Steve Packer by

Posted on January 15, 2018

At a glance

• Memory of the devastating floods in 2015 has been short lived;
• The Government and industry backed, Flood Re scheme, is currently supporting domestic homeowners and tenants in the UK providing access to affordable insurance coverage, although from 2039 a free market will be introduced;
• Commercial properties have no such scheme, although open market insurance schemes are becoming available; and
• There remains a requirement for developers and property owners to take responsibility for flood risk and provide their own risk mitigation solutions.

Flood Experience

The devastating floods of late 2015 (storms Desmond, Eva and Frank) have, fortunately, not been repeated, in early 2016 the Association of British Insurers (ABI) published statistics that showed:

• more than 3,000 families were in alternative accommodation while repairs are made to their homes.
• the average expected pay out for each domestic flood claim is £50,000 – compared with an average from the 2013/14 winter storms of £31,000.
• of the £24 million emergency payments made, £9million has been to domestic customers and £15millon to businesses.
• customers made nearly 15,000 claims for property damaged by the flooding, more than 5,000 of these claims coming from business customers.

Memory of flood events appears to be a very short term practice:

• research by the BBC in 2015 identified that after the 2007 and 2009 flood events in Tewkesbury and Cockermouth, the price of residential properties have remained largely unaffected;
• the Committee on Climate Change has stated that for the period 2011 to 2015, the growth of housing in areas where flooding is likely has grown by 1.2%, while in areas of low risk, growth has been 0.7%;
• the ABI conducted a survey in early 2016 found homebuyers were more likely to have looked into the ease of parking in the area (33%) than checked whether their house could be at risk from flooding (28%).

James Dalton, Director of General Insurance Policy at the ABI, said:

Flooding is a growing threat that as a nation we have to adapt to living with. As the floods of last winter reminded us, being flooded is horribly traumatic and can leave people out of their home or business for months. Anyone whose property is at flood risk needs to be aware of that so they can take steps to protect themselves.”

Insurance for Domestic Properties – Flood Re

The Government has worked closely with insurers in the UK delivering Flood Re, a not-for-profit scheme funded by insurers. Flood Re will give homeowners and tenants access to affordable insurance allowing local authorities to get better prepared for flooding.

How Flood Re Works

Flood Re takes the flood risk element of home insurance from an insurer in return for a premium based on the property’s Council Tax band.

Source: With thanks to Flood Re for use of this image on how the scheme works. For more information, see the Flood Re website.

Flood Re also:

• charges the insurer an excess of £250; and
• takes an annual levy on insurers of a total of £180m,

allowing them to charge a premium that is lower than that normally charged on properties at the highest risk of flooding.

Eligible Properties

Properties will be eligible only if they meet all of the following criteria:

1. They are covered by an insurance contract which is held in the name of, or on trust for, one or more individuals or by the personal representative of an individual;
2. The holder of the policy, or their immediate family, must live in the property for some or all of the time (whether or not with others) or the property must be unoccupied;
3. They have a domestic Council Tax band A to H (or equivalent);
4. They are used for private, residential purposes;
5. They are a single residential unit or a building comprising of two or three residential units;
6. They are insured on an individual basis or have an individual premium;
7. They were built before 1st January 2009 (if a home is built before 1stJanuary 2009 but then demolished and rebuilt, the new home is still eligible); and
8. They are located within the UK comprising England, Wales, Scotland and Northern Ireland (excluding the Isle of Man and the Channel Islands)

It is expected that the following properties will be eligible for buildings or combined cover provided they also meet the criteria 1-8 above:

A. Bed and breakfast premises paying Council Tax and insured under a home insurance contract;
B. Farmhouse dwellings and cottages. Where farmhouse dwellings are included in a commercial line policy, provided the insurer can split out the dwelling element (which meets the criteria 1-8 (inclusive) above), that part of the risk can be ceded to Flood Re;
C. Holiday/Second Homes;
D. Properties occupied by home workers;
E. Individual leaseholders protecting their own property/flat;
F. Leasehold blocks if they contain 3 units or fewer and the freeholder(s) lives in one of the units to be insured;
G. Single unit leasehold properties where the leaseholder insures the structure of the property;
H. Residential ‘buy to let’ properties;
I. Static Caravans/homes if in personal ownership.

Flood Re will also cover a tenant’s / individual’s contents in rented or leasehold properties even where the buildings risk would not be eligible (such as in large blocks of flats) provided the policy and the property it relates to fulfil the criteria 1-8 above.

Properties that are not expected to fulfil the eligibility criteria for buildings or combined cover include:

A. Bed and breakfast premises paying business rates;
B. Blocks of more than three residential flats;
C. Company houses/flats;
D. Properties covered by contingent buildings policies (e.g. held by banks);
E. Farm outbuildings;
F. Properties used by freeholders/leaseholders in deriving commercial income insuring blocks/large numbers of properties in a portfolio;
G. Housing association’s residential properties;
H. Multi-use properties under commercial or private ownership;
I. Residential ‘buy to let’ (which do not meet the criteria 1-8 (inclusive) above);
J. Social housing properties; (eligible for Contents cover but not eligible for Buildings cover);
K. Static caravan site owners (for commercial gain).

Claims

Claims will continue to be handled by individual insurers with Flood Re reimbursing insurers for any valid claims paid out to its customers.

Transition

Flood Re is planned to be in place until 2039. As well as helping to enable home insurance to remain affordable in areas at risk of flooding, Flood Re also has a role to help manage a transition to home insurance prices that fully reflect flood risk.

This means that people benefiting from Flood Re need to become more aware of their flood risk and, if possible, take action to reduce it: after 2039, there will be a free market for flood risk on domestic properties.

Andy Bord, Chief Executive of Flood Re, commented:

It’s important to us that people across the UK understand how the scheme can help them more easily access affordable flood insurance. People across the UK should speak to their current insurer to see if it has signed up to Flood Re and shop around to ensure they are able to get the best possible deal. We’ve seen how flooding can cause destruction and distress and are proud that tens of thousands of people have benefitted from the scheme since launch.

Insurance for Commercial Properties

Research by the British Insurance Brokers Association (BIBA) identifies that of the 28 million properties in the UK, more than five million are at risk of flood (1 in 6). Whilst the introduction of the government and industry backed Flood Re will increase the availability and affordability of flood insurance for eligible homes, there will still be a large number of landlords that are either unable to obtain any insurance at all or pay huge premiums for minimal levels of cover.

There is currently no provision for small businesses in areas prone to flooding who may struggle to get insurance cover or who may have onerous terms applied such as a very high excess for flood claims. The Association of British Insurers (ABI) are of the view that there is not currently a need for a commercial Flood Re scheme, claiming that most businesses are still able to arrange flood cover at a competitive premium.

BIBA’s evidence goes against this view, however. Following Storm Desmond which hit Cumbria in 2015, flood damage was caused to 25,000 business premises. Many of these premises were either not covered or had very high excesses imposed on their policies following previous damage from the storms in 2012. This additional financial burden has caused some SMEs to cease trading, and this problem is not likely to go away any time soon with the global forecasts indicating that these severe storms are likely to become a regular occurrence.

BIBA has launched a commercial insurance scheme which aims to significantly improve the ability of small and medium sized businesses (SMEs) and property owners to find suitable flood insurance.

Key benefits include:

• quotations for many SMEs/leasehold/let properties in flood risk areas;
• recognition of flood resilience/resistance measures in pricing and terms;
• state of the art mapping tools;
• additional policy options covering high flood excesses.

In addition to specialist schemes there are also alternative insurance options:

• insuring high excesses if these are applied to an insurance programme is something that is becoming widely available in the market;
• flood prevention/protection specialists can work with landlords to improve flood defences.

Both brokers and insurers are starting to understand the requirements of their clients and are working hard to provide solutions at reasonable cost.

In summary, there are many tools available to check the flood exposure when looking to purchase property. Involving a broker at the earliest possible stage of due diligence prior to purchase can be of huge benefit and allows both broker and insurer to advise and structure an insurance solution.

Liability for Flooding

The schemes and approaches described above reflect insurance for flood damage caused to your own property. Liability for flood damage you cause is still unclear – other than with respect to pollution (i.e. a fuel tank that floats off).

In the period since the last major flood event, the environmental insurance market has continued to grow, with some unsubstantiated evidence of pollution claims. Impact caused by the next flood event may result in more experience.

Conclusions

In the absence of significant flood events since 2015, the general interest in flood risk has reduced. However, over the same period, the Government and insurance industry has prepared to respond to the next flood event by:

• successfully launching Flood Re to support residential property owners; and
• creating schemes for commercial properties.

However, this does not remove the requirement for property owners to be prepared to protect and mitigate flood events.

Insurance, via an experienced insurance broker, should be considered as part of a whole risk management approach to manage the risks associated with flooding.

Duncan Spencer, EDIA Limited, a specialist environmental insurance broker and consultant with nearly 30 years’ industry experience.
Steve Packer, Property Insurance Initiatives Limited, a real estate insurance broker with over 20 years’ experience.

First published in the UK Environmental Law Association’s journal elaw in December 2017
Image: Symac / Sylvain Machefert (own work) [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

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