Terrorism Insurance Principles Blown Apart by LVT

This change was the result of the government being lobbied by major property owners, freeholders and the Association of British Insurers to change the scope of cover for terrorist events from fire and explosion only to a full “all risks” basis. By including nuclear, biological and radioactive causes this provides cover against a so called “dirty bomb” which potentially could cause airborne contamination affecting both residential and commercial property. This was considered a major threat and needed a government backed solution to provide adequate cover because of the potential financial magnitude of such an event.

Leases on blocks of flats do not take a standard form and every single one can be challenged on its exact wording in an LVT hearing. This problem is compounded by the fact that, as insurance practice evolves, the wording of these leases remains unchanged and there is no up to date definitive guidance in respect of best practice. Mistakenly some are turning to the Council of Mortgage Lenders’ Handbook for guidance, forgetting that section 6.14.1 simply defines the insurance cover required to be in place to satisfy a lender. It does not specify terrorism as a requirement but neither does it specify a requirement for “all risks” or full accidental damage, trace and access, contents of communal parts or even alternative accommodation; but the failure to provide any of these potentially leaves flat owners seriously at risk.

Terrorism insurance is an important cover and, as it is commonly available on a full “all risks” basis, it should be considered as a normally available peril or even part of the requirement for an up to date comprehensive insurance policy. Also, it is irresponsible to assume cover is not required because a given location is not close to an obvious target as the whole basis of the threat has changed, hence the need for the change in cover.

Over the years the insurance industry has developed insurance policies to meet the needs of their customers. However, the blocks of flats market is different in that the block policy needs to respond to the demands of the lease but, by focusing on the fine print of the insurance covenant in the lease (which inevitably may be deficient), there is a danger of doing a disservice to flat owners.

This case is of significant importance as it outlines a major failing in the current leasehold system in respect of block insurance. There is no officially recognised guidance stating the basis on which a buildings policy for a block of flats should be formed and what is reasonable. As a result freeholders have to take informed guesses, guided by the insurance industry, ARMA and RICS, which are then subject to challenge later by the LVT who themselves are lacking an appropriate and up to date source of reference.

Ultimately flat owners (who have little or no say in the placement of the block policy) will be exposed to significant financial hardship if appropriate insurance protection is not provided because of the current conflict caused by the leasehold system. This is not a case of the insurance industry bolstering its income by adding to the range of covers it provides but simply a way to ensure the wealth of flat owners is appropriately protected.

What are the usual comprehensive risks that should be protected by a block policy and should freeholders be criticised for obtaining terrorism cover or should criticism arise if they do not obtain terrorism cover?   

Should freeholders be criticised for obtaining terrorism cover or any other cover that it would be prudent to provide in order to ensure flat owners have appropriate protection? Regulation is quite rightly in place to ensure insurance is sold appropriately, that it meets customers’ needs and they are treated fairly. Can the same be said of the interests of flat owners buildings insurance requirements and, if not, what needs to be done to change this?