Property Matters edition 2

ISSUE 2 2015 Published by Thomas Carroll UK Broker of the Decade*

Insurance News for Property Owners and Professional Advisers

Property Underinsurance Do you have adequate cover

Terrorism

How to deal with the effects

New Landlords

The right advice at the right time

Heritage Property Understand your risk

WELCOME TO THE

Second Edition of Property Matters for 2015 We aim to provide topical property articles which relate to our property insurance and risk management activities.

Thomas Carroll specialises in the property sector, providing residential landlords, housing associations, commercial property investors and developers with insurance and risk management solutions as well as wealth management, estate planning and health & safety compliance.

We enjoy close business relationships with many property sector professionals, including solicitors for legal indemnity solutions, lenders, property managing agents and other property sector specialists.

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We would be delighted to receive feedback on our publication, or suggestions for future topics to be covered, and we would welcome the opportunity to offer you independent, professional advice and assistance on any property sector issue.

Mick Learoyd Head of Property

Property Matters

The Problem of

Property Underinsurance

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Up to 80% of commercial properties could be underinsured by an average of up to 50%, according to the Building Cost Information Service (BCIS), part of the Royal Institution of Chartered Surveyors. There is a similar issue with the residential rental market.

Leading UK property insurance underwriters are raising serious concern about the extent of property underinsurance and the problems this causes when reinstating property damage.

Insurers highlight several factors as being responsible for properties being undervalued, including the wide discrepancy between the market value and the cost of rebuilding the property in a like for like manner, complying with all current regulations. The economic climate, which has particularly affected commercial property, means market values across the UK have been depressed compared to pre-2009 values. At the same time, building raw material costs have risen and various changes to Building Regulations have added to the cost of repair, reinstatement or re-building of properties.

Building Sum Insured Variables There are many factors to consider when assessing the adequacy of the sum insured for a particular building:

•• Age & whether it is Listed or in a conservation area

•• Height, ground conditions & site access •• Construction materials •• Professional fees & specialist consultants •• Regulatory compliance •• Lease responsibilities •• Contamination & remediation - e.g. asbestos

•• Basis of insurance cover required

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Property Matters

Underinsurance

Policy Voidable

Underinsurance Waiver

Many insurance policies contain clauses regarding underinsurance: the wording confirms that the insurer’s liability for any loss under the policy is limited to the proportion that the sum insured bears to the rebuilding value at the time of loss. Whilst there are variations in the wording, if a property is deemed “underinsured” by 50%, this would likely result in the amount payable by the insurer being limited to 50% of the actual cost of reinstatement or repair. In the event of serious damage causing total loss and demolition of the property, the insurer’s maximum liability is the sum insured, which is often inadequate to rebuild. This can cause breaches in mortgage covenants, lease obligations and failure to meet requirements of the local authority.

Property Insurers base their assessment of risk and their underwriting on disclosure of material facts regarding the property. Many policies contain a general condition which states “policy voidable”: the insurer will void the policy cover if any material fact is misrepresented. Some insurers deem deliberate underinsurance as misrepresentation, as this is often solely to achieve a lower insurance premium. In extreme circumstances insurers may void the policy due to underinsurance, which would result in no cover and no claim payment.

Thomas Carroll Brokers Ltd carries out insurance audits for many professional bodies as well as advising property investor clients. We can arrange property owner insurances with no underinsurance clause.

Some insurers are prepared to consider this approach, subject to a RICS professional valuation every three years per property asset. Thomas Carroll also has a network of property business partners who can undertake professional insurance valuations, to ensure that property assets are adequately protected and obligations to mortgage providers, lease holder tenants and local authority regulators are met.

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TERRORISM Standard property insurance policies do not cover damage caused by acts of war or terrorist attacks. We are reminded by daily news bulletins of the continual underlying threat of such damage in the UK.

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Property Matters

In a recent interview, the head of MI5 warned that advances in technology are allowing terrorists to communicate “out of reach of authorities” and terror plots are at the highest level since 9/11.

Most UK insurers providing commercial property and consequential loss insurances are members of the Government-backed Pool Re scheme. This scheme uses the Reinsurance (Acts of Terrorism) Act 1993 definition of an act of terrorism. An event must fall within the Act definition for insurer to make a recovery from Pool Re. However, the insurer policy often provides wider cover than the Act definition - for example, malicious damage, or incidents not directed towards overthrowing or influencing the UK Government or any other government de jure or de facto.

The Pool Re scheme covers most types of commercial property, buildings, their contents, site property, construction projects and machinery and plant.

The scheme does not cover property insured under marine, aviation or motor policies and it does not extend to life or personal injury, nor private property.

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Pool Re cover is normally an extension to a conventional commercial material damage insurance, without the need for a separate policy. There is no exclusion for chemical, biological, radiological or nuclear contamination, although the terms and conditions of the underlying policy will equally apply to the terrorism cover.

Pool Re is regarded as the traditional placement route for terrorism property damage and linked business interruption cover. Many businesses are placing their terrorism cover with alternative FCA-approved providers, and Lloyds of London market offers innovative and flexible alternative arrangements. These alternatives, in contrast to Pool Re, include “First Loss” cover availability, cover for Europe and most other countries and the ability to “cherry pick” properties for terrorism cover within a portfolio.

Terrorism cover is often required to meet contractual obligations such as mortgage covenants, lease obligations, bank loans or hire purchase agreements.

Thomas Carroll Brokers Ltd arranges terrorism cover for a substantial number of property assets across the UK, for business operations and property owners.

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The Right Advice at the Right Time Property investment is an increasingly attractive asset class, offering strong yields at a time when the cost of secured borrowing remains low. Thomas Carroll Group is seeing confidence returning to the property sector, with increased activity in both the residential and commercial sectors.

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Property Matters

There are lucrative deals to be made, with an increasing number of motivated sellers in the market, as well as new investors following the April 2015 pension reforms.

As a result, there are many new landlords, in both the residential and commercial property markets, for whom obtaining the right level of insurance protection and advice is very important.

The landlord’s liability for personal injury to persons on or near their property can be onerous and potentially expensive.

The landlord may also have obligations and responsibilities for repair, depending on the lease and tenancy agreements.

Under the provisions of the Occupiers Liability Act 1957, anyone injured whilst

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visiting a property may seek compensation from the occupier (not necessarily the owner). When the premises are rented, the claim would initially be brought against the tenant occupier. However, if the injury is caused by disrepair of the premises, the landlord could be held liable. Where the landlord has a duty to repair and has not carried out the necessary work, the claimant would have the same rights against the landlord as against the tenant.

If premises are let under a tenancy where the landlord is obliged to carry out repairs (All Assured Shorthold & Residential Tenancies, the landlord has a statutory duty, under the Defective Premises Act 1972, to take reasonable care to ensure that those at risk of injury are protected, including occupants and visitors.

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Under a commercial lease, where repairs are the responsibility of the tenant, the landlord may be in a position to avoid any liability for injury as a result of defects in the property. However, the obligations for repair can be for “core or shell” of the property. In the case of Hannon v Hillingdon Homes Ltd (2012), which concerned the landlord’s liability under the Defective Premises Act 1972 (DPA), it was shown that commercial property landlords can be held liable in certain circumstances.

Commercial landlords may be liable if the lease contains provisions such as (1) a requirement that the landlord is responsible for maintaining or repairing the premises, the duty will arise if the landlord is put on notice of the defect and (2) an express or implied right in the lease which allows the landlord to enter the premises to carry out maintenance or repair.

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Landlords could also be held liable for injuries caused by defects due to changes made by their tenants, even if these changes are in breach of the lease terms.

The Right Professional Advice?

It is important to arrange the correct insurance cover, which includes a “non-invalidation” clause. This ensures that the cover for building damage and landlord liability will not be prejudiced by any alteration, act or omission which occurs at the property without the authority or knowledge of the freeholder, mortgagee or lessor.

Property management is also important. Insurance companies recognise the benefits of good property management and reflect this in their premium rate and the extent of cover.

Professional property managing agents play an increasingly important role in good stewardship of property assets, from finding and vetting tenants to preparing lease and tenancy agreements, repairing and maintaining properties and carrying out regular property inspections.

Landlords can also consult residential lettings and property management guides, which offer advice on residential landlord obligations and requirements, including gas certificates, electrical inspections, smoke and carbon monoxide alarms.

Thomas Carroll Group offers a range of professional property services, including advice on financial planning and investment, in-house property claims management and health & safety compliance.

Property Matters

Heritage Property We are very fortunate to have a significant number of heritage properties across Wales and The Marches.

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For these special properties, which may be in conservation areas or individually Listed, there are very special insurance requirements.

Insurance products exist which are specifically designed for heritage property and aim to meet the obligations and stipulations of the Planning (Listed Building and Conservation Areas) Act 1990. Bespoke insurance cover needs to be sufficient to allow sympathetic repair or restoration of the heritage property, using appropriate techniques and substantially the same materials.

Expertise and knowledge of the heritage property sector is necessary to provide insurance and risk management advice, as well as property damage repair using skilled tradespersons. Feedback from heritage property owners suggests that a professional service package should also include bespoke insurance products, in-house heritage property claims expertise, health and safety compliance, risk management, wealth management and inheritance tax planning.

Many heritage properties present operational issues that would not arise in purpose-built commercial premises. Many Listed buildings are part residential homes and part business operations, so the insurance programmes need to be bespoke and flexible. Many heritage properties are not Listed, but the owners and business operators rely on the heritage aspect of their property to attract visitors.

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For Listed buildings, there is a legal requirement to obtain Listed building consent for repairs or restoration work following damage.

This may involve restoring the property as close to the original state and character as possible. Research by leading heritage sector insurers has shown that a significant number of Listed properties are underinsured, which can result in a large shortfall in the insurance money available to cover the repair or restoration cost.

Heritage sector insurance specialists recognise that the modern building valuation process (RICS: Building Cost Information Service) is inappropriate for heritage property, where up to 80% of value is likely to be in the building envelope rather than internal fixtures and fittings.

The reliance on specialist manual skills for repairing and restoring heritage property can increase the reinstatement or insurance valuation, together with the cost of sourcing the building materials.

Property Matters

In heritage property used for business trading, repair and restoration times may be increased, adversely affecting the trading position and reducing income during the recovery.

Fire prevention is a critical aspect of heritage property risk management.

Many heritage properties are remote from the emergency services, use solid fuel fires and have combustible timber linings.

These risk features require good property stewardship and fire risk reduction measures. Fire Risk Assessments should form part of a professional consultancy service.

Asbestos can be a factor in older properties. A specialist asbestos survey should be carried out with an agreed remediation or containment action plan. Disaster recovery and contingency planning is also

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important This should include good cooperation with the emergency services. Risk management should be part of the organisational culture.

Specialist heritage property insurers include Awards from English Heritage and the Heritage Alliance.

These insurers recognise the need for flexible and bespoke insurance covers. Their products cater for historic houses, visitor attractions, castles, museums and galleries, fine art and collections, boutique hotels, theatres, ornamental and landscaped gardens, stately homes and country estates. They offer many tailored services, including building valuations, fine art specialists and restoration experts, as well as providing access to skilled craftsmen, conservators and restorers.

Legal indemnity insurance solutions can also be provided to protect owners from Local Authority enforcement and financial penalties, where previous works have offended the Listing or are in breach of Building Consent.

Thomas Carroll has a real understanding of the sector and we positively encourage a partnership between ourselves, our clients and the insurer. We also have close business relationships with many professionals active in the heritage sector including surveyors, valuers, solicitors and restoration specialists. With the combined activities of our Group companies, we can provide a tailored, holistic service for historic houses and castles, fine art collections, heritage property used for commercial purposes and heritage property venues.

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Insurance Premium Tax Changes The Chancellor announced earlier this year that from 1 November 2015 the standard rate of Insurance Premium Tax (IPT) of 6% will increase to 9.5%.

Insurance industry bodies have reacted negatively to this large increase in IPT as part of the budget proposals which were passed in July.

This increase to 9.5% will affect all new property insurance placed in the UK and renewal of property insurances from 1 November 2015.

The position with mid term alterations will vary by insurer as they may use different

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accounting systems to HMRC. However, in the majority of cases, mid term alterations to policies with effect from 1 November to 1 March 2016, which result in additional premiums will be charged at 6% IPT. The Government included this 4 month transitional arrangement for policies renewing prior to 1 November 2016.

Return premiums during this period will be charged

at the 6% rate, mirroring the tax rate applicable when the insurance cover was incepted.

Thomas Carroll has held discussions with all our property insurance providers and we are available to advise clients on the impact of these changes, particularly where property insurance premiums are being recovered from tenants by virtue of lease agreements.

Property Matters

Contact Our Experts To talk to us about the potential issues and risks, and the solutions available, please contact your Thomas Carroll Account Executive or our dedicated teams:

Gareth Cotty ACII Director t

029 2085 5240

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gareth.cotty@thomas-carroll.co.uk

Property Risk Matters Mick Learoyd FCII PgDip MM MIRM

Jack Lane BSc (Hons) Cert CII

Head of Property

Property Development Executive

t

029 2085 3750

t

029 2085 3756

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michael.learoyd@thomas-carroll.co.uk

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jack.lane@thomas-carroll.co.uk

Legal Indemnities Louise Jones LLB (Hons) Dip CII

Cerith Bevan LLB (Hons) Cert CII

Development Executive

Development Broker

t

029 2085 8602

t

029 2085 3763

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louise.jones@thomas-carroll.co.uk

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cerith.bevan@thomas-carroll.co.uk

Thomas, Carroll (Brokers) Ltd is authorised and regulated by the Financial Conduct Authority 15

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