Stuart Durrant, Partner and Head of the Property Team at Gardner Leader, talks about the challenge of insuring against flooding and how to assess the level of flood risk when buying a property.
The British Summer is upon us and although as I am writing the sun is out and the sky is indeed blue, we really have had a lot of rain recently. I walked past a property yesterday in Park Terrace Newbury which had a sandbag at the door and a barrier at the gate. This was presumably to stop flood damage and I was reminded of the flooding that occurred in Newbury in July 2007.
At the same time I was reminded that up to 200,000 homes in England and Wales have been warned they will struggle to obtain adequate flood insurance after June 2013. This is when the insurance industry’s voluntary flood agreement with the government to ensure the universal provision of flood insurance ends.
In almost a hundred constituencies there are 1,000 or more homes at high flood risk, according to the Association of British Insurers (ABI) after analysing the latest Environment Agency flood data. Boston and Skegness in Lincolnshire is the constituency with the most homes at significant risk of flooding with 7,550 properties under threat, although Windsor is close behind with 7,125 such properties. A property is defined as being at risk if it has a one in 75 chance of flooding in any given year.
The risk of households being unable to obtain cover is heightened by an ongoing row over who pays for the flood defences needed to maintain protection for the five million homes at risk across the UK.
There has been a “gentlemen’s agreement” between insurers and the government since 1961. The government of the time said it would be responsible for flood defences, and in turn the insurance industry would include flood cover as standard. At the end of the 1990s it was becoming clear to the insurance industry that the government’s side of the bargain was not being met, and was unlikely to be met in the near future.
The current flood insurance statement of principles agreement with the government, agreed in 2000 as a short-term measure, ends in June 2013. It states that insurers must include flood cover as standard for properties built before 1 January 2009, where the risk of flooding is low; and crucially, insurers must allow at-risk households who already have flood cover to automatically renew cover with the same insurer, as long as flood defences are planned to be in place within five years.
The ABI’s view is that this has grossly distorted the market because people in lower risk flood areas pay more to subsidise those at higher risk. Conversely, customers in high risk areas are tied to their existing insurer, and those insurers covering them have ended up with a disproportionate number of high flood risk properties.
Adrian Webb of esure put it beautifully: he said insurance in general “ensures a flow of money from the fortunate to the unfortunate. But the difficulty comes in areas where flooding isn’t accidental or a peril anymore, but a certainty. Then it becomes a redistribution of wealth and not insurance.”
It is clearly essential that the government and the insurance industry reach an agreement to ensure insurance cover is both available and affordable before the expiry of the agreement in June 2013.
If agreement cannot be reached then either cover will become unaffordable (or declined) in areas where there is a strong likelihood, of flooding or costs will rise for everyone. The areas identified by the ABI would probably be hit first.
If you are unable to obtain insurance then you will automatically be in breach of your current mortgage arrangements.
However there is a strong free market argument to say that the end of the current agreement on insurance would be a good move in the long run, because flood insurance provides economic penalties to discourage building in flood hazard areas. However, clearly in the short term, the withdrawal of insurance cover is likely to lead to blight and a fall in property values.
I understand that some insurers are saying that high risk homeowners might not be able to renew their cover later this year, because their new policy will extend beyond 1 July 2013: with all the implications for property value and mortgage availability that this implies. It is therefore very important when buying a property to assess the level of flood risk and to seek advice of the prospects of obtaining flood insurance after the current agreement ends. Information is available through the ABI and the Environment Agency and certainly when I act for a purchaser of a property I would do an environmental search and if this identifies a risk follow it up with a Flooding Report.
For more information regarding buying a property and assessing its flood risk, please contact Stuart Durrant on 01635 508080.