Since the tragedy of the Grenfell fire, in 2017, the shockwaves are still reverberating. The building fire safety and related cladding scandal still makes headline news. While stricken leaseholders continue to lobby the Government, the bills for ‘waking watch’, EWS1 reports, fire safety reports and interim safety measures come rolling in. Added to that from December 2020 the buildings insurance premium hikes followed thick and fast. Cladding affected building premiums increased upwards to 1,000 plus percent. The victims of the cladding scandal are paying for this building safety crisis and systemic failure they did not cause.
It is ironic and feels unfair that due to the contractual arrangements you, the leaseholder, paying the bill are likely to be pushed very low down in the chain of command. You may have a Managing Agent, numerous freeholders, which may possibly even be owned by a holding company, you will also have a placing insurance broker, who may engage further intermediaries in the insurance process.
If your building operates with a Right to Manage Board, then you have greater control.
We have produced a document that aims to give some helpful guidance to leaseholders who will be concerned about the next buildings insurance renewal.
Regardless of the complexity, here are some things you should understand and questions you should ask whoever is responsible for placing the buildings insurance. Or, talk to us on 01926674875.
- What intermediaries or other third parties have been involved in the placement and distribution chain
- What fee or commission or contingency commission have each of those parties earned
- What bulk placement or remuneration incentives are in place in relation to this placement
- Has the policy been placed on a portfolio with other blocks of flats or on a standalone basis
- Hold your Managing agent or Broker to Account for the next renewal
- Is the sum insured correct
- What is the basis of the sum insured
What intermediaries or other third parties have been involved in the placement and distribution chain
This is an important question because it will help you to understand how much of your money is being paid to the insurer to cover the actual insurance and how much on top of this is being paid to other companies.
Do the others involved add sufficient value to justify their share of your money?
Do they deserve a share of income?
Who will be receiving payment for being in the “chain” of intermediaries that sit between the insurance company and you?
This could be the: Managing Agent, the right to manage board, the freeholder company, the holding company of the freeholder company, a general placing broker and some additional intermediary broker who have access to particular products.
There could be as many as 5 plus intermediaries all receiving a cut of your service charge bill. Some of these intermediaries add value and others will simply be taking a slice because they feel they can.
Make sure you know and push for value for money.
What fee or commission or contingency commission have each of those parties earned
Intermediaries can be charging a fee, or a commission, or both.
They may also be gaining from aggregated deals, of which your insurance contributes towards their additional earnings.
It is good to be able to understand these elements and if they apply to your arrangements.
All professionals deserve to earn a living and have a strong business in return for the services and value they provide. Look at the total remuneration they earn and consider if it is a fair and reasonable price for a good job done well.
Then find out if this is split between commission and or a fee.
Commission versus fee, which is better? Why does it matter?
Aside from some legal and financial responsibilities around the law of Agency and in which capacity and when the Broker is acting either as agent for the insured, or agent of the insurer, there is another reason why you should be interested.
If the basis of remuneration is purely on a fee, then the overall total charge should be lower than if the equivalent amount of income the Broker earns is by commission.
This is because no VAT applies to insurance fees.
Additionally no Insurance Premium Tax (IPT) is charged on a fee but it does apply to commission.
If you are paying a commission, you will be paying an additional 12.5% IPT on top but if you were paying the same amount as a fee, then no VAT or IPT applies.
Remember to ask the question and try to negotiate for a better outcome for you.
What bulk placement or remuneration incentives are in place in relation to this placement
This relates to the other arrangements a Broker might have in place, it could mean that due to increased earnings, they favour these facilities for your solution, when it may be possible that other better options could be available.
Ask the question.
Has the policy been placed on a portfolio with other blocks of flats or on a standalone basis
Similar to above.
Bulk placements can be favourable as economies of scale in terms of leveraging better coverage and pricing is possible.
However, a poor risk could be being subsidised by a better risk which means that if your building is a good, well managed risk your premium could ultimately be contributing towards another inferior block of flats not connected in any way to yours.
Hold your Managing Agent or Broker to Account for the next renewal
Get ready at least 6 to 4 months before the renewal date.
If your Broker is not already working on renewals months ahead, especially when the clad buildings insurance hikes are well known, then you should ask them to start six months ahead.
How hard is your broker working for you? Ask them about their approach to the forthcoming renewal, including-
What investigative/ mitigation reports were done pre renewal
Irrespective of the confusing message from Mr Jenrick in June 2021 regarding the requirement for some buildings to no longer need an EWS1 assessment, most flats above 6 metres will already have had an EWS1 and a Fire Safety Report.
Insurers are likely to want sight of these.
Try to establish the positives, are there factors that have been identified, or measures that have been subsequently implemented which will reduce the possibility of a fire and the extent to which it could spread and cause damage.
Try to demonstrate any positive remedial actions that have happened since last renewal to the Broker and they in turn will convey this to the underwriter.
When will they approach the insurance market for renewal terms
How will they approach the market?
Will it be to email a risk presentation (this scattergun approach is usually less effective) or will they discuss your development specifically with underwriters before sending the full risk details.
Will they approach a small panel, one insurer or the whole market. There are advantages and disadvantages in these approaches ask your Broker to explain their rationale.
What Sum Insured to opt for?
Your broker should discuss this with you, if not, ask them the question.
Is the sum insured correct
Fundamentally is the rebuild cost correct?
Where does the basic sum insured come from?
The intrinsic reinstatement cost is critical. How is that arrived at?
Traditionally property owners overstate these levels, their priority is asset protection, they are not paying the premium so they are less concerned about it being overstated.
Has there been a professional valuation done? Such a survey may demonstrate a much lower valuation and reduced insurance risk?
What is the basis of sum insured
There are a number of ways you can decide what “sum insured” to opt for:
- Declared value with day one inflation uplift = sum insured.
However what is the percentage uplift and is this included free of charge.
On what basis was the uplift percentage determined. For example, where there is volatility in the building supply chain, such as we are currently experiencing: lack of delivery drivers, global shortage of raw materials, Brexit and cargo bottlenecks, then the percentage inflation will be higher
- First loss – this is where you estimate the maximum probable loss in the event of a fire. Be careful, you need proper advice before considering this approach. Talk to your Managing Agent, your Broker, or contact [email protected] to find out more.
Be careful not to fall in to the trap of underinsurance, otherwise, the insurer will pay less on your insurance claim if you get it wrong, this is because of the Average Condition.
Be careful, you need to seek advice to avoid underinsurance and the Average Condition. First loss is where you opt for partial insurance where you decide that it is unlikely that a total loss would occur. This might be because of fire breaks established by the Fire Safety Report, an EWS1 report, an insurance fire survey etc. A sprinkler system, a fire alarm, a direct line to the local fire brigade, etc. If this establishes that whilst the Declared Value to rebuild may be, for example £100,000 but because of all of the mitigating factors there may be only an estimated maximum loss (EML) of 50% of the total, i.e. £50,000 you may consider selecting a maximum sum insured of £50,000
This is not the same as underinsurance because the insurance underwriter will rate this based on the weighting of cost of loss and will weight the rating accordingly.
However, be very careful as this might leave you exposed if the loss exceeds the first loss limit. The EML could be inaccurate, the initial rebuild cost could be inaccurate.
Additionally because the insurer will have applied a rating to generate premium to cover the probable loss, they will already have factored in the EML. Therefore, it is not likely that by reducing the sum insured by 50% that you would reduce the premium by the same amount.
It is important to get proper advice before opting for this.
What is the difference between sum insured and declared value
You might hear the expression Declared Value and Sum Insured. The Declared Value is simply the cost to rebuild your property in full.
A “Day One” Clause provides protection against the effects of inflation during the period of insurance for a given percentage uplift figure. The percentage uplift will vary from insurer to insurer but will typically be between 10% and 50%. The insurers still require a rebuilding figure to be given to them, known as the “Declared Value” and in return they will confirm what the total Sum Insured equates to the Declared Value plus this Day One protection. For example a property with a rebuild figure of £500,000, which represents the declared value, will have a Sum Insured of £600,000 if the insurance policy contains a 20% Day One Uplift Clause.
Watch out for the Average Condition!
The Declared Value figure and the sum insured figure are often confused. If the Declared Value is incorrect then problems may still arise with under insurance as the Day One Uplift is only meant to protect against inflationary problems and not valuation inaccuracies. The Average Clause will still apply. When arranging buildings insurance quotations on a “Day One” basis the insurers will need to know the Declared Value and not the Sum Insured. At the time of a complete loss the insurers should pay the maximum of the Declared Value, plus the amount by which inflation has increased the Declared Value stated at the start of the policy period the added allowance protecting you from inflation, without you paying more premium.
If a policy of insurance covering a building has a sum insured of £80,000 and at the time of a loss the real insurance value is £100,000 then the proportion of Average would be £80,000/£100,000 or 80%. You will only receive 80% of any loss you suffer.
Now consider that you suffer damage of £5,000 and there is a £250 policy excess. This means your claim would be reduced as follows:
- Claim £5,000 x 80% Average = £4,000
- Less policy excess: £250
- Insurer’s payout: £3,750
For more information please email [email protected] or call us on 01926674875