Insurance blow for flat owners: Landlord need not seek cheapest quote

FLAT-OWNERS may have to pay much more than is necessary for property insurance after a court ruling that landlords are not required to find the cheapest quote.

A landlord was able to insist that tenants pay an insurance premium of more than pounds 14,000, even though the property could have been insured for pounds 3,000. Thousands of leaseholders could find themselves in the same position because their leases are similarly worded.

They will have to reimburse their landlord for whatever amount is demanded, regardless of whether it is reasonable. The landlord in this case, a company called Havenridge, owned two commercial properties in Leicester. But the same principle applies if you live in a leasehold house or flat where the landlord arranges the property insurance. The lease of the properties was for 25 years. The landlord was required to insure the property against specified risks in 'some insurance office' of repute.

The tenant, a company called Boston Dyers, was required to pay the amount that the landlord spent on insurance. There was nothing in writing that required the landlord to act reasonably in arranging insurance. All the lease said was that the money had to be 'properly payable'.

In January 1990, the landlord asked for a payment of pounds 14,057 for the insurance. The tenant objected. It said that a fair sum would be pounds 3,000 and argued that the words properly payable implied that the insurance premiums should be fair and reasonable.

John Samson, property partner with Nabarro Nathanson, a firm of solicitors, said: 'There is a major distinction between what is proper and what is reasonable. If a payment is required to be reasonable you have rights to reclaim any excess charge. This does not apply to payments that are merely described as proper.'

The tenant did pay the full amount of pounds 14,057 but claimed credit for the difference - pounds 11,057. The court decided whether the landlord's right to recover the insurance premium was restricted to what was fair and reasonable.

The tenant lost the case, the Court of Appeal deciding that 'properly' did not mean 'reasonably'. 'Properly' only means that a landlord is required to act in a normal business manner.

It is sufficient for the landlord to approach one insurance company provided that the premium paid was no more than the market rate for that insurer in the normal course of business. The fact that the landlord could have found a cheaper quote, or did not shop around for more than one quote, is irrelevant.

Ashwin Mody, litigation partner with Barradales of Leicester, acts for the tenant. He said: 'The decision does look unfair on first principles, particularly where a tenant could get the insurance so much cheaper. But when you follow the law through, fairness is not always the governing factor.'

In this case, the landlord did use an independent insurance broker to find quotes and the insurance was placed with a reputable insurance company.

Flat-owners should check the insurance terms in their lease. Many blocks of flats have similar wording to the lease in this case.

It could be possible to challenge the amount of the insurance, but it is difficult. It would be necessary to show that the choice of insurance arrangements was not in the normal course of business.

It would be improper if there was a special arrangement about commission, or if there was a relationship between the landlord and the insurance company, or a special discount had been obtained by the landlord but had not been passed on to the tenant.

Mr Samson said: 'In my experience most landlords behave honourably when they arrange insurance.

'There is a Service Charge Code for flats, which has statutory force, and does cover insurance. But it does not contain any requirement that the amount spent on insurance or services has to be reasonable.'

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