Insurance for properties at risk of flooding has been uncertain since the end of the ‘Statement of Principles’ last year. The new ‘Flood Re’ arrangement seems to offer light at the end of the tunnel, but, asks Jo Morgan , will it be fit for purpose?
In the wake of the horrendous weather conditions which plagued last winter, it is clear that, unfortunately, more homes have been affected by flooding than ever before. Many people are having to check their insurance policies to establish whether they are covered, and perhaps making their first claims due to adverse weather.
31 July 2013 saw the end of the ‘Statement of Principles’ policy, which allowed flood-hit owners of properties built before 1 January 2009 to renew insurance automatically against repeat flooding. Despite significant talks, the insurance companies refused to renew the statement, because the government had cut funding for flood defences. ‘Flood Re’ has provided potential light in a gloomy situation, although not without controversy. This article outlines the new agreement, and addresses a number of questions for property practitioners. Even if a current home insurance policy provides cover, will the insurers offer protection in the future? How far are solicitors required to delve into the issues surrounding flood risk, and how should we deal with reporting and advising clients? Are there foreseeable problems which could be countered, and how can liabilities for future claims be tackled and mitigated?
Due to the exclusions of Flood Re, it is important that homeowners and businesses are given advice now, as property assets could be adversely affected, either immediately or in future years, by the forthcoming scheme.
What is Flood Re?
Flood Re is the new agreement between the insurance industry and the UK government, relating to flood insurance. It is due to come into force from July 2015. It will place a cap on the cost of flood insurance in high-risk areas. This cap will be funded through a proposed levy added to all home insurance premiums, of around £10.50 per annum.
The cap will relate to the flood insurance element of a householder’s policy, with the maximum cost dependent on the council tax band of a property. For example, it is estimated that if a property falls within bands A and B, the flood insurance premiums will be on a sliding scale, starting at £210 per year.
Flood Re will cover only residential freehold properties, not commercial or leasehold. There are a number of other exclusions, explored further below.
What happens until 2015?
Flood insurers have agreed to continue the Statement of Principles until Flood Re comes into force. This means that, until Flood Re is brought in, there is no cap on premiums; in the current environment, premiums could skyrocket.
How should I advise clients?
Due to the exclusions of Flood Re, it is important that homeowners and businesses are given advice now, as property assets could be adversely affected, either immediately or in future years, by the forthcoming scheme. The failure to give this advice could be costly to not only clients, but also to law firms faced with potential negligence claims.
A starting point for property lawyers would be to ensure that flood enquiries are raised with the seller in relation to past flooding and problems with obtaining flood insurance. For residential conveyancers, the Law Society TA6 Property Information form includes standard enquiries to this end. The Commercial Property Standard Enquiries form also incorporates flooding questions. If replies are provided in these forms that indicate problems or risk, then further questions should be raised.
What about searches?
There are a couple of places to look for a rough indication of a property’s flood risk. The Environment Agency provides a free of charge postcode-based flood map on its website. Although useful as a tool, the map provides a very crude indication only, is not property-specific (as it only covers general areas), and excludes certain types of flooding, such as groundwater. The Land Registry flood risk indicator is also helpful, but relies on the Environment Agency website flood map, so information is particularly limiting. To base advice to clients on these results could be misleading, due to the substantial limitations of the information.
As part of a prudent investigation of a residential property title, a desktop environmental search is therefore usually obtained. This gives limited information regarding flooding, but where flooding is a possible risk, the report will often suggest that a specialist flood report is obtained. The flood search industry is not regulated, and there are various reports available which are based on differing information and have varying degrees of ease of interpretation. Property-specific reports give the most accurate guide to the likelihood of problems. Your usual search provider should be able to provide information regarding the different types of reports available, including desktop specialist flood reports, surveys and specialist flood investigations.
As a personal choice, I favour the Homecheck Profession flood report as an initial flood-specific search which is relatively inexpensive, at less than £30. It covers river, coastal, surface and groundwater flooding, and gives an insurability rating, along with practical recommendations for clients and advisers. Information is set out in a clear visual manner, and as with all good reports, the language is straightforward and concise, helpful to both practitioners and client.
Due to an outcry from a number of stakeholder groups, there is currently a review being conducted on government policy over the property exclusions from Flood Re
Practitioners may wish to let clients know about the availability of these on all their conveyancing cases. Alternatively, you may decide to highlight the availability of these reports only where there is either flood risk highlighted in initial enquiries and reports, or where perhaps no information regarding flood risk is available at all; this will also serve to satisfy flood-related due diligence enquiries. Referral of reports to surveyors or specialists for interpretation is also important, and discussion with surveyors and clients on flood risk should also be encouraged.
Are there any mortgage-related requirements?
Ultimately, when acting for lenders, the overriding requirements are contained within the Council of Mortgage Lenders’ Lenders Handbook. Buildings insurance is a condition of any mortgage offer covered by the handbook and under part 1, section 6.14.2, flood is a risk that is to be covered. Referral to the lender should therefore be made where buildings insurance cannot be obtained for flood risk, or where there are difficulties in obtaining cover.
In order to ensure this is correctly reported, clients should be advised to seek buildings insurance quotations at an early opportunity. In all cases, whether with or without a lender, clients should obtain and produce a buildings insurance proposal, which should be checked for the terms within it, to ensure all risks are covered.
Lenders may also include additional requirements relating to flooding in the mortgage valuation, in the requirements set out in part 2 of the Lenders Handbook (which is specific to each lender), or within the mortgage conditions. Practitioners have also reported a recent increase in cases where stipulations on buildings insurance excesses are included.
Are any properties excluded?
Yes, many. Exclusions from Flood Re include:
- properties within council tax band H;
- leasehold properties;
- private rented properties;
- holiday homes;
- housing associations;
- new homes built after 2009.
It is not yet clear how practitioners should handle properties currently excluded from Flood Re. Of most concern are those properties which have flooding history and are covered by the exclusions. For these properties, flood insurance could be completely unaffordable, or just simply unavailable in the future. This has a knock-on effect on valuation and saleability, as where a property is uninsurable for flood risk, it is effectively unmortgageable.
Due to an outcry from a number of stakeholder groups, there is currently a review being conducted on government policy over the property exclusions from Flood Re. It is important to ensure that you keep up with the policy changes, so that you are not caught out when deciding whether to report to a client or lender. While the review takes place, the position remains uncertain for those clients with properties excluded from the new scheme. Depending on the case, it would therefore be wise to consider reporting the forthcoming policy changes to both the client and, where appropriate, the lender.
If you want to know more…
…about best practice around flood risk, see the Law Society’s flood risk practice note of 23 May 2013, available free of charge from our website.