Does freeholders co-insurance breach lease?

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    Does freeholders co-insurance breach lease?

    Hello,

    I have a flat in an apartment block which I rent out. The freeholder has renewed buildings insurance which now includes a co-insurance clause in relation to fire claims of 10% claim value or £100,000, whichever is greater. Essentially this means that an insurance payout would not cover the first £100,000 of loss and only pay a maximum of 90% of the total claim.

    The lease obliges the freeholder to "insure and keep insured... the Block against loss or damage by fire....covered by a comprehensive flat owners policy in the aggregate amount of (i) the full replacement value of the Block and (ii) the amount of two years' rent". The replacement value of the property according to the policy is around £30m.

    I asked the freeholder where any shortfall between loss and insurance payout would come from, and they said the service charge. There are around 90 apartments, so a claim for fire damage to the block of £100,000 would have no benefit from insurance, leading to a bill to each lease holder of £1,100 or so. A total loss of the block would lead to service charge demands of around £33k.

    Two questions. (1) Has the freeholder met their obligations to insure the property to the full replacement value, even though the maximum payout is 90% of replacement value? (2) Is it reasonable for the freeholder to effectively shift the risk of the first £100k or 10% of claim value to the leaseholders, when it is the freeholder's obligation to insure?

    Thanks for your thoughts!

    David

    #2
    "Full replacement value of the Block" has to be taken at face value, though a reasonable excess is probably acceptable. 10% is not reasonable. If the landlord covenants to insure and there is a shortfall the landlord has to make up the difference. He cannot charge any excess to the tenants unless the lease specifically allows it.

    Comment


      #3
      Thank you very much for your response.

      The landlord's position is that the block is fully insured, because the 10% co-insurance claim only relates to fire risk. I've asked them to explain that one further, but they have decided not to.

      The lease is silent on the issue of insurance excess and co-insurance. Those two things are different, albeit two similar mechanisms for the insurance company to leave some liability with the insured.

      If the landlord cannot recover excess / co-insured amount from leaseholders, a large loss would almost certainly bankrupt it. That would leave leaseholders in a very precarious position of having potentially lost their properties with no route to re-building. Further, the insured replacement value of the block is less than half the market value of all of the apartments.

      So the question is, what to do about it? I thought about seeking "personal" insurance to insure against the risk of loss that the co-insurance deliverers to me as an individual. The cost of this could then arguably be deducted from the service charge payments. But I doubt such a thing can be insured. Taking the landlord to court to enforce specific performance risks substantial adverse costs. Of course, the landlord would easily fund their defence out of the service charge!

      Thanks for your help.
      David

      Comment


        #4
        This is very odd and worrying. Not sure what they mean by co-insurance but I can see no benefit to the freeholder unless he owns several flats and wants to keep the premium down.
        Can you not go for RTM on the block ?

        Comment


          #5
          The landlord's position is that the block is fully insured, because the 10% co-insurance claim only relates to fire risk.
          A very dubious argument. Try pointing out that the lease does not allow the landlord to claim any excess and that he will be liable for any shortfall.

          I thought about seeking "personal" insurance to insure against the risk of loss that the co-insurance deliverers to me as an individual.
          You can get back up insurance. Important to get that and not double insure.

          The cost of this could then arguably be deducted from the service charge payments.
          Possibly.

          Comment


            #6

            Thanks Lawcruncher - I'll look into backup insurance.

            Originally posted by Section20z View Post
            This is very odd and worrying. Not sure what they mean by co-insurance but I can see no benefit to the freeholder unless he owns several flats and wants to keep the premium down.
            Can you not go for RTM on the block ?
            Co-insurance is similar to an excess in that some of the risk is left with the insured. In this case, the first £100,000 or 10% of claim value will not be paid by the insurance company.

            The freeholder claims that it was the only insurance offer on the entire market. They showed a document where they went to multiple insurers (via the retained broker). Taking out the ones that simply don't insure large apartment blocks left several that (so we were told) will not insure properties where any amount of combustible material is present in the external walls, even where this complies with guidance and regulation (as is the case at this block). This left one single insurer and those where their terms. Or at least, that is what was presented to us.

            David

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