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When is an insurance premium 'reasonable incurred'?

We are grateful to Cassandra Zanelli, Partner at PM Legal Services, and Paul Robertson, Managing Director of Midway Insurance Services for providing this article.

In a landlord and tenant relationship, if there is one issue that is more likely than any other to polarise the views of landlords and leaseholders, it’s insurance.

This polarisation leads to the often-asked question: “When is an insurance premium ‘reasonably incurred’?

The tension this issue invariably creates has led to a raft of litigation focusing on the question of when an insurance premium is reasonably incurred.

What’s been decided to date

There are a number of cases decided by the Courts and Tribunals on this thorny issue.

In no particular order (other than chronological), the following are important points to note.

In Havenridge [1]:

“Where a lease contained an obligation on the Landlord to ensure the premises “in some insurance office of repute”, and an obligation on the Tenants to pay “by way of further and additional rent or yearly or other sums as the Lessor shall from time to time properly expend or pay to an insurance company in respect of, or for insuring and keeping insured the premises”, it was held that:

(1)       “Properly” did not mean “reasonably”;

(2)       There was no implied term that the premium recoverable from the Tenant should be fair and reasonable;

(3)       The Landlord could not recover in excess of the premium which he had paid and agreed to pay in the ordinary course of business;

(4)       The fact that the Landlord might have been able to obtain a lower premium elsewhere was not relevant; he was not obliged to shop around; and

(5)       It was sufficient for the Landlord to show either that the premium was representative of the market rate, or that the insurance contract was negotiated at arms’ length and in the market place” [2]

A similar approach was followed in Berrycroft [3]. In Williams v Suffolk Borough Council [4] the Court held that a landlord was not obliged when calculating the service charge payable by its leaseholders in respect of insurance to deduct the commission it had obtained from its insurer. The charge was, therefore, reasonably incurred.

In Forcelux [5] the Lease required the Landlord to insure the building. The leaseholders disputed the premiums on the basis they were excessive. The landlord had insured the whole of its property portfolio under a single policy, which it acknowledged could cause the premiums payable to be “significantly higher” for owner occupiers. In that case, the Court was satisfied from the evidence given by the landlord that the block policy was competitively obtained in accordance with market rates, and therefore that the costs of the premiums were reasonably incurred.

In Avon Estates Limited [6] the Upper Tribunal had this to say:

“[30]…so long as the insurance is obtained in the market and at arms’ length then the premium is reasonably incurred. There is nothing to suggest that the insurance was arranged otherwise than in the normal course of business, and [the tenants] did not seek to adduce evidence to support such a contention. The [tenants’] complaint is that it might be possible to obtain a cheaper rate, but it is not for the Landlord to establish [as has been expressly found in Berrycroft] that the insurance premium was the cheapest that could be found in order for the costs to have been reasonably incurred. The words “properly testing the market” used by Mr Francis in Forcelux in 2001 does not in any way detract from the decisions of the Court of Appeal in Berrycroft and Havenridge that the Landlord must prove either that the rate is representative of the market rate, or that the contract was negotiated at arms’ length and in the market place.”

But following the recent upper Tribunal Decision in Cos Services Limited v Nicholson and anr [7] is the approach towards assessing the reasonable, or otherwise, of insurance premiums quite so Landlord friendly?

How has the insurance market place changed?  

Much has changed over the last 20 years in the placement of block insurance and, as a result, it is unsurprising to see more cases tested in tribunal. Twenty years ago, it was in fact quite difficult to obtain quotations for blocks and generally a number of specialist brokers dominated the block insurance market. A lessee approaching their local broker (who probably at that stage handled their personal household and motor insurance) would probably struggle to obtain particularly competitive quotes. Many insurers had little appetite to write single blocks in isolation and, when they did so, would charge premiums that reflected lack of appetite and competition in the market. 

Freeholders or managing agents with large books of business were considered more attractive to insurers who would be more likely to write large portfolios, being tempted by large overall premiums. It was commonplace that insurers would be prepared to offer generous commission incentives to attract these large blocks of business and, as a result, the payment of large levels of commission became commonplace.

Disruptors

The biggest disruption is the availability of insurance products online. Insurers have invested heavily in online distribution to reduce cost - but in the world of block insurance, this can be dangerous. Typically, most landlords struggle to comply with the basis of disclosure and the small print that is normal in these generic products. An inexperienced broker could easily offer a landlord a policy that looks good in the sales literature but in reality is not properly fit for purpose.

Leaseholders however are likely to try and buy insurance online via comparison sites, probably a culture already embedded from their experience of arranging their own personal insurances such as car insurance. More and more leaseholders are presenting their landlord with quotes on products that are completely inappropriate and do not represent a like for like comparison.

Where are we now?

The question as to when an insurance premium is ‘reasonably incurred’ has been the subject of consideration again by the Upper Tribunal in the Nicholson case. Amongst the challenges brought by the leaseholders in proceedings before the First Tier Tribunal were those relating to the following insurance premiums:

2014/15:         £12,598.20

2015/16          £12,670.02

2016/17          £13,561.94

The FTT determined that the insurance premiums payable should be as follows:

2014/15          £2,803.10

2015/16          £2,819.08

2016/17          £3,017.65

The impact of the FTT decision is obvious, and it’s perhaps no surprise that the landlord sought to appeal that decision. The issue on appeal was the very simple (!) issue of whether the premiums claimed by the landlord from the leaseholders have been ‘reasonably incurred’.

The relevant clause in the lease required the landlord to insure and keep insured the building against loss or damage by fire - or such other risk as the landlord thinks fit in some insurance office of repute.

How then does the Tribunal approach the question of whether the costs have been reasonably incurred?

The burden (based on the authorities outlined above), is on the landlord to satisfy the Tribunal on the balance of probabilities that the costs have been reasonably incurred.

But there is seemingly some conflict between the decisions, and how the Tribunal can hope to assess whether insurance costs have been reasonably incurred.

Is the Forcelux approach correct? (i.e. (1) the appropriateness and lawfulness of the landlord’s actions and claiming the costs; and (2) the reasonableness of the amount being claimed) or is the approach in Avon Estates the correct one? (i.e. (1) the rate charged was represented of the market rate or (2) the contract was negotiated at arms’ length and in the market place).

In squaring this circle, the Upper Tribunal considered the recent Court of Appeal decision in Waaler and whilst Waaler doesn’t concern insurance, it does consider, in some detail, when costs have been reasonably incurred. In Waaler, emphasis was placed on not just the process of incurring costs, but also the outcome and in assessing whether costs have been reasonably incurred, it’s necessary to consider the outcome.

This is an important issue of wider implication when considering whether any costs have been reasonably incurred, and it requires a Tribunal to go beyond the issue of rationality of the landlord’s decision making, and to consider, in addition, whether the sum being charged is (in all the circumstances) a reasonable charge.

We are therefore back to a two-stage test in Forcelux.

A Tribunal must be satisfied that the charge in question was reasonably incurred.

How will the Tribunal approach that?

In approaching this, the Tribunal must consider the terms of the lease and the potential liabilities that are to be insured against.

Thereafter, the Tribunal will require the Landlord to explain the process by which the particular policy and premium has been selected. This may well be with reference to the steps taken to assess the current market.

Leaseholders may be able to place before the Tribunal quotations that they have been able to obtain. It is worth noting that in doing so those leaseholders must ensure that the policies are genuinely comparable (that they “compare like with like”) so that the risk of being covered properly reflect the risk being undertaken pursuant to the covenants contained in the lease.

This is not to say that landlords can’t negotiate a block policy covering the entirety (or at least a significant part) of their portfolio. However, it will be necessary for any landlord to satisfy the Tribunal that the block policy has not resulted in a substantially higher premium being passed on to the leaseholders without any significant compensating advantages to them.

Possibly the landlord and leaseholder will always have a division of opinion as to what is reasonable.

The landlord will always seek to ensure the insurance policy will discharge the leasehold obligation and not fail, whilst the leaseholder may be looking for the most cost-effective policy with less regards to the performance of the policy.

The real challenge is understanding the reasonableness of an insurance premium as seen by both parties - and how a Tribunal values the security of the contract.

The online culture is based on price - and reducing costs can only be achieved by reducing risk, which for an insurer often means reducing the cover and introducing restrictions in the cover.

It is vital that managing agents arranging insurance are experienced in handling block insurance and have amassed a depth and breadth of knowledge of the subject and are able to understand the so called small print.

In the adage that prevention is better than cure, we recommend that this knowledge is provided by an experienced internal team or via the services of a specialist broker.

 

[1] Havenridge v Boston Dyers Limited [1994] 2 EGLR 73

[2] Woodfall on Landlord and Tenant at 7.193

[3] Berrycroft Management Co Ltd v Sinclair Gardens Investments (Kensington) Ltd [1996] 29 HLR 444

[4] Williams v Suffolk Borough Council [2001] 33 HLR 22

[5] Forcelux Ltd v Sweetman [2001] 2 EGLR 173

[6] Avon Estates (London) Ltd v Sinclair Gardens Investments (Kensington) Ltd [2013] UKUT 0264 (LC)

[7] Cos Services Limited v Nicholson and anr [2017] UKUT 382 (LC)

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