Rain check

Yet again, this spring sees many parts of the country dealing with the aftermath of winter flooding: last December was the wettest in a century. According to the government, about 16,000 houses in England were flooded. Many of those affected have been unable to claim against their insurance policy. But help may now be at hand, with the expected launch next month of the government’s Flood Re scheme, a reinsurance company that will act as an insurer of last resort for insurance companies that want to spread the risk of continuing to offer insurance to people in flood-risk areas.

It is planned that Flood Re will be in place for 25 years. At the end of this time, there will be a free market for flood risk insurance. Homeowners benefitting from Flood Re therefore need to become more aware of their flood risk and, where possible, take action to reduce this risk

Background

Flood Re replaces the ‘Statement of Principles’, which came to an end in 2013. The Statement of Principles allowed owners of flood-hit properties built before 1 January 2009 to automatically renew their flood insurance. In 2013, the government and the insurance industry agreed, after lengthy negotiations, on Flood Re, a new long-term solution to replace the Statement of Principles.

The Water Act 2014 formally set out the powers to establish Flood Re. The Flood Reinsurance (Scheme Funding and Administration) Regulations 2015 and the Flood Reinsurance (Scheme and Scheme Administrator Designation) Regulations 2015 were made on 10 November 2015 and came into force on 11 November 2015. These regulations establish Flood Re, and are supplemented by the Scheme Document. Under the regulations, Flood Re Limited has been designated as the Flood Reinsurance Scheme administrator.

Approval from the Prudential Regulation Authority is still required before Flood Re can come into operation, but the government has indicated that it expects the scheme to be operating by April 2016, provided the necessary approval is in place.

What is Flood Re and how will it work?

Flood Re is a not-for-profit flood reinsurance fund, owned and managed by the insurance industry, which will allow insurance companies to pass the flood part of home insurance policies to Flood Re. Insurance companies will sell home insurance in the normal way, and Flood Re will then take the flood risk element of that insurance, in return for a premium based on the property’s council tax band. Flood Re will also charge the insurance company an excess of £250 on the flood part of the policy. It is estimated that, over time, approximately 350,000 properties could benefit from Flood Re. If a property is flooded, the homeowner will claim against their insurance company in the usual way, and Flood Re will reimburse the insurance company the cost of the claim.

The insurance industry is paying the set-up costs to get Flood Re up and running. Flood Re itself will have two sources of income. The first is the flood element of the policies which are passed into it. The premiums charged to insurers will be capped based on council tax bands, starting at £210 per policy per annum in bands A and B, rising to £1,200 for a band H home (I in Wales). The second source is an additional levy on the insurance industry, which will be paid by all insurers authorised to write home insurance in the UK, and is set at £180m per year for the first five years. This levy will be based on an insurer’s market share.

It is planned that Flood Re will be in place for 25 years. At the end of this time, there will be a free market for flood risk insurance. Homeowners benefitting from Flood Re therefore need to become more aware of their flood risk and, where possible, take action to reduce this risk.

Eligibility for Flood Re

A property will be eligible to be covered by Flood Re if it:

• has a domestic council tax band A to H (or equivalent in Wales);
• is used for residential purposes;
• was built before 1 January 2009; and
• is located in England, Wales, Scotland or Northern Ireland (excluding the Isle of Man and the Channel Islands).

In addition, the insurance contract must be held in the name of, or on trust for, one or more individuals or by the personal representative of an individual; the property must have an individual premium; and the policy-holder, or their immediate family, must live in the dwelling for some or all of the time (whether or not with others) or the dwelling must be unoccupied.

For clarification and avoidance of doubt, Flood Re has stated that all of the following risk categories will be interpreted as being eligible, as long as they also meet the above criteria:

• bed and breakfast premises paying council tax and insured under a home insurance contract;
• farmhouse dwellings and cottages – where they are included in a
• commercial line policy, and the insurer can split out the dwelling
• element (which meets the eligibility criteria above), that part of the
• risk can be ceded to Flood Re;
• holiday / second homes;
• home-workers;
• individual leaseholders protecting their own property / flat;
• leasehold blocks, if they contain three units or fewer, and the
• freeholder lives in one of the units to be insured;
• residential buy-to-let static caravans / homes if in personal ownership; and
• tenant’s / individual’s contents (even if living in large blocks / flats, where the buildings risk would not be eligible).

Flood Re has also clarified that the following domestic properties will not be eligible for the Flood Re scheme:

• bed and breakfast premises paying business rates;
• blocks of residential flats;
• company houses / flats;
• contingent buildings policies (eg those held by banks);
• farm outbuildings;
• freeholders / leaseholders deriving commercial income insuring blocks / large numbers of properties in a portfolio;
• housing association’s residential properties;
• multi-use properties under commercial or private ownership;
• residential buy-to-let (which do not meet the eligibility criteria above);
• social housing properties (eligible for contents cover, but not for
• buildings cover); and
• static caravan site owners (for commercial gain).

What advice should you give to clients?

It is important that property buyers are given advice on Flood Re. As outlined above, many properties are excluded from the scheme, and failure to advise clients could result in potential negligence claims. If a property does not fall within Flood Re, the buyer should be advised to check what flood insurance may be available before proceeding. The Law Society’s flood risk practice note sets out good practice and is available free of charge on the Law Society’s website.

Questions about flooding should be raised as part of the buyer’s preliminary enquiries. For residential properties, the Law Society property information form (TA6) includes questions intended to elicit information about flooding and whether a flood risk report has been prepared for the property. If the property is commercial, then the Commercial Property Standard Enquiries also include questions on flooding.

There are also a number of ways of carrying out a flood search. These range from the free Environment Agency postcode-based flood maps to desktop environmental searches provided by commercial search companies. Details of the different searches available are set out on the Law Society’s flood risk practice note.

Mortgage-related requirements should also be borne in mind. The CML Lenders’ Handbook no longer sets out the risks which must be insured against, although the BSA Mortgage Instructions still provide that flood is a risk that a solicitor may need to confirm is covered.