The Upper Tribunal gave guidance as to how an assessment of reasonableness of insurance premiums under s.19 of the Landlord and Tenant Act 1985 ought to be approached.
The landlord was obliged under the terms of the various leases to keep the building in which the flats were situated insured in an insurance office of repute. The tenants were obliged to contribute to the insurance premiums via the service charge.
The landlord incurred the following costs in respect of insurance premiums:
2014/15 - £12,598.20
2015/16 - £12,670.02
2016/17 - £13,561.94
However, the tenants had obtained other quotations indicating that similar cover was available on the open market for 75% less than the sums paid by the landlord.
The issue in this case was the approach to be taken in assessing the reasonableness of insurance premiums under s.19 of the 1985 Act.
The Tribunal identified a tension in the authorities – in Forcelux Ltd v Sweetman  2 EGLR 173 it was held that the Tribunal ought to assess firstly whether the sums claimed were lawfully and appropriately recoverable, and then secondly whether in any event the sums claimed were reasonable. However, in Avon Estates (London) Ltd v Sinclair Garden Investments (Kensington) Ltd  UKUT 0265 (LC) it was suggested that the landlord had to prove either that the rate charged was the market rate, or that the contract was negotiated at arm’s length and in the market place.
On the test set down in Avon Estates, a landlord need only prove that it had conducted a proper process in arranging insurance. If it did so, an unreasonably high insurance premium would nevertheless be held to be reasonably incurred. However, the test in Forcelux suggested that in any event there ought to be an assessment of reasonableness.
The Upper Tribunal sought to resolve this tension.
The matter took place by way of a rehearing before the Upper Tribunal.
Decision on appeal
In attempting to reconcile the authorities, the Upper Tribunal considered the recent case of Waaler v Hounslow LBC  EWCA Civ 45.
Although not a case which dealt with insurance premiums, the Court of Appeal in Waaler examined the meaning of reasonableness generally in the context of s.19 of the 1985 Act. It was held in that case that firstly, the landlord’s decision making process under the lease must be rational, made in good faith and consistent with the contractual purpose. However, a landlord must do more than act rationally when making decisions, otherwise s.19 would serve no useful purpose. When assessing whether costs have been reasonably incurred, it was held that the Tribunal must bear in mind that the cost of the work is ultimately to be borne by the lessees.
In commenting on the decision in Forcelux, the Court of Appeal in Waaler approved of an approach which tested the outcome of the landlord’s decision making process by reference to the market rates for similar insurance cover – the question of reasonableness is not simply a question of process, it is also a question of outcome.
Accordingly, the Upper Tribunal held that the question of reasonableness was a two-stage test. First, the decision to incur cost must be a rational one, but secondly the sum charged must be, in all the circumstances, a reasonable charge.
Of course, the landlord need not choose the cheapest cover, however the Tribunal in assessing reasonableness will assess:
- The terms of the lease and the liabilities to be insured;
- The landlord’s explanation of the process of selecting the policy and the steps taken to assess the current market;
- Whether any comparable cheaper policy is genuinely comparable by reference to its terms;
On the facts of this case (and particularly given the disparity between the quotes obtained by the landlord and the tenant, which went unexplained by the landlord), the premiums charged were not reasonable.
The old adage that “the landlord does not need to shop around for insurance” may no longer be correct. Indeed, it now seems that a landlord facing a challenge to insurance premiums will have to adduce positive evidence as to the steps taken to test the market. Further, whilst it is still open to a landlord with a large property portfolio to negotiate a block policy, that landlord must satisfy the Tribunal that doing so has not resulted in a substantially higher premium payable by the tenants without any commensurate compensating advantages.
It will be seen that the requirement to adduce positive evidence may mean that landlords will be well advised to call their insurance brokers as witnesses to the appropriateness and competitiveness of the policy relied upon.