excluding BTL properties and all leasehold flats from the scheme is that insurers class these as ‘non-domestic' meaning that the building owners will have to seek commercial property insurance. While there may not be any problem in obtaining such insurance it is likely that the premiums will be higher than for ordinary freehold homeowners.

But if insurers consider that a particular building is in an area at higher risk from flooding they will probably require higher premiums, or even decline to insure against flood damage altogether. The cost of higher insurance will then be passed on to individual flat-owners or to the tenants of BTL properties.

Councils and Housing Associations are also likely to pass on higher insurance costs to their tenants in the form of increased rents.

Flat-owners do not usually get much say in their building insurance, as in most cases this is arranged on a block policy by the freeholder of the building or their managing agent. But while the freeholder or agent may be carrying on a business the residents of flats will not regard their home as being ‘non-domestic.' Under planning law flats are residential dwellings, so why the insurance industry classes a block of flats as a business is incomprehensible.

The same surely also applies to the majority of BTL properties. From the point-of-view of flood risk what is the difference between a house which is occupied by the owner and one which is occupied by a residential tenant?

The exclusion of all homes built after January 2009 is another area of concern for homebuyers. Many new homes are now being built on flood plains or other low-lying land which is particularly at risk from flooding. Anyone buying a new home will therefore need to get confirmation that they can get insurance cover at reasonable rates before going ahead with the purchase.

Several organisations representing lenders, property managers and owners have expressed concern to the government over this issue. At the moment the plans for Flood Re have not been finalised, so they are hoping that the scheme can be amended to include all residential property including flats.

Mortgage lenders require buildings to be insured against all risks including flood damage. So property buyers will want to know if a property can be insured at reasonable rates as if not they are unlikely to get a mortgage. In the case of flats the buyer will want details of the freeholder's existing insurance policy.

Any difficulties in getting insurance cover on a property will make it difficult to get a mortgage on it. This will substantially affect the value of a property and make it very difficult to sell.

The Leasehold Knowledge Partnership, a consumer group championing the cause of residential leasehold owners, argues that leasehold flats and retirement properties should not be excluded from the proposed affordable flood insurance cover.

And Ian Fletcher, Director of Policy at the British Property Federation, says: “Every property that is occupied is somebody's home and investment. Flood doesn't discriminate between freehold and leasehold, owner-occupation and renting, and it is of small comfort having contents cover if the building itself is left uninhabitable. If a property is at risk, regardless of its status, it needs to be able to insure itself affordably against disaster, not least because that is a condition of most mortgages.

Increased surface water flooding means you don't need to live next to the sea or a river to be impacted by flood these days, it can happen to most of us. Depriving leasehold property owners, including millions of owner-occupiers, access to Flood Re is frankly unbelievable.”

Strong words perhaps, but we quite agree that the proposed arrangements will throw the residential property into chaos unless substantially altered. This is a matter which affects millions of owners, but it seems that few are aware of the problem at present.

We recommend that all homebuyers get a full flood-risk report before buying a property. This will give a detailed picture of the potential risk from flooding, as well as details of any known previous flooding, and can prevent expensive mistakes. Contact us for further details.