Block insurance – a hole in your pocket?

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Many a portfolio Landlord directly or via their managing agents, insurance brokers or professional advisers will have block insurance policies in place.  Why not? There any many benefits – administratively, it may help with that rogue property in the portfolio which would be hard to insure alone, you would usually expect there to be a cost saving in the overall premium.  Great……

……….but beware of a risk if your block insurance includes residential properties let on long leases.  If your insurance premium is not ‘reasonably incurred’ the tenants may not have to pay despite what their Lease states.

By section 19(1) of the Landlord and Tenant Act 1985 residential tenants only have to pay charges ‘reasonably incurred’ by their Landlord.  We all are aware of this ongoing requirement, but take care not to simply assume that the block policy premium as renewed from year to year will be a capable of fending off an attack by a tenant that it is unreasonable.

In Cos Services Limited v Nicholson and Willans [2017] the Upper Tribunal were called to decide whether insurance premiums over 3 years satisfied the ‘reasonably incurred’ requirement.  The Landlord had put in place a block insurance policy for its whole portfolio. The burden of proof is on the Landlord to justify that the resultant premium was reasonably incurred.  The Tribunal found for the tenants that the insurance charges, whilst payable by the tenants on the strict wording of the Lease, did not satisfy the ‘reasonably incurred’ requirement of section 19 so the Landlord could not fully recover the premium from the tenants irrespective of the wording of the Lease.

In the particular case the evidence presented by the claimant tenant showed that over the 3 years the premium for an individual policy with comparable cover would be in the region of 20-25% of the premium the Landlord attributed to the property from their block policy.  The difference to the 16 tenants, who were required to contribute to this was therefore relatively substantial.

So, whilst block policies in themselves may well usually give economies of sales, Landlords and their representatives should be prepared with evidence obtaining comparative individual quotes to confirm that the block policy is acceptable in the market conditions. Failure to have that evidence may give rise to a deficiency in recovery and “a hole in your pocket”.

By Gemma Lawrence, Partner Commercial Property – Bennett Griffin LLP