Edwin Coe Property Blog – Flood Insurance

The Department for Environment, Food and Rural Affairs has recently issued a briefing note (Department for Environment, Food and Rural Affairs  Water Bill: Part 4 – Flood Insurance Scope of Flood Re March 2014)  that provides a very useful summary of available information regarding flood risk and some very useful further information about the government’s approach to flood insurance as well as a summary of the present position with regard to discussions between the Government and the Association of British Insurers regarding the industry’s future commitment to provide and make available flood insurance.

1. Existing main sources of information available relating to flood risk.

It is a well-established principle of the conveyancing process that the onus is on the buyer of a property to satisfy itself as to the suitability of that property.  In assessing potential flood risk several sources of information are available to a purchaser:

• Pre-purchase valuations and surveys by appropriately qualified valuers.
• Environment Agency’s flood risk mapping service.
• Specific Flood Risk Survey by a suitably experienced individual.
• Commercially available searches an enquiries by private sector suppliers of information taken from publicly available records such as the Environment Agency, Land Registry, Local Authorities, the British Geological Survey and combined with the search suppliers own data-sets.

2. Where a property is at risk of flooding what insurance cover is available against flood risk?

The “Statement of Principles”

Under the previous “Statement of Principles”; the understanding that existed between the Government and the Association of British Insurers (“ABI”) (which was agreed in 2008 but which expired on 30^th June 2013) it had been the case that ABI members had undertaken to:

• Continue to make flood insurance for domestic properties and small businesses available as a feature of standard household and small business policies if the flood risk is not significant (e.g. no worse than a 1 in 75 year probability of flooding).
• Continue to offer flood cover to existing domestic property and small business (including new owners of such premises) customers at significant flood risk provided the Environment Agency has announced plans and notified the ABI of its intention to reduce the risk for those customers below significant within five years-ie by June 2013.
• Charge premiums and impose policy terms that were reflective of  the level of risk presented.
• BUT NOT IN RESPECT of any new property built after 1 January 2009.

In June 2013  in the absence of agreement on any replacement arrangement,  the government and the ABI agreed as an interim measure, to extend the operation of the old Statement of Principles until a new scheme – to be known as  “Flood Re”  – could be brought into effect.

The proposed “Flood Re” Scheme

The latest briefing note ( issued 14^th March 2014 by The Department for Environment, Food and Rural Affairs) sets out details of the current thinking regarding the reduced scope of the “Flood Re” scheme as presently being discussed between the Government and the ABI and sets out the detailed criteria to be used to determine if a property is eligible for Flood Re.

In summary the following is proposed:

• Flood Re will be funded by a levy on the insurance industry of approximately £10.50 per policy.
• Council Tax Band H properties (and equivalents in the Devolved Administrations) are excluded from the Flood re proposals and outside of the scope Flood Re – owners of properties within Band H will be required to source affordable insurance cover against flood risk in an open market to protect themselves and satisfy their lenders.
• To be eligible for inclusion within the Flood Re scheme the property must have been added to the Council Tax valuation list (via a Notice of Completion) before 1 January 2009. Any newly built property or existing property that has been converted to residential use after 1^st January 2009 would not be eligible for Flood Re.
• Flood Re is not designed to cover any commercial insurance.  Buildings insurance policies which are generally classified as “commercial”  by the insurance industry are out of the scope of and are not covered by the Flood Re scheme.
• Small businesses, in general, will be out of scope for Flood Re. However, certain categories of micro-businesses where they operate from domestic premises and hold a policy (provided this is classified as “domestic” by the insurance industry) will be eligible.
• Leasehold houses will be within the scope of Flood Re, provided that the owner (or its immediate family) lives in the property and purchases the buildings insurance in their own name.
• Buildings with three flats or fewer, for example maisonettes or converted houses, will also be within the scope of Flood Re, provided that the freeholder lives in one of the units (or if the insurance is purchased by one of the leaseholders that has a share of freehold).
• Leaseholders in larger blocks of flats (where there are four or more flats) will be excluded from and are outside the scope of the Flood Re arrangement. Leaseholders in such blocks will be required to source affordable insurance cover against flood risk in the open market to protect themselves and satisfy their lenders    

The ABI does not believe that small businesses or those leasehold properties excluded from Flood Re will have problems accessing affordable flood insurance and the Government and the ABI have committed to monitoring the market for small businesses and the residential leasehold sector – BUT NO commitment or agreement appears to have been reached as to what will happen in the event of significant systemic market failure emerging.

3. Summary

Although it would seem that the government and the ABI are moving closer to an agreement regarding the provision of future insurance against the risk of flooding it would seem that there is still much to be discussed and agreed. The proposals issued to date, seem to meet many of the requirements of the insurance industry to minimise and mitigate the potential cost for insurers of providing flood risk cover. However, the unintended impact that these proposals may have (if implemented in their present form) on the valuation and future saleability and mortgageability of residential and leasehold land and buildings, has yet to be assessed.

Please contact Robert McNally if you have any questions in relation to this blog.

For information regarding Edwin Coe and the Property and Construction group please visit http://www.edwincoe.com/services/property.asp.

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