Ensure leaseholder clients are aware of insurance risks
Figures from the Building Cost Information Service highlight that while it is becoming common in England and Wales for freeholders to ask their leaseholders to insure their own flats within a property, many leaseholders are unaware of the risk of under-insurance.
All too often leaseholders fail to understand or do not have it explained when taking out their policy, that the sum insured may be inadequate and limited only to the cost of building their individual flat.
This places them in a vulnerable position should a catastrophic incident occur and if uninsured, the entire premises may not get rebuilt, leaving them paying a mortgage on a property that no longer exists.
In the event that damage requires a rebuild of the premises, leaseholders need not worry if the freeholder has arranged full cover on the complete block.
But as we are increasingly seeing, if the freeholder has asked each leaseholder to insure their portion, insurers of each leaseholder will need to work together to reinstate the property.
If one or more leaseholder fails to insure their portion, or is significantly under-insured, there may not be sufficient insurance funds to rebuild the property.
In such cases insurers may decide to indemnify policyholders simply by paying them the sum insured under the property, leaving them with the no option but to walk away from the lease.
It does not stretch the imagination far to estimate the financial loss the client could incur in this situation.
If one or more leaseholders fails to insure their property there may not be sufficient insurance to rebuild it
For example, if the rebuild sum insured for one flat in a block of four is £100,000, but the market value of the lease is £250,000, the insurer will pay out £100,000 but will not reinstate the property. This leaves the leaseholder with a loss of £150,000.
Insurers are only liable for the rebuild sum insured under the policy. There is no commitment to compensate the leaseholder for loss of market value.
In addition, many leaseholders may rely on a mortgage valuation or base the sum insured on their estimation of the rebuild cost of the block, when they should spend a couple of hundred pounds on a specialist survey.
One issue often overlooked in press coverage is that brokers need to understand that the risks associated with under-insurance of buildings do not fall solely into the laps of policyholders.
Brokers face the possibility of both reputational and commercial damage for not adequately explaining this issue to customers.
Intermediaries who fail to address this issue do so at their own peril.
I urge all of you to realise before it is too late that it could backfire if you fail to ensure that your leaseholder clients understand the potential exposures of not having the right buildings cover in place.