Lords of the manna

Some freehold property owners are not giving tenants the best deals in buildings insurance because they are earning attractive commissions. By Karen Woolfson
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The Independent Culture
Some freehold landlords are making sizeable profits from arranging buildings insurance for properties. The deal involves creating a structure that allows them to receive commission for placing their insurance policies and charging higher than necessary prices to leaseholders to finance the deal.

The landlord may then be tempted to place the business with a company offering the highest commission rather than the one that offers the best policy at the most reasonable price.

The more leasehold properties a freeholder controls, the more scope there is to take advantage of the system. The freeholder typically sets up an insurance broking company to arrange wholesale cover for all his properties. The landlord will receive commission for arranging the cover via the broking company.

Leaseholders therefore end up paying much more for buildings insurance than they would as individuals on the open market. Moreover, the charge for insurance should decrease the more flats that are being covered because buying in bulk normally pushes down the cost.

Paul Pritchard, of the Freshwater Lessees Alliance (Fleas), which has more than 1,500 members, says their landlord, the Freshwater Group, has been challenged about the high amount charged for insurance through Highdorn, the broker it owns and which acts for it.

Ed Elliott, another committee member of Fleas, who lives in Burnham and Windsor Courts, London, alleges: "Freshwater admitted in February Highdorn is receiving 30 per cent commission on the buildings insurance. All it takes is a couple of phone calls to arrange insurance and if there is any commission it should be returned to leaseholders."

Mr Elliott ensured that the original insurance estimate of pounds 41,866 presented by Freshwater to 90 leasehold flats in 1996 was reduced to pounds 16,376 by coming up with some competitive quotes. "That's a staggering difference of pounds 25,490," he said.

"Even after that incredible reduction, the sum charged was pounds 3,838 more than the amount quoted by an alternative insurance company. This year we'll be demanding Freshwater shops around for the best deal and rebates at least 75 per cent of any commission received to leaseholders."

Terence Michael, a leaseholder in Kensington, west London, says: "The law is not tough enough and some landlords are finding the opportunity to make a special arrangement with an insurer irresistible." He wants all insurance deals to be completely independent of the landlord and stresses this should also apply to relationships with solicitors, accountants, surveyors and any other company or person connected with the management of the property.

"Some landlords just don't bother choosing the best deal. Leaseholders paying out the money are not being given any choice about where the insurance business is being placed and end up with a poor deal. In a number of cases, leaseholders have found insurance cover for less money and plan to challenge their landlords through a Leasehold Valuation Tribunal," he said.

Robert Hedden, group solicitor at Freshwater, defends the company from allegations that its insurance charges are too high. He said: "Our objective is to ensure that the number of insurance companies which we deal with is sufficient to maintain healthy competition. It is not in our lessees' interest to accept loss-leading quotes, which would inevitably lead to disputes over claims and higher charges over the long-term."

Mr Hedden says that Highdorn's commission earnings are in line with the market and the 30-per-cent figure quoted "well within the range of what might generally be expected". The current commission rate is now 20 per cent. This sum is payment for Highdorn's "complex" work in insuring the Freshwater blocks, plus dealing with claims and inquiries from lessees. The company does not charge a second fee to leaseholders for its activities.

He adds that when Freshwater produced its estimate for the cost of insurance for 1996/97, the sum of pounds 41,866 was arrived at by taking the previous year's sum and assuming a 7- per-cent "uplift". The pounds 16,376 figure was not comparable because it did not, unlike the original quote, include engineering and terrorism insurance. However, Mr Elliott, from the Fleas committee, claims the final quotes for terrorism and engineering cover were pounds 656 and pounds 1,913 respectively which, even if added to the new pounds 16,376 total, were still much lower than the original estimate. In the event, the bill for the general insurance element came in even lower, at pounds 15,253.

Separate from the row between Freshwater and its leaseholders, landlords are generally responsible for the insurance of a building under the lease and have the right to appoint the insurer. However, under leasehold legislation you have the right to ask for information about the insurance and the cost of the policy must be "reasonable".

You can ask the landlord to give you a written summary of the insurance cover, which must be supplied within one month. This should include the sum for which the property is insured, the name of the insurer and the risks covered. Your landlord may provide a copy of the relevant policy instead. Once you have seen the policy or received a summary, you can ask to inspect the insurance policy and supporting documents which provide evidence the premiums have been paid.

In some cases, the leaseholder is responsible for insuring the property but the landlord can nominate the insurer. You can challenge this arrangement if the cover is unsatisfactory in any respect or the premiums being charged are excessive.

It is worth checking the building is covered for its full re-instatement value and that the cover allows for inflation. The tenancy relations officer at your local council will be able to give you more information. If the policy is deemed unreasonable your council may help enforce these legal rights.

You are welcome to write to Karen Woolfson, Homebattles, c/o Nick Cicutti, 'The Independent', One Canada Square, Canary Wharf, London E14 5DL. Karen regrets she is unable to reply personally to all letters