Challenging the cost of insurance

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It is frequently common for lessees to complain that the decision of a landlord to insure the freehold building with a particular insurer or under a particular policy is unreasonable because it is too expensive. Often the complaint is based on the lessee having found an alternative quote that does not include the same level of cover as is deemed necessary by the landlord. Sometimes, however, there are also cases where lessees find “like for like” quotes that are significantly cheaper than that obtained by the landlord. While it is well established that s.19, Landlord and Tenant Act 1985 does not require a landlord to obtain services at the cheapest cost, where there is evidence that the market will generally provide those services at a significantly lower price the First-tier Tribunal is more likely to find that the costs incurred by the landlord are not reasonable.  

The position appeared to be different for insurance. In Avon Estates (London) Ltd v Sinclair Gardens Investments (Kensington) Ltd [2013] UKUT 264 (LC) the Upper Tribunal held that the fact that the property might be properly insured at a cheaper cost does not mean that the landlord’s decision to insure the building at a greater cost is unreasonable. Provided the landlord can “prove either that the rate is representative of the market rate, or that the contract was negotiated at arm’s length and in the market-place” then the cost will be reasonable. This appeared to mean that so long as a landlord obtained insurance through a broker then it was irrelevant that the market could otherwise provide the same insurance at a cheaper rate. In short, it was almost impossible to challenge.

COS Services Ltd v Nicholson

That approach has, however, been recently doubted by a differently constituted Upper Tribunal in COS Services Ltd v Nicholson [2017] UKUT 382 (LC). In Nicholson, the Appellant was the freehold owners of a number of block of flats. The Respondents were the owners of flats within one of those blocks. Each year the Appellant’s managing agents took out insurance for each block under a wider block policy, through an insurance broker, and claimed the cost of doing so from the Respondent lessees as a service charge. The Respondents applied to the First-tier Tribunal to challenge the reasonableness of the premiums. At the hearing the Respondents adduced evidence of materially similar alternative insurance cover, albeit not under a block policy, at a quarter of the price that they were being charged. The Appellant did not call any evidence to explain why its premium was so much more expensive. The First-tier Tribunal held that the insurance premium was unreasonable and the Appellant appealed to the Upper Tribunal.

The Upper Tribunal dismissed the appeal. The fact that a landlord has instructed a broker to take out insurance of a building will not, of itself, mean that the premium charged is reasonable if there are “like for like” quotes from alternative providers that are significantly cheaper. In such cases, it will be necessary for the landlord to explain the process by which the particular policy and premium have been selected, with reference to the steps taken to assess the current market. While it is reasonable for a landlord to take out a block policy it is necessary for the landlord to satisfy the Tribunal that this has not resulted in a substantially higher premium without any significant compensating advantages to the tenants. It followed therefore that, in the absence of an explanation from the Appellant as to why the premium it obtained was four times more expensive than the quotes obtained by the lessees, the First-tier Tribunal had been entitled to find that the insurance premium charged was excessive.

Comment

In future it will therefore be necessary for landlords to do more than to adduce evidence that the premium was obtained by a broker and negotiated at arm’s length. The landlord must be able to adduce evidence which justifies the cost of the insurance and explains why it is necessarily more expensive than quotes obtained the tenant. The landlord’s managing agents, unless they are also experts in insurance cover, are unlikely to be able to give this evidence and therefore consideration will need to be given to calling the landlord’s broker or other expert in any tribunal proceedings. Of course, that will only be necessary if the lessees have themselves produced evidence that materially similar insurance premiums can be obtained at a cheaper cost.