Flooding has become an increasing widespread property risk in the UK in recent years. Flooding caused £400 million worth of damage in 2012 alone, and over 5 million properties in England and Wales are at risk of flooding (that’s almost 1 in 6 properties).
The insurance industry’s 2008 Statement of Principles (Principles) set out a commitment to continue to provide flood risk insurance to homes and small businesses. This was due to expire on 30 June 2013, so an announcement about its successor has been much anticipated. As the date approached with no announcement on future plans, the Association of British Insurers (ABI) extended the duration of the Principles for a further month to 31 July 2013.
On 27 June 2013, the Government launched a consultation paper on securing the future of flood insurance and announced an agreement with ABI of a Memorandum of Understanding (MoU) on developing a scheme called Flood Re. The consultation paper discusses various options that have been considered, but Flood Re is the government’s preferred option of addressing the availability and affordability of flood insurance for households.
When it comes into place in summer 2015, Flood Re should ensure that most domestic property owners, even if they are at risk from flooding, will be able to access and afford flood insurance. In the meantime, ABI has confirmed that the Principles will continue to apply.
The new scheme will be financed and run by insurers and it will be a not-for-profit fund. Flood Re would charge member firms £180 million annually; and they in turn would pass this on to all their customers, leading to a levy of approx. £10.50 on insurance premiums across the board. It also controls excess levels to between £250 and £500. Flood Re is intended to be a transitional scheme, gradually increasing the maximum premiums and then being phased out after 20 to 25 years.
Whilst this is a big step forward in terms of stability and availability of flooding insurance for households, it does not cover businesses of any size. The Statement of Principles has never applied to larger businesses but did cover small businesses, whereas Flood Re only applies to domestic properties. ABI’s agreement to extend the application of the Principles to 2015 pending the establishment of Flood Re is not specifically stated to only apply to householders, but given the context it is strongly presumed that that this is the intention. The government has determined that there is insufficient evidence to justify intervening in the business insurance market here, but has said that it will keep the situation under review.
In a connected move, the Law Society has issued a practice note advising all solicitors to raise flood risk with clients in property transactions, and undertake further investigations if appropriate.
Always consider flood risk when you are contemplating buying or leasing a new property, and do not assume that flood risk insurance will necessarily be available at a reasonable cost.
