The Director's Cut: Demystifying Buildings Insurance

This article is an attempt to strip things back to first principles and bring some clarity, without unfairly criticising the professionals involved.

Start with the basics

At its core, buildings insurance is not especially complicated.

The premium is derived from the rebuild cost of the building (known as the declared value), multiplied by an insurer’s rate. Insurance Premium Tax, currently 12%, is then added.

That means two things matter enormously.

First, the rebuild cost. This is not the market value and not related to the market value; it is the cost to reconstruct the building from the ground up. If that figure is too high, leaseholders overpay. If it is too low, the building risks being underinsured, which can be financially catastrophic in the event of a major claim. Regular reinstatement cost assessments are therefore essential.

Second, the insurer’s rate. This is where underwriting judgement comes in. Insurers will look closely at the building’s risk profile: its claims history (particularly escape of water), any fire safety concerns, construction type, height and general exposure. A building with a problematic history or unresolved risks will attract a higher rate, and therefore a higher premium.

Historically, commission levels have also influenced that rate. Where more of the premium is being distributed as commission, the cost tends to rise accordingly. That dynamic, however, is changing.

The commission question – context matters

Much has been written about commission sharing between brokers and managing agents, often in fairly stark terms. The reality is more balanced.

For many years, commissions have effectively supplemented managing agents’ fees. Given the increasing regulatory burden placed on agents, it is not unreasonable to argue that base management fees alone have often been insufficient to reflect the true level of responsibility involved. Commission income has, in many cases, helped bridge that gap.

That said, the landscape is shifting quickly. Insurers are reducing the amount of commission available, and many managing agents are voluntarily moving towards transparent, fee-based models for insurance work. At the same time, the direction of travel from government is clear, with the Leasehold and Freehold Reform Act 2024 expected to tighten the rules further – including an outright ban on commission sharing.

There is also a growing legal dimension. Quite by chance, I recently found myself at a dinner party speaking to a senior partner of a law firm whose work underpins Leaseholder Action – a class action lawsuit pursuing claims relating to undisclosed commissions. That conversation was a useful reminder that this is no longer a niche issue; it is firmly in the mainstream.

For leaseholders, the key takeaway is straightforward: you are entitled to understand how your agent and broker are remunerated. Increasingly, that transparency is being provided.

Excesses: the part people forget

While much attention is paid to premiums, excesses often receive far less scrutiny.

Two decades ago, excesses of £100 or £250 were typical. Today, particularly for escape of water claims, they can be significantly higher – even tens of thousands. This reflects a more risk-averse insurance market and a sharper focus on claims experience.

Higher excesses can help keep premiums down, but they do not remove the cost – they simply shift it. When a claim arises, someone must pay the excess, and that “someone” is occasionally defined by the lease. It may fall to the individual leaseholder responsible, the claimant, the service charge fund, or a combination of the above.

What are you actually insuring?

Most blocks will have a suite of insurances in place. The core ones are buildings insurance, terrorism cover, Directors’ and Officers’ (D&O) insurance, and engineering insurance for lifts and plant. Each serves a distinct purpose, and gaps in cover can have serious consequences.

The lease: the overlooked cornerstone

One of the most important and most frequently overlooked documents in this process is the lease itself.

The lease should set out what must be insured, who is responsible for arranging it, and how the cost is recovered. It will often also determine how uninsured excesses are treated. If you are involved in procuring insurance, the lease should be your starting point, and your broker should be working from it.

Do you need a managing agent?

A question I am asked regularly is whether leaseholder directors can procure insurance themselves.

The answer is yes, but with some important caveats. Managing agents who arrange insurance are required to have appropriate regulation through the Financial Conduct Authority (FCA). Not all do. In fact, anecdotal evidence suggests a surprisingly high proportion north of 50% still operate without formal insurance permissions.

There is also a workaround whereby a managing agent acts as company secretary to an RTM or RMC and procures insurance in that capacity. This is currently permissible, but it is firmly on the radar of regulators and may not remain untouched.

If your managing agent is properly regulated, they can be very well placed to handle insurance procurement. Equally, many specialist brokers will deal directly with RTM and RMC directors, and that route can work perfectly well with the right support. What is unlikely, however, is procuring meaningful buildings insurance via a price comparison website. This remains a specialist, broker-led market for good reason.

Disclosure: absolutely critical

Insurance depends on full and accurate disclosure.

That means providing a complete claims history, being open about any fire safety issues, and presenting an honest picture of the building’s condition and use. If material information is withheld or misrepresented, insurers can refuse to pay claims or even void the policy entirely. The consequences of that scenario, particularly following a major loss, are difficult to overstate.

Not all policies are the same

Finally, it is worth emphasising that not all insurance policies are equal.

Two policies with similar premiums can contain very different terms, exclusions, and conditions. Unoccupancy clauses are a common pitfall, particularly in blocks with buy-to-let or intermittently occupied flats. The detail matters, and it is always worth interrogating the policy wording rather than focusing solely on price.

Buildings insurance is complex, but it is not unknowable. Leaseholder directors do not need to become experts, but they do need to be informed – particularly given that this is often one of the largest and most consequential items in the service charge budget.

In a future column, I will share a practical checklist to help RTM and RMC directors procure insurance with confidence, particularly for those operating without a managing agent.

In the meantime, if your building’s insurance arrangements feel unclear, it is worth asking questions – or seeking a second opinion.

About the Author

Jonathan Channing is an independent property management consultant working across the residential leasehold sector. A Fellow of The Property Institute (TPI), an Associate of RICS and an Honorary Consultant to the Federation of Private Residents’ Associations (FPRA), he also co-founded Proper Talk, the industry panel discussion series. Jonathan serves as an RMC director for two residential developments himself and regularly supports RMCs, share of freeholders and RTM companies in sourcing, assessing and appointing managing agents – helping boards navigate the market, structure tenders and make informed governance decisions.