Insurance: the need to be reasonable

In most residential leases there will be provision for either the landlord or the management company to place insurance in respect of the block. Leaseholders will, commonly, contribute to the cost of insurance via their service charge or in some instances as a separate charge in respect of the insurance.


Can the cost of insurance be challenged?

In respect of residential premises, leaseholders have the right to challenge the costs associated with the insurance in the First Tier Tribunal (Property Chamber) (in Wales this is still the Leasehold Valuation Tribunal).

Leaseholders may be able to rely on the terms of their lease which may set out that any insurance costs must be reasonable but there are statutory provisions namely section 19(1) of the Landlord and Tenant Act 1985 which also requires insurance charges to be reasonable.

The reasonableness of insurance can therefore be challenged by leaseholders in the tribunal.


What would help a landlord/management company if the reasonableness of insurance is challenged?

Landlords and/or management companies should, always be mindful of the Royal Institution of Chartered Surveyors (RICS) Service Charge Residential Management code. This code sets out the best practice for arranging insurance among other things. If a lessor and/or management company can show that they have considered this code, the tribunal are likely to look favourably on the process undertaken by the relevant parties when arranging insurance.

The test for reasonableness was set out in the 2001 case of Forcelux Ltd v Sweetman. This test has most recently been reaffirmed in the case of Hounslow London Borough Council v Waaler.

The test as set out in Forcelux is as follows.

  • Were the actions of the landlord appropriate and properly effected in accordance with the requirements of the lease, the RICS code and the 1985 Act? Did the landlord “test the market” for alternative insurance premiums?
  • Was the amount charged the landlord reasonable in light of all the evidence that they gathered or was the premium charged by the landlord outside of the market norm?

While the test suggests that cost of the insurance should be a consideration, a landlord does not need to find the cheapest possible insurance. It was confirmed in the case of Avon Estates (London) Limited v Sinclair Gardens Investments (Kensington) Limited [2013] UKUT 0264 (LC) that provided insurance is obtained within the market and ‘at arm’s length’, the premium will be considered a reasonable one.


The moral of the story?

The moral of the story is, when placing insurance, landlords do not need to go out and seek the cheapest possible insurance premium but must go to the market and obtain insurance at arm’s length. Provided the landlord can provide evidence that they have done this, challenges to the insurance charges on the basis of reasonableness can be defeated.

It is important therefore that landlords maintain a paper trail and evidence that they have approached the insurance market at the time when considering placing new insurance. Many landlords use insurance brokers who will do this for them and again it is essential that a paper trail is available should any challenges as rise as such a paper trail may mean the difference between a reasonable and unreasonable finding within the First Tier Tribunal.