Leaseholder building insurance

The Council must provide buildings insurance for residential leasehold properties on behalf of Right To Buy (RTB) and residential leaseholders, including shared owners.

The buildings insurance contract was entered into on 31 March 2023 with a new provider, Protector. This was following a difficult procurement process where the existing insurer declined to bid. The new contract resulted in an undesirable increase in the premium payable by leaseholders and shared owners.

The procurement process

In order to secure a new insurance provider the Council conducted a legally compliant procurement process under an ‘Open Tender’ procedure.

This means the contract was open to as many insurance providers as possible – with any supplier able to offer cover having the opportunity to enter a bid.

However, Local Authority Leasehold is a very specific market with limited suppliers and unfortunately price comparison websites which you may use at home for private insurance isn’t available in this case.

In the end - two bids were received, one was non-compliant and that bidder was then unable to honour the quotation. Another two suppliers have exited the market recently reducing an already limited market further.

The existing insurer declined to bid. Therefore there are no other suitable suppliers in the market currently willing to bid.

Insurance market issues

The current insurance market is extremely tough.

Inflation along with increased rebuilding costs and supply chain pressures for building repairs are pushing up premiums across the board.

The impact of increased severe weather such as storms, floods and fires has also had an effect on the insurance market, nationally, due to higher claims costs.

This has led to many insurers leaving the market causing an even smaller pool of providers to choose from.

In turn this has driven up the price of premiums and has even meant some councils have not been able to secure any insurance providers at all.

The result is fewer providers prepared to quote and those that are prepared to quote are unfortunately at significantly increased premiums. This is sadly beyond the Council’s control.

Claims numbers and costs have also increased significantly for this property risk during the last contract period.

Claims costs have exceeded premiums in three consecutive years, at the same time the average cost of a claim has risen from approximately £1,700 to £8,500.

The quote received has reflected this as well as the other factors mentioned above.

Market conditions have worsened during the procurement process and there is no sign of any new suppliers offering local authority leasehold cover.

Insurers take into account the claims record for a period of five or more years when setting a premium and the contract period of five years gives an opportunity for the claims record to settle.

We obviously have no guarantees on pricing or what the future holds in terms of claims costs, inflation and insurance market pressures, but the five-year contract will hopefully provide some stability of cover and price for leaseholders during this uncertain period in the market space and reduce the risk of being unable to place cover.

Can leaseholders arrange their own insurance?

The Council is obliged to arrange buildings insurance in accordance with the terms of the individual lease. Leaseholders are therefore unable to obtain buildings cover independently.

An insurer would decline to arrange cover for a leasehold property separately, as the leaseholder does not have responsibility to do so.

The Council’s (as freeholder) obligation is to ensure there is consistent insurance cover for the benefit of both the leaseholder and freeholder.

The leaseholders’ insurance policy is for buildings insurance cover which will include common parts and areas where the leaseholder is responsible. This includes area such as roofs, walls and main entrance doors.

For example, if a building roof was damaged by a storm, the portion of communal repair costs for the leaseholder would be covered under this insurance policy.

This would unlikely be the case under a general independent homeowner policy.

In the event of an incident affecting the building such as a fire or storm damage, there could also be multiple insurers involved. Inconsistencies in cover could mean an increased risk of non or underinsurance.

An issue with insurance on one unit could impact the repairs or reinstatement of a whole block.

The only circumstance for leaseholders to provide their own insurance would be if a majority of the properties are owned by leaseholders, they buy the freehold interest, and they decide to set up a commonhold company to manage the freehold interests in the block.

Further details are available on the Leasehold Advisory Service website..

Support

The Council appreciates that this increase for insurance cover is unwelcome for residents, especially in the face of a general increase in the cost of living.

However, the Council as freeholder is obliged under the lease agreements to arrange buildings insurance and recharge to leaseholders via the service charge.

If you are concerned about the cost of living, please take a look at our financial advice and support page to see what support you may be able to get.