INSURANCE Advice
FloodINg: is yourhome atRISK?
FromJune 2013UKhomeowners could find themselves without cover for flood damage under their household insurance policy. Bill gloynexplains
The risk of flood damage to homesand theinsurance coverassociatedwithithas beenasubject of concerntothe government and the insurance industry in theUKfor decades. Thefirst agreementonflooding, designedtohelphomeownersand give them theright levelofinsurance coverwasmade betweengovernmentand theAssociation of BritishInsurers(ABI) anddates back to at least theearly 1960s. Theagreement wasbased on two important assumptions: nInsurers wouldprovide flood insurance covertoall residentialproperty, unless the flood risk wasregular andunavoidable;and nGovernment wouldprovide sufficient flood protectiontoBritish homes. Theresultwas that flood insurancebecame
incorporated as astandardelement of householdpoliciesregardless–inthemajority of cases -ofthe levelofrisk. Homeowners whoconsideredthemselvestobeatlow risk were unable to opt-outofsuchcoverageas this wouldhavereduced thetotal premium incomeavailabletooffset againstclaimsof those in higher risk areas. This ‘gentlemen’s agreement’ between
government andtheABIevolved into aformal “Statement of Principles”(SoP) in
2002.The SoPwas prompted by theserious rise in flood claimswhen homeowners across the country suffered record-breaking losses of around £700 millionin1998andmore than £1 billionin
2000.Atthattime, theestimatedworst case scenario forinsurerswasaUK-wide loss of £2 billion. In fact,thisfigurewasfar exceeded in thefloodsof2007which,accordingtotheABI, resulted in morethan£3billion in insurance claims. Since the SoP cameinto force government
spending on flood defences,whileincreasing slowly,has notmet theinsurance markets expectationsfor evenmaintaining existing
levels of defence, let alone improving them. Whenthe former Labour government’s ComprehensiveSpendingReviewin2007did notinclude an increase of spending on flood defences,the Director Generalofthe ABI declaredittimethatthe government “put its moneywhere itsmouth is”. Shortlyafterwards, theABI set June 2013 as
afinite date forthe existing agreementwith government on flooding to end and stated that the SoP would not extend to properties built after January 2009. A harsh decision but one that was prompted by continuing concerns that house building was being allowed in high flood risk areasdespite tighterplanning regulations.
whileincreasingslowly, hasnotmetinsurance market expectations...
In 2004, some185,000 residential properties
were designatedbythe Environment Agency as beingatrisk–primarilyfrom riveror coastal flooding. By 2010, that figure had risento5.2 million, ofwhichsome3.8 million were exposedtosurface waterflooding–an issue not really appreciated until themajor incidentsin2007. Of that total, some500,000 were classified as being at ‘significant’ risk. Sowhere does all this leave homeowners?
At themomentitisnot clearwhatthe government and the ABI will do to ensure that cover is available after June 2013. The government is due tomake a statement on itsintentionsthisspringand theABI is not
governmentspending on flooddefences,
prepared to proposeany solutionuntil they knowwhat thegovernmentwilldo. Forthe timebeingweare allfaced with aCatch 22 situation-withhouseholderslikelytobe seriously affectedwhichever waythingsturn out.
As youwillsee fromthestatisticsshown
earlierthe cost of flood damage is increasing andwithcontinuingirregular weather patterns andthe seemingscant regard paid by somedevelopers to flood risk,thiscould continue to rise. Flat owners,whether they live in a
ground floor flatorthe penthouse,mayfind themselves without cover as insurers’ rating andacceptance is likelytobebased purely on thepostcode.Floodingisanissuefor all homeowners –livingonthe upperfloors of ablock does notmeanthatifyourbuilding is flooded youwillremain unscathed. Flood damage canbedevastating to both communal areasand thephysicalstructure of buildings andwithout insurancecover,all leaseholders wouldbeobliged to help foot therepairbill –not just thosewhose individual flats are underwater.Withinsurersrefusingtomake anyproposals untiltheyhaveseenwhat the government intends to do, the future availability of insurancecover againstflood damage after June 2013 is unclear. What is certain is that privateindividuals
in high risk areas are going to find difficulty in obtaining cover by themselves. The market muscle andunderwriter relationshipsthat abrokercan provideare goingtobemore important than ever.●
Bill gloyn Partner, European Real Estate andConstruction, JLT Specialty Limited
www.landlordsinsurance.
jltspecialty.com
Flat Living Spring2012
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