Miserable March – The importance of house insurance and the looming gap

26 Mar 2013

The continuing rain and snow is a stark reminder both of the importance of maintaining buildings and contents insurance of you property, particularly if you are in the process of selling,  but also of the urgency of seeking out a buildings insurance quote at a very early stage when looking to purchase a property.

Flooding alone is one of the biggest natural risks to the UK, and the effects of global warming and other climate changes suggests the frequency and impact of such events will increase. There are reportedly more than five million – or one in six – homes in England and Wales at risk of flooding. Official figures from the Association of British Insurers indicate the insurance industry paid out £1.2bn in 2012 and helped 1,300 customers every day to recover from the devastation of flooding.

For homeowners wishing to sell, the question often arises when to cancel their house insurance. While the fine print within residential conveyancing contracts – the Standard Conditions (Fifth Edition) – provides that the buyer takes over the ‘risk’ of damage and destruction from and including the day of exchange of contracts, Sellers are advised not to cancel their own buildings insurance until the day of completion and only once the seller’s conveyancer confirms the sale is complete.

This is because the buyer might withdraw from the purchase even after exchange of contracts, or you as the seller might default allowing the buyer to withdraw leaving your property uninsured.

As for the buyer, if the risk passes on exchange, then that is when they should insure, and many mortgage companies will also require it. Only an alert conveyancer might be able to reverse the risk passing and allow the buyer to refrain from insuring until completion. But such a decision should be carefully discussed between conveyancer and buyer.

Indeed, in very limited circumstances, there might even be a right for either party to terminate a contract before completion where for instance the property has been destroyed – and a sudden panic by the seller ensues to recall if they continued to insure.

However, whilst the buyer will invariably insure from exchange of contracts, they should nevertheless seek out an insurance quote as early as possible. Why is this?

Is the premium much higher than expected due to the property’s risk of flooding, it’s previous flooding, or it’s likelihood of flooding? Is flood insurance or subsidence insurance even covered for the property? Mortgage Lenders have a standard requirement for both to be insured and as a result, homeowners could find it difficult to get the mortgages on their dream home, leaving a chain of hopeful people sorely disappointed many weeks down the line instead.

Until June 2013, there exists an agreement between the Government and the Association of British Insurers (ABI), called the Statement of Principles, that obliges insurance companies to offer flood cover as part of standard insurance policies where they are at significant risk of flooding,  if there are plans in place to reduce that risk within five years. However, in 2008, it was agreed that this current Statement of Principles would not be renewed. This now increase the risk of far more houses being at risk of no flood insurance cover being available. (Worryingly, the Statement of Principles does not apply to homes built since 1 January 2009. Therefore there is no obligation for insurers to offer cover against flood risk for newly-built property. Developers and customers purchasing a property in a new development are encouraged to make sure that the risk of flooding is at a bare minimum.)

Indeed, many other suggestions revolve around providing people with information about flood risk before buying a home, encouragement to fit flood prevention measures, better data sharing between the various bodies that are involved in assessing flood risk (including local authorities, the highways agency, water companies, commercial data providers and the insurance industry).

As a result, conveyancing solicitors are being bombarded with search companies selling ‘Flood Searches’ (or more accurately ‘Flood Data Searches’) which give the impression of some miracle solution but as stated on the Defra website, “the flood data currently published gives information on risk for the general location of a property, rather than for an individual building. It does not usually take account of specific features of your home or business premises, for example, the elevation of the ground floor or whether it has a basement or cellar. You may be able to show that your property is at a much lower risk of flooding than the general area in which it is situated.”  Defra go on to state that “Action taken by the Government, communities, individuals and businesses to reduce levels of local flood risk is the best way of keeping insurance available and cover affordable over the long-term. One of the best ways to do this is for property owners and residents to reduce the chance of their own home being flooded and to minimise the size of any claim should flooding take place….. In some cases specialist brokers may be able to provide better terms than mainstream insurers. Specialist brokers can be found through the British Insurance Brokers’ Association consumer helpline on 0870 950 1790 or via the online their ‘find a broker service’. Consumers can also contact the ABI if they feel they have been unfairly treated by an insurer. They can be reached on 020 7600 3333 or via the ABI website.”

However, the Government still remain in negotiations, and one option remains levy a 6% tax on buildings and contents insurance to be used to protect vulnerable properties until a replacement for the Statement of Principles is in place.