Author: Madeleine Goward
Block insurance policies are a very common way of insuring multiple properties. Landlords can benefit from economies of scale and may find the administration easier with only one renewal date and uniform terms. However, earlier this year the Upper Tribunal held that one landlord could not recover its block policy premia, despite being permitted to do so under the terms of its lease, because the premia were not “reasonably incurred”.
Cos Services Limited v Irene M Nicholson, Wendy E Willans  UKUT 382 (LC)
The tenants held a long lease of 999 years in a purpose-built block of 16 flats. Under the terms of their lease they were each obliged to pay one-sixteenth of the premia incurred by the landlord. The landlord had put in place a block insurance policy covering the whole of its property portfolio, described as “enormous” and being spread over a range of locations. The insurance premia for the last three years for the building, which were claimed from the tenants through the landlord’s managing agent, were around £12,000.
The tenants produced insurance quotes with significantly lower premia.The landlord argued the increased premia were justified by the advantages that it secured in taking out a block policy. It argued that it wanted a “comprehensive all-cover policy because [it] did not want to have to deal with discrepancies and it was crucial that everything was covered”.
Under section 19(1)(a) of the Landlord and Tenant Act 1985, any service charge costs, including insurance premia, charged to residential tenants are only recoverable from the tenant if they have been “reasonably incurred”.
The Upper Tribunal established that section 19(1)(a) was introduced to protect the leaseholder against charges that were contractually recoverable and, therefore, courts must consider both the rationality of the landlord’s decision-making and the reasonableness of the amount charged. Therefore, although a landlord may have acted rationally in obtaining a certain policy and in accordance with the terms of the lease, it may not be able to recover its insurance premia from its tenants where the resulting premium is too high.
It is not necessary for the landlord to show that the premium is the lowest that could be obtained in the market, but courts will expect a landlord to have made an assessment of the current market.
The Upper Tribunal found that the benefits to the landlord of the block insurance policy were so insubstantial that they did not justify the premia. The landlord was unable to explain the mystery as to why there was such a discrepancy between the premia incurred and the premia obtainable from other insurers in the open market.
Accordingly, the Upper Tribunal upheld the First Tier Tribunal’s decision that the premia were not “reasonably incurred” and that the amount payable for the building, for the last three years, was significantly less than claimed and should be around £3,000.
It remains open to landlords and block managers to negotiate block policies covering all, or part, of their property portfolios and, clearly, there may be benefits in doing so. However, when arranging insurance landlords and block managers should examine the resulting premium to ensure that it accurately reflects market conditions; they must justify the amount being charged. A routine of automatic annual renewal could be disputed by tenants. We would strongly recommend that you obtain comparable quotes when you obtain new policies and on renewal, and consider whether it would be reasonable to charge your tenants these amounts.
Madeleine Holding, Associate, Fladgate LLP (firstname.lastname@example.org)