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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.

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  • Liz 26th April 2012 at 12:32 pm

    Very interesting and worth bearing in mind. Def good to be aware of.

    However, love the way everyone says ‘broker to balme for all’ the insurance is the solcitior’s responsibility and mortgage brokers do not generally see lease agreements!!!! We cannot possibly know in most cases, and checking this sort of information is why solictiors are paid hundreds of pounds for a conveyance, amongst other reasons.

  • Geoff Hall 24th April 2012 at 8:53 am

    Mary’s comments are understandable and correct in the main. This responsibility would not rest on the mortgage adviser if they were not advising on the general insurance. If introducing to another firm to arrange the insurance, the responsibility would fall on the insurance firm. Mary is also right that it is best to arrange the insurance on the block as one policy, and that is indeed what we would always encourage to happen. However it is becoming more common for the freeholder to abdicate their insurance responsibilities to the leaseholders, hence the reason we wrote the article. Wouldn’t it be lovely for a government of any persuasion to write a piece of legislation that protected the freeholder, the leaseholder and UK businesses, but from experience, is this likely to happen? If first time buyers are in the main the leaseholders being asked to insure the property, and with their lack of financial experience, doesn’t that make the adviser/client relationship even more keen to understand what needs to be done and to make sure it happens?

  • Geoff Hall 23rd April 2012 at 2:37 pm

    Mary’s comments are understandable and correct in the main. This responsibility would not rest on the mortgage adviser if they were not advising on the general insurance. If introducing to another firm to arrange the insurance, the responsibility would fall on the insurance firm. Mary is also right that it is best to arrange the insurance on the block as one policy, and that is indeed what we would always encourage to happen. However it is becoming more common for the freeholder to abdicate their insurance responsibilities to the leaseholders, hence the reason we wrote the article. Wouldn’t it be lovely for a government of any persuasion to write a piece of legislation that protected the freeholder, the leaseholder and UK businesses, but from experience, is this likely to happen? If first time buyers are in the main the leaseholders being asked to insure the property, and with their lack of financial experience, doesn’t that make the adviser/client relationship even more keen to understand what needs to be done and to make sure it happens?

  • Mary Lockyer 22nd April 2012 at 8:24 am

    As introducers, we do not get to see the leasehold contract, and it is the Solicitor who has to confirm to the Lender on report on title that cover is in place. I am happy to make this clear to clients, but frankly there are two major issues here, most leaseholders are likely to be first time buyers, with no experience and the whole process of buying in itself saturates their capacity to take on board such important information, most lenders would prefer a block policy arrangement as the complexity of apportioning liability in the event of a claim is not in the leaseholders best interests as several companies could be involved. Very few understand the rebuilding costs are seldom the same as the valuation, I feel that on this one as the Solicitors get the information its their job to explain what is the risk. And perhaps making it a legal requirement that a building should be under one policy regardless of how many domestic dwellings it comprises would be a sensible piece of legislation? The consumers in this instance may lack the knowledge and experience ie be vulnerable in protecting their most valuable asset, and Lenders will appreciate the implications only too well. Sorry, but brokers do not get the lease info, the solicitors do, they are the legal experts acting for the buyer and the lender in most instances.

  • James Cooke 18th April 2012 at 10:06 am

    Very useful guide to the responsibilities for freeholders, leaseholders and insurers.