Contact: Richard Higgs; Clarkslegal LLP (Reading, England)
The ongoing floods, following the wettest winter on record, have affected almost everyone in some way and have dominated the headlines over the past few weeks. This crisis has come against the backdrop of an already challenging situation with regard to insurance for properties in areas liable to flood.
Last summer, the agreement between the government and insurers, known as the Statement of Principles, which covered residential properties and small businesses, expired. This agreement guaranteed the renewal of existing customers' buildings insurance policies and also provided for the continuation of cover for the new owners of property which had been previously flooded (or was at risk of flooding) in the event of the sale of the property. This agreement did not set any cap on insurance premiums; accordingly, insurance premiums in areas of flood risk have risen year on year.
When the Statement of Principles expired, the government consulted regarding a possible replacement scheme and new provisions have been tabled in a Water Bill, which is currently before Parliament. The new scheme will be known as 'Flood Re' and will link the insurance premiums for properties in flood risk areas to their Council Tax band. A levy of £10.50 will be placed upon all home insurance premiums (irrespective of flood risk) in order to provide a pool of funds to cover the cost of flood claims for high-risk properties.
The new scheme is not due to commence until summer 2015 at the earliest and until then the insurance industry has confirmed that it will honour the Statement of Principles. This means that in the short term, insurance premiums for properties in high-risk areas will continue to rise.
Dwellings in the highest Council Tax band (H) will be excluded from Flood Re, as will properties in areas of flood risk constructed since 2009. It has been estimated that insurance premiums will rise by around £1,000 per annum for properties in band H, compared to current prices under the Statement of Principles (and those estimates were made before the damage caused by the current flooding crisis).
Additionally, small businesses, owners of buy-to-let properties and business landlords of residential leasehold properties will be excluded from the Flood Re scheme and will potentially be hit quite hard by the increased premiums for properties in areas at high risk of flooding.
The long term effect on the insurability of property not covered by the Flood Re scheme remains to be seen, but with lenders continuing to require borrowers to maintain insurance, the potential costs for affected property owners will only increase.
