When insurance costs are unreasonably incurred

Insurance, taken out to insure a block, is a service charge. Section 18(1) of the Landlord and Tenant Act 1985 (“the 1985 Act”) confirms this. A service charge is “an amount payable by a tenant to the dwelling as part of or in addition to the rent

  1. Which is payable, directly or indirectly, for service, repairs, maintenance, improvements or insurance or the landlord’s costs of management and
  2. The whole or part of which varies or may vary according to the relevant costs.

As such, insurance charges are subject to the same rules of reasonableness as all other service charges. Section 19(1) of the 1985 Act confirms that service charges are payable only to the extent which they’re reasonably incurred.

There have been a number of cases in the tribunal which have sought to deal with the issue as to when an insurance premium is “reasonably incurred”. The leading previous decision on this is the matter of Avon Estates (London) Limited v Sinclair Gardens Investments (Kensington) Limited [2013] UKUT0264 (LC)

It was decided in this case that the landlord did not have to obtain the cheapest possible insurance cover for the block and only had to show that the rate was representative of the market rate, or that the contract for insurance was negotiated at “arm’s length and in the market place”.

The recent case of COS Services Limited v Nicholson [2017] UKUT 382 (LC) has revisited the thorny issue of what’s reasonably incurred in relation to insurance premiums and has sought to clarify the position.



This case concerns Chiltern Court. This was a four storey block of flats comprising of 16 individual flats and separate garage areas. The leaseholders of a single flat in the block sought to challenge 3 years worth of insurance premiums.

In the first instance, the FTT determined that the insurance premiums payable for the building for the 3 years challenge should be significantly reduced. The landlord, COS Services Limited, appealed this decision and the Upper Tribunal looked into the issue and commented on what would constitute a reasonably incurred insurance premium.

The Upper Tribunal considered the Court of Appeal case of Waaler v Hounslow which considered the meaning of reasonably incurred within the scope of section 19.

The court took the view that where a lease “empowered one party to make discretionary decisions” the law should seek to ensure that that discretion is exercised in a rational way. Essentially any decision made under the terms of the lease should “not be so outrageous that no reasonable decision maker could have reached it.”

Interestingly, the Court of Appeal went further in Waaler and noted that the decision did not just have to be rational but the outcome of any decision must be considered. This notion was supported by the Upper Tribunal in the present case. The Upper Tribunal therefore determined that the tribunal was required to look at the issue of rationality of the decision making process and also to consider if that process led to a reasonable charge being levied.

In considering whether or not the insurance premium was reasonably incurred, the Tribunal determined that it must consider the terms of the lease and also the liabilities against which the insurance had been taken out. The landlord would be required to set out how the decision was reached (ie why they’d chosen that particular insurance policy) and what led to a particular premium being decided upon. This process would, include, an assessment of the current market.


Block policies

Landlords with a large property portfolio will often take out block policies which cover most (if not all) of the portfolio. These policies are still subject to the idea that they must be reasonably incurred. The Tribunal stated that the use of such block policies must not result in

“a substantially higher premium that has been passed on to the tenants of a particular building without any significant compensating advantages to them.”

This confirms that there must be some benefit to the leaseholders of their building being included within a block policy to effectively justify any higher premiums that may be paid.

It may however be significant if these advantages can be obtained under a different insurance policy for a lesser price. This would go to the idea of reasonably incurred.

The appeal by the landlord in the current case was dismissed and the tribunal determined that insurance premiums were not reasonably incurred.


Points to Note

This decision makes it clear that it is no longer sufficient to just take out an insurance policy and argue that it was negotiated at arm’s length and that the landlord went to the market for insurance quote. Each insurance decision must be taken on a case by case basis and consideration must be given to the decision making process as the landlord as well as the outcome of that process.

If an insurance premium is being taken out that is significantly more expensive than other policies available within the market, this needs to be looked at and any advantageous terms in that policy must be substantial enough to justify the premiums being charged.

In terms of block insurance policies, this may be more pertinent since landlords often cite the advantages of a block insurance policy. A landlord must be prepared to justify their reasoning as to why a block insurance policy is justifiable for a particular development given the risks to the insured and also if any advantages of that block insurance policy can be matched or come close to alternative insurance policies available in the market at a lower premium.

The placing of insurance is a process and landlords need to be aware that the decision making in this process together with the outcomes may now be under more scrutiny.



17 October 2017

Liz Rowen

With over 10 years specialist property management litigation experience, Liz has accrued a wealth of knowledge and experience in all things property management.