Practical steps leaseholders and Directors of Resident Management Companies (RMCs) can take to reduce their residential buildings insurance.
Residential Buildings Insurance Is The Big One
Leaseholders will know from experience the biggest cost in a typical block’s service charge budget is the building’s insurance. Given it’s the biggest cost it’s also the most sensible place to start when trying to reduce service charge bills. Luckily insurance is also the most common area for leaseholders to make significant savings.
In most cases the lease will require the freeholder (landlord) to insure the building. The freeholder will then recover the insurance cost from the leaseholders. Often the lease entitles the freeholder to purchase the buildings insurance from whoever he/she chooses and at whatever risk cover they decide. Which makes sense – after all they are the building’s ultimate owner. But often leaseholders feel the rate of insurance is needlessly expensive.
The Reasonableness Test
Leaseholders who feel the residential buildings insurance charge is excessive can instruct the freeholder or their managing agent to explain how the insurance is arrived at and what is covered. Leaseholders can ask the freeholder, or his managing agent, to demonstrate that the insurance costs are ‘reasonable’.
This legal right is detailed in the Landlord and Tenant Act 1985 and is clearly aimed at ensuring the leaseholder doesn’t pay above market rates. A freeholder is duty bound to provide not just a summary of the insurance policy but also the detail of the risks covered and all the associated schedules.
Get Your Insurance Docs
Leaseholders are advised to write to their freeholder requesting the key documents. Once received it makes sense to shop around. Contact several different insurance companies – at least three. They will be only too pleased to produce a competitive quote.
Compare Apples With Apples
But make sure you’re comparing apples with apples. The quotes must be for the same detailed specification i.e. risk cover must be the same on all quotes and any claims history must be consistent. For example if numerous claims have been made than naturally this will increase the residential buildings insurance quote.
Write To Your Landlord
Assuming leaseholders manage to get hold of a better, lower quote then they should share that information with the building’s freeholder. The freeholder then has several options. He/she can take the opportunity to re-negotiate a new residential buildings insurance deal with the existing insurer. Or go to the market and bring in a new, better value premium. Or thank the leaseholders for the information and make a commitment to revisit the market at the annual renewal. Or do nothing.
The Leasehold Valuation Tribunal
If the freeholder does nothing and fails to prove ‘reasonableness’ then the leaseholders are entitled to take the matter to the Leasehold Valuation Tribunal (since 1st July 2013 it’s now called the First Tier Tribunal (Property Chamber) to have the matter determined.
Rather than go straight to the Tribunal leaseholders should issue a formal letter to the freeholder warning of their intention but allowing the freeholder one more opportunity, with a fair timeline, say two weeks, to respond. Assuming the freeholder fails to respond then the leaseholders should pursue the matter to the Leasehold Valuation Tribunal (under s.27 of the Landlord and Tenant Act 1985).
- Residential buildings insurance is the biggest cost factor in service charge bills.
- Insurance is often overcharged
- Insurance represents an opportunity for big savings
- The insurance market is ultra-competitive. Shop around.
- The law, the Landlord and Tenant Act 1985, says Insurance costs should be ‘reasonable’
- If the freeholder doesn’t respond to your suggestion of a better quote warn him/her that you’ll be going to the Leasehold Valuation Tribunal