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Government-backed flood insurance scheme will not help commercial property owners, says expert

Out-Law News | 01 Jul 2013 | 11:57 am | 3 min. read

A new not-for-profit flood insurance scheme, agreed in principle last week between the industry and the Government, will not help commercial property owners in high flood risk areas, an expert has said.

However Michael Smith of Pinsent Masons, the law firm behind Out-Law.com, said that homeowners would welcome the agreement in principle between the Government and the Association of British Insurers (ABI) to develop a new ‘Flood Re’ fund.

 “As flood cover is usually crucial to obtaining a mortgage, the omissions could yet have serious repercussions for the property industry,” he said. “Homes with a council tax band of ‘H’ (or equivalent outside England) will fall outside the scheme as currently proposed, as will commercial property in high flood risk areas. Nor is it clear whether mixed use properties will be covered by the scheme.”

“However, the announcement will be widely welcomed, particularly by homeowners in high flood risk areas who might otherwise struggle to obtain affordable flood insurance,” he said.

Once established, Flood Re would provide certainty to householders by capping flood insurance premiums, based on the council tax band of the property. An industry-backed levy, payable by all UK household insurers, would be used to fund claims made by people in homes at high risk of flooding. This levy would be passed back to customers, resulting in an estimated levy of £10.50 on annual household premiums.  According to the ABI, as flooding costs are already covered by householder premiums, consumers should not notice any difference.

It is anticipated that the scheme will be set out in the Water Bill and that it would last for at least the next 20 years. The current industry Statement of Principles, which was due to expire at the end of July, will be extended until the Bill has passed through Parliament and Flood Re is set up. According to the ABI, the new scheme is expected to be in place by summer 2015.

Homes built after 1 January 2009 would not be covered by Flood Re, to “avoid incentivising unwise building in flood risk areas”. This mirrors the position under the insurance industry’s existing Statement of Principles.

Since 2000, insurers that are members of the ABI have agreed to provide flood insurance cover to existing customers under certain circumstances through a ‘Statement of Principles’ agreement. Under the agreement, insurers will continue to offer flood cover to existing customers where the risk is not “significant” or the Government has announced plans to reduce the property’s flood risk within five years. However, insurers are able to adjust premiums and excess to “reflect [their] understanding of the flood risk”.

The ABI has previously raised concerns that this arrangement is “unsustainable” and has distorted competition in the insurance market since there is no incentive for new insurers to offer flood cover, while customers have been unable to switch suppliers or risk losing the benefit of the agreement.

“Flooding is terrible for anyone affected by it,” said Environment Secretary Owen Paterson. “We have worked extremely hard with the industry to reach an agreement on the future of flood insurance. There are still areas to work through, but this announcement means that people no longer need to live in fear of being uninsurable and that those at most risk can get protection, now and in the future.”

A Government consultation on the future of flood insurance confirms that the creation of Flood Re is its preferred option. However, powers included in the Water Bill will enable it to take action to regulate the insurance industry if flood insurance becomes unaffordable, it said. The Government has also committed to £370 million of capital investment in flood defences in the six years beginning 2015/16 as part of this year’s Spending Round. This figure will rise with inflation, it said.

The Water Bill builds on the draft published for pre-legislative consultation last year. It proposes to open up the water market to competition by allowing businesses, charities and public sector customers to switch supplier. The Bill would also make it easier for new companies to enter the supplier market or to offer supplies in more than one UK jurisdiction, improve drought resilience and extend the scope of the Environmental Permitting regime beyond pollution prevention to include flood defence and abstraction rights.

Otto Thoresen, head of the ABI, said that Flood Re would be a “major undertaking” for UK insurers.

“The work insurers have undertaken to get here reflects the industry’s desire to cover flood risk at an affordable price in the face of the increasing flood threat in the UK,” he said. “The hard work now begins for both sides if we are to make this vision a reality.”