It may no longer be the case that a landlord need not shop around for insurance. An important recent decision in the Upper Tribunal of Cos Services Limited v. Nicholson & Willans (2017) considered the approach to be taken in assessing the reasonableness of insurance premiums under s.19 of the 1985 Act. It is important for landlords to be able to establish that insurance premiums are reasonable. If you don’t, you could be opening yourself up to litigation from tenants.
The facts of the case:
The landlord was obliged under the terms of the various leases to keep the building in which the flats were situated insured in an insurance office of repute. The tenants were obliged to contribute to the insurance premiums via the service charge.
The landlord incurred the following costs in respect of insurance premiums:
2014/15 - £12,598.20
2015/16 - £12,670.02
2016/17 - £13,561.94
However, the tenants had obtained other quotations indicating that similar cover was available on the open market for 75% less than the sums paid by the landlord.
Decision:
The Upper Tribunal considered that reasonableness was a two stage test. Initially, the decision to incur the costs must be a rational one. . Secondly, the sum charged must in all the circumstances be a reasonable charge. Although the landlord does not have to select the cheapest cover, the Upper Tribunal stated in assessing reasonableness, it must consider:
• The terms of the lease and the liabilities to be insured
• The landlord’s explanation of the process used for selecting the policy and the steps taken to assess the current market
• Whether any comparable cheaper policy is genuinely comparable
On the facts of the case, the insurance premium was not reasonable given the disparity between the quotes and the lack of explanation by the landlord.
Implications of the decision:
It would appear that if a landlord is faced with a challenge to the reasonableness of the insurance premiums, it will have to provide evidence as to the steps taken to test the market. Whilst a landlord with a large portfolio can still negotiate a block policy, the landlord would need to establish that in doing so it has not resulted in substantially higher premium without any commensurate compensating advantages. So if challenged about the reasonableness of insurance premiums, the landlord may need their broker to evidence the appropriateness and competitiveness of the policy.
