Flood Risk Insurance - are you covered?

April 2015

Flood Risk Insurance - are you covered?

We are encountering an increasing number of commercial properties where flood risk insurance is proving very difficult to obtain.  These properties are excluded from the Government’s Flood Reinsurance Scheme ‘Flood Re’, which is supposed to solve the problems in obtaining flood insurance.  For those with an interest in these properties, such as owners, lenders and purchasers, the risk is that these properties may soon become uninsurable, leaving them exposed to irrecoverable costs and lower market values should flooding occur. Professionals involved in the sector may wish to give greater focus to these issues when acting on transactions involving commercial property.

The draft Flood Re regulations were laid before parliament on 24 March 2015.  The legislative process is expected to be completed after the General Election with implementation currently set for Spring 2016.

As is well documented, the majority of leasehold properties, all commercial properties, the private rented sector and all properties built since the start of 2009 have been excluded from the Flood Re scheme; they are not eligible for flood cover through Flood Re.

The Government and the Association of British Insurers have successfully argued that there is little evidence owners/occupiers of such properties have difficulty obtaining insurance for flood risk at acceptable prices, and that if they do experience higher costs, those costs can be passed on to others. As excluded properties, their owner/ occupier must rely on insurance cover in the open market, paying whatever premium and conditions the insurers are prepared to offer for those properties with a flood risk profile.

This may be overly reliant on the insurance market.  We have recently seen businesses and lenders experience considerable difficulty obtaining flood insurance particularly for unoccupied commercial or mixed use properties in flood risk areas.  In one case, the flood insurance cover was refused by a number of insurance companies as the property would remain unoccupied for several months whilst refurbishment works were being carried out; flood risk cover was eventually obtained through the lender’s own insurance broker and for a markedly higher excess.  Without such insurance cover to protect both purchaser and lender, the deal would have been jeopardised.

This does not appear to be an isolated case.  The British Property Federation conducted a survey in 2014 into flood insurance problems and found some evidence of higher premiums or excesses being charged to owners/ occupiers of leasehold properties excluded from Flood Re.  On 18 December 2014 the BPF reported that there are an estimated 800,000 leasehold properties at risk of flooding in the UK (70,000 of which are considered high flood risk), whilst some leaseholders have reported increases of 500% in their premiums.

If this recent case is a sign of things to come, it is a worrying development for businesses and lenders alike as these properties may soon become uninsurable, meaning not only irrecoverable costs in the event of flooding but also a potential loss in property value.

The Government has thankfully agreed to keep this aspect under review and monitor such evidence.  How much evidence will need to be gathered and whether this will result in further change is unclear.

For now, potential purchasers and lenders would be well advised to investigate the flood risk profile and the terms of any insurance cover for commercial or mixed use properties at the outset of any transaction, before committing to any finance or purchase.