‘Daylight robbery’: Probe demanded after cladding scandal victims hit with 400% insurance price hike

Dramatic rise in insurance costs rubs ‘salt in sore wounds’ for leaseholders already facing huge bills to fix fire safety defects, competition watchdog told

Ben Chapman
Wednesday 10 November 2021 21:20
<p>Freeholders and managing agents have received large commissions as leaseholders have been hit with heft insurance premiums </p>

Freeholders and managing agents have received large commissions as leaseholders have been hit with heft insurance premiums

Regulators are facing demands to investigate hidden commissions paid to freeholders of flats after homeowners saw their buildings insurance premiums hiked by 400 per cent.

The dramatic rise in insurance costs rubs “salt in sore wounds” for hundreds of thousands of residents trapped in potentially unsafe homes that they can’t sell due to fire safety defects discovered in the wake of the Grenfell Tower tragedy, the Liberal Democrats have said.

The party, along with campaign group the Leasehold Knowledge Partnership (LKP), is calling on the competition watchdog to step in to ban commission paid by insurance firms to freeholders and managing agents of blocks. They argue that the payments give a financial incentive to freeholders to negotiate higher premiums and worse insurance cover for leaseholders.

Residents facing bills of tens of thousands of pounds to remove combustible cladding and fix other fire risks have seen insurance bills rocket. The increases have heaped further financial misery on homeowners while delivering a payday for freeholders, managing agents and brokers, who all take a cut of the insurance premiums that they negotiate but which leaseholders must pay.

There is no legal obligation for the freeholder to disclose to leaseholders how much mark-up they add to the cost of the premium, which can be as much as 72 per cent. Commission rates of 20 per cent are common.

The Lib Dems have told the Competition and Markets Authority (CMA) that leaseholders in unsafe blocks are “already standing on the edge of a precipice”.

“Therefore to allow the unfair practices that subject many leaseholders to hefty hidden mark-ups into their already punishingly high premiums is to rub salt into sore wounds.

“Urgent action is needed to protect an already vulnerable sector of society.”

The CMA said it can’t comment on any potential probe but the watchdog has taken an increasingly tough stance on leasehold property more generally, issuing a damning report on problems in the sector last year.

Michael Gove, the new housing secretary, has signalled that he will take a tougher stance than his predecessor on leasehold and said this week that leaseholders should not have to pay to fix unsafe buildings.

Joe Douglas, a leaseholder in north London, is one of hundreds of residents in his development to have seen premiums rise from £350 per year in 2019 to £1,500 from March this year, an increase he describes as “daylight robbery”.

Mr Douglas investigated the hike and found that other blocks on the same development, which had also been found to have fire safety defects, had had much lower premium increases, even though some of the buildings were deemed to be higher risk and had insurance provided by the same company, Zurich

“It just makes no sense. It can’t be justified,” Mr Douglas said.

He approached an insurance broker to get a better quote but was told that no broker would provide one because the freeholder already had a policy in place. “We are just stuck with what we’ve got,” said Mr Douglas.

Upon investigating, he found that the freeholder of his flat, E&J Estates, took out a new policy this year with its existing insurer Zurich. Leaseholders were not informed about the quote until the policy was already in force.

Standard practice in the industry is not to quote for a building that already has insurance in place, meaning leaseholders are effectively barred from finding a better deal. Mr Douglas was told that the broker would need permission to obtain a new quote from the insurer and the freeholder, both of whom had benefited from the policy they had put in place.

If the freeholder took a 10 per cent commission, its cut would have received £25,000 for the deal, just from Mr Douglas’ block and a neighbouring one.

E&J Estates said that its brokers had contacted 16 insurers but had been unable to find a better deal and that the company always challenges quotes that appear out of line with the market.

A spokesperson added: “The work involved in securing renewal this year, in a very difficult insurance market, was materially greater and required significant additional resource compared to previous years.”

Zurich said it provided insurance for E&J’s whole portfolio and did not have influence over how the cost was allocated to individual leaseholders.

E&J’s premium had increased due to fire damage at another development as well as “previously unknown information regarding combustible cladding, which changed the risk profile”, a Zurich spokesperson said. They added that the rate of commission it paid to E&J was “significantly” reduced in 2021 compared to the previous year.

Growing pressure on freeholders is beginning to persuade some to reduce the commissions they collect. Karryn Beaumont, a leaseholder of a flat in New Providence Wharf in London, discovered that her freeholder had been charging commissions of more than 20 per cent.

After a long battle, the freeholder, Ballymore, agreed to reduce its fee. Ballymore will charge a “placement fee”, which it says will be based on the amount of work it has to do to get the quote, instead of a commission. However, the developer has not yet provided details of the new arrangement.

Figures obtained by Ms Beaumont indicate how lucrative commissions have been for freeholders. Ballymore collected more than £114,000 for New Providence Wharf last year.

After fire at New Providence Wharf earlier this year, Ballymore temporarily reduced its commission to 6.1 per cent of the premium value. The broker that arranged the policy collected around 4.5 per cent.

“The broker does have to go out into the market and arrange the insurance but it’s not clear to me what work Ballymore have to do for that money,” said Ms Beaumont. Ballymore already charges leaseholders separately for administration relating to the insurance policy, through the service charge.

Ballymore said it manages its estates “entirely in the interests of leaseholders and not with a view to profit” and charged commission at a level below the maximum recommended by the Association of British Insurers.

“It is designed to be a not-for-profit revenue, used only to help deliver management services across our portfolio, a Ballymore spokesperson said.

“Nevertheless, we continually seek ways to lower insurance costs. This includes all Ballymore properties moving to a fee-based system in 2021/22, which is anticipated to reduce costs still further as fees will not fluctuate when insurance premiums go up.

Ballymore added that it had helped a number of residents’ associations to find their own quotes but none had been able to find a better deal.

LKP wants the Financial Conduct Authority to tweak its rules around insurance to recognise leaseholders as parties to buildings insurance policies taken out by freeholders. For years, the FCA has resisted the change.

The regulator said it was “aware of issues” around commissions and working to resolve them.

A spokesperson said: “New rules we introduced recently require firms to deliver products which are fair value, including whether commission payments are consistent with this. In addition, our rules prohibit commission arrangements which are not in the best interests of customers.”

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