Flood Insurance Cover

Under a home insurance policy, the peril of flood is included for the vast majority of Uk homeowners. It is classed as one of the standard insurance perils and is listed in the council for mortgage lenders handbook as one of the perils required before a mortgage can be advanced on a property. Under an agreement between the Association of British Insurers and the Government, even homes in higher rated areas have the cover included thus extending to the owners valuable insurance protection and ensuring compliance to the terms and conditions of their mortgage.

Now this agreement between the Government and the Association of British Insurers to provide cover to “at risk” homes expires in June 2013 and a new agreement has yet to be reached. It is estimated by The Environment Agency that 5.2 million homes in England alone are at risk of flooding and as many as 185,000 business premises. This is a serious situation for homeowners and mortgage lenders alike as potentially no insurance cover = no mortgage.

Why is the agreement coming to an end?

The statement of principles was agreed by the Association of British Insurers and the Government in 2008 and under these agreement insurers would continue cover for at risk homes, often at a higher premium with a higher policy excess. The Association of British Insurers believes that despite these additional terms, their members have continued to cover many properties, which had the agreement not been in force would have been uninsurable. The Association further believes that its members contribution to providing flood cover is almost unparallelled in European countries.

However, the Association, in my opinion correctly believes that the problem of providing cover against flood is not solely the problem of insurers, after all they wish to make a profit and cannot continue to provide cover if losses continue at the current levels. Without additional investment and a plan of action, the situation is likely to worsen. With changing weather patterns and the increased likelihood of flooding caused by surface water, claims look set to increase unless appropriate action is taken.

The government needs to spend more money on improving flood defences in high risk areas, and until this is done, it is unlikely that insurers will want to continue to foot the bill for losses which can average between 20 and 40 thousand pounds per property.

What’s the answer?

The situation of allowing homes to be insured without some flood insurance cover is clearly unacceptable, without the protection of this insurance cover, home owners could not only face potentially a situation where they do not have the funds to repair their damaged homes but may also find they are unable to obtain a mortgage or continue with an existing mortgage. Clearly, without a mortgage, the sale of a property may only appeal to cash buyers and even they may not be interested if the acquisition of a suitable contract of home insurance is not possible.Further, I do not believe that lenders will wish to have funds outstanding on property that is not secured by an insurance policy.

I believe it is time the Association of British Insurers and the government advanced their discussions in to this matter and perhaps arrive at a temporary situation where the government underwrites the risk of flooding, in return for an insurance premium, which perhaps could be added on or incorporated in to a home insurance policy. This may prove a controversial method as homeowners who are not at risk will not want to subsidise those that are. However, as with Terrorism insurance, the government in conjunction with the Association of British Insurers should be able to come up with banded insurance premiums so those at risk pay more than those that are not.

Other European counties have levies imposed by the government for certain risks

In Spain, for example, Spanish insurance policies have a “Consorcio” charge, the Consorcio is a public corporation that basically acts as a catastrophe insurer for certain types of insurance and perils, the primary role of Consorcio is to compensate losses arising from a number of natural events including socio-political acts defined as “ extraordinary events.” Also in Turkey they have a system known as DASK. DASK is a compulsory earthquake insurance provided by the Turkish Government which covers a percentage of damages in the event of an earthquake.

It is being reported in the press that some households are already finding it difficult to buy home insurance and with the deadline now less than a year away, urgent action is required to avert a crisis for homeowners.