Generally, standard property insurance cover on a block of flats does not automatically include damage caused by terrorism although in most cases, the cost to add terrorism insurance to a policy can be relatively low depending on the location of the block.
Terrorism insurance has become an increasingly contentious issue in service charge cases; in short, many leaseholders think it is unnecessary and simply serves to increase their service charges, but is that what the Tribunal’s think?
CASE LAW
On the 16th June 2014, in the case of Qdime Ltd v Various Leaseholders at Bath Building (Swindon) and others [2014] UKUT 261 (LC): the Upper Tribunal held that terrorism insurance was required in order to comply with a covenant in a lease covering “the usual comprehensive risks in accordance with the Council of Mortgage Lenders (CML)” recommendations.
Following this case it seems that the Upper Tribunal may well have greatly extended the number of properties which are now required to obtain such insurance.
CASE FACTS:
The case concerned a development of 13 flats in Swindon known as the Bath Building - a self contained 4 storey block of flats. The Appellant was the freeholder. The Respondents were a lessee-owned management company and the leaseholders of the flats.
Under the terms of the lease, the Appellant was required to “… keep the Building including the Demised Premises insured to its full reinstatement value against loss or damage by fire and the usual comprehensive risks in accordance with the CML recommendations in that respect from time to time and such other risks as the Landlord may in its reasonable discretion think fit to insure against…”
The costs for the insurance could be recovered as a service charge.
The appellant took terrorism insurance as part of the general insurance package which added a small amount to the insurance premium. The leaseholders considered such cover was unnecessary and successfully challenged the same in the Leasehold Valuation Tribunal (LVT).
Briefly, the Leasehold Valuation Tribunal held that:
- There was no contractual obligation under the lease to obtain terrorism insurance. They contended that the covenant to insure against loss or damage by fire did not include terrorism; and
- The Appellant had not exercised discretion in whether or not to choose terrorism insurance in particular, there was no evidence of any particular risk of terrorist activity; and
- Even if the Appellant had exercised discretion and made a “conscious or express decision”, the decision to obtain such cover was unreasonable.
The freeholder appealed on both the duty and the discretion points.
On the “duty” point, it was argued:
(a) there was a duty to insurance in line with the CML guidelines;
(b) those included “explosions” as a usual risk;
(c) further and in any event, one insured against risks, not particular causes of the risk (Enlayde Ltd v Roberts [1917] 1 Ch 109).
On the “discretion” point:
(a) it had led unchallenged evidence that it had made a conscious decision to obtain terrorism insurance;
(b) the discretion was a reasonable one as (i) it had obtained evidence from its brokers that Swindon was in the same “risk” category as central London; and, (ii) the RICS Code strongly suggested that terrorism insurance should be obtained.
The Upper Tribunal agreed. It held that the lease obliged the Appellant to obtain insurance against the “usual comprehensive risks in accounts with the CML recommendations. Those CML recommendations included “explosion”. A terrorism attack was within the ordinary meaning of that word therefore that was enough to dispose of the appeal.
However, in case that was incorrect, the LVT were also incorrect in finding that there was no discretion exercised in this case; there plainly had been and, for the reasons given, it was a reasonable discretion. In particular, the RICS Code (a code given the force of statutory guidance (s.87, Leasehold Reform, Housing and Urban Development Act 1993) supported obtaining terrorism insurance.
HEALTH WARNING!
This outcome suggests the Upper Tribunal has greatly extended the number of properties which are now required to obtain such insurance.
QUESTION: What does your lease say?
Yashmin Mistry - Partner & Head of Property Practice Group, JPC Law
