We continue to see images of the devastating impact of flooding in the UK. Environment Agency flood warning systems have helped unfortunate residents and small business owners cope as best as they can by predicting flooding where possible and advising on preventative measures. Those who are affected will no doubt have contacted their insurers for help with the damage and costs of alternative accommodation.
Current Protection
Since 1961 the Government and the Association of British Insurers ('ABI') have effectively secured insurance against the risk of flooding for most homes and small businesses through a series of agreements. The last agreement, reached in 2008, provided for cheaper flood insurance to be available on standard terms even where the property is at a "significant" risk of flooding (i.e. where flooding is expected once in every 75 years), so long as there are plans to reduce that risk below "significant" within a five year period.
The 2008 agreement does not benefit new properties or those where there is insufficient funding to permit the construction of flood defences to reduce the risk, however it does provide significant assistance to hundreds of thousands of property owners throughout England and Wales.
The 2008 Agreement expires on 30 June 2013. After that date insurers will not be obliged to provide insurance on standard terms against flooding, but have agreed that: "the industry will continue to work with existing customers to explore insurance options for domestic property and small business customers where the flood risk is significant and no public plans are in place to defend the property"
Changes Ahead
Faced with huge losses from recent claims, decreased investment in flood defences and increased incidents of flooding partly due to climate change, the insurance industry argues that it can no longer afford to maintain such agreements to insure against flood risk. After the expiry of the 2008 Agreement the cost of insurance premiums are likely to more accurately reflect the risks associated with individual properties. Insurance premiums may increase substantially and policies may be restricted or withheld for a much higher number of the most at-risk properties.
Know Your Property
With one in six properties in England and Wales at risk, and less than eight months until the 2008 Agreement expires, it is important that property owners, tenants, investors and lenders start to review their potential exposure and obtain advice where necessary. Where "at risk" properties are to be bought, sold, let or remortgaged, the relevant parties must be aware of the uncertainty regarding the availability of insurance.
If a property is close to a waterway of any nature, specialist investigations are recommended. The results of such investigations may affect the value of the property.
The Environment Agency flood-risk maps do not provide property-specific information or advice. They only consider flood risks from coastal and "main" rivers (not from ground/surface water) but nevertheless provide a good starting point for investigations. Independent flood risk reports use more sophisticated data and risk models than the Environment Agency. They often cover surface water flooding and predict some range of anticipated flood depth. These desktop reports are relatively cheap to obtain, with prices starting from £30. They provide a useful level of knowledge before engaging a more expensive flooding expert.
Actions and consequences
The Government is looking at proposals from the insurance industry in the hope that insurance will be available, regardless of flood risk, after the 2008 Agreement expires. However, it is still wise for parties to be aware of the implications of a high flood risk now and to take precautions accordingly.
A purchaser or tenant aware of a flood risk may be able to negotiate the price or rent paid for a property and consider installing flood resistance measures or take practical steps to minimise the impact of flooding.
Standard loan documents may be breached when borrowers find themselves unable to insure for specified events, or for events that a prudent property owner would insure against. An inability to insure may not amount to an event of default in itself, but there may be an impact on the loan to value ratio which the borrower is required to maintain. Landlords or tenants could find that, where a property becomes uninsurable against flooding, depending on the terms of the lease, they are liable for repair costs and the costs of alternative accommodation. Tenants will remain responsible for insuring their contents.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
