The Reasonableness of Insurance Premiums

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Leases generally require leaseholders to contribute to insurance of their block – whether by including the cost in the general service charges or by way of a separate charge known as an “insurance rent”.

Residential leaseholders have statutory rights in relation to insurance, but the most important is the ability to challenge the costs in the First-tier Tribunal (Property Chamber) in England, or the Leasehold Valuation Tribunal in Wales. Insurance costs are limited in three ways:

  • The lease may expressly or impliedly say the insurance costs must be reasonable.
  • Insurance charges are usually required to be reasonable under section 19(1) of the Landlord and Tenant Act 1985.

The Royal Institution of Chartered Surveyors (RICS) Service Charge Residential Management Code and The Association of Retirement Housing Managers (ARHM) Code gives best practice for arranging insurance.  

Express/implied terms

An express stipulation that the landlord may make “reasonable” provision for insurance premiums is clear enough. But even if the lease does not say so, can a similar limitation be an implied? The answer to this is “yes”. The very recent case of Hounslow v Waaler [2017] EWCA Civ 45 has confirmed.

Landlord and Tenant Act 1985 s.19(1)   

Section 19(1) requires two things. Under section 19(1)(a), an interim service charge must be “reasonable in amount”. Under section 19(1)(b), a charge relating to expenditure already undertaken requires the relevant insurance costs to have been “reasonably incurred”.

The RICS Code

The Code requires managers to regularly review levels of insurance and landlords should therefore consider the level of cover where necessary. Furthermore, the Code provides the landlord to have regard to the insurance company’s record of handling claims in addition to the level of premium charged.

The ARHM Code

This Code is for retirement housing managers and in the same it is asked that the insurance policy should be transparent and be prepared to demonstrate value for money to the landlord, or leaseholders.

What is reasonable?

Hounslow v Waaler mainly dealt with the test for reasonableness in s.19(1), and most importantly, it reaffirmed a two stage test derived from the earlier case of Forcelux v Sweetman [2001] 2 EGLR 173. The two stage test was:

  • Whether the landlord’s actions were appropriate, and properly effected in accordance with the requirements of the lease, the RICS Code and the 1985 Act. In particular, did the landlord ‘test the market’ for alternative insurance premiums?
  • Whether the amount charged was reasonable in the light of that evidence. In effect, is the premium grossly out of line with the market norm?

However, a landlord need not shop around to find the very cheapest insurance. So long as the insurance is obtained in the market and at arm’s length, the premium will generally be a reasonable one: Avon Estates (London) Ltd v Sinclair Gardens Investments (Kensington) Ltd [2013] UKUT 0264 (LC).

This article was written by Mark Loveday and Ibraheem Dulmeer a Legal Advisor at The Leasehold Advisory Service and first appeared in News on the Block.