Block of Flats - Who Pays The Excess?
These days it is accepted that an insurance policy will carry an excess which is sometimes referred to as a deductible. This is the contribution the policyholder has to pay towards any claim before the insurer pays the balance. Commonly, different levels of excess will apply to different types of losses. The challenge, however, is who should pay the excess and why?
The answer to this is often unclear and there are a number of issues to be considered. The starting point is the lease; with some modern leases specifying how excesses are to be dealt with – which is usually done by including them under the service charge account. Older leases, on the other hand, are unlikely to specifically dictate how insurance excesses are to be handled as, when they were drafted, excesses were less common.
So, you may ask, why have excesses become common place and the answer is simply that they are a means of reducing the premium. Initially, small excesses were imposed on insurance policies to eliminate small claims where the cost of administering the claim could be greater than the amount of the loss being claimed for. More recently, however, larger insurance excesses have become a way of reducing the premium; and the larger the excess becomes, the more contentious an issue it becomes and the more likely this will be legally challenged by means of an appeal to the Leasehold Valuation Tribunal (LVT).
Assuming your lease is silent on the subject, you will have to consider whether you wish to add it to the service charge account. But if you do, then you need to be aware that the LVT may rule against you, depending upon the way the rest of your lease is constructed.
If the claim relates to common parts, or affects multiple flats, it could be assumed that this would be considered a general maintenance issue and, as such, the excess simply be added to the service charge account.
With an escape of water, on the other hand, it is usually the flat owner underneath the flat where the water originated that suffers damage and will often be the party making the claim. Whilst, morally, the flat owner below may feel that it is the fault of the flat owner above, the challenge is in establishing strict liability in law and for most claims this is not easily possible. For example, a flat owner who accidentally overfills a bath would probably not be considered negligent by a court of law unless it could be proved that this was not the first time they had done so.
The LVT have generally allowed for excesses to be claimed under the service charge account but this is not always the case. In fact the LVT have ruled both for and against excesses to be charged in this manner so this is a grey area.
It is commonly accepted that insurance excesses are a means by which insurance premiums can be reduced but the difficult debate is whether they form part of the insurance costs in the eyes of the lease.
Electing for or having a very large excess can also cause problems for a flat owner looking to sell their flat. The conveyancing solicitor acting for a prospective purchaser is bound by the Council of Mortgage Lenders’ handbook which requires them to refer to a mortgage lender if the insurance excess contribution from any one flat is greater then £1,000. Where this is the case, a mortgage lender may refuse to lend which can drive down the market value of a flat.
With a growing trend towards larger insurance excesses this is an emerging problem and possibly the best solution, if your lease is silent on the subject, is to pay a little more premium for a lower insurance excess wherever this is possible. Arguably this may be in the best interest of all the flat owners.