A fire, a repudiated claim and a reinstatement figure from 2017
Elmfield Grange is a nine-storey, 28-metre block of 32 flats. The lease obliges the landlord to insure the building in its full reinstatement value 'against fire and such other risks as are normally covered by a comprehensive policy' and permits recovery as insurance rent. The policy was last formally valued in 2017 at £4.2m and indexation has been applied since, but the block gained a two-storey rear extension in 2019 and a cladding replacement quote now stands at £1.1m. The renewal excludes terrorism and damage caused by faulty workmanship. The owner of Flat 14 has run a nail salon from her living room for three years without telling anyone. In August a fire starting in Flat 14 caused £380,000 of damage. The insurer has repudiated for non-disclosure of the business use and points to wiring installed by the landlord's contractor in 2021. Two lenders have written asking for evidence of cover.
1. The insurer has repudiated. Analyse whether that is the end of the claim, and who bears any uninsured loss.
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Repudiation is not automatic.
The duty. The landlord is the insured and owes the duty of fair presentation under the Insurance Act 2015. The Flat 14 business use is a material circumstance that should have been disclosed. The leaseholder may also be in breach of a lease covenant requiring notice of business use or alterations, but her failure does not move the insurance duty onto her.
The remedy. If the breach was deliberate or reckless the insurer may avoid the policy and keep the premium. Otherwise the remedy is proportionate: the claim is reduced to what the insurer would have done had the risk been disclosed - typically a higher premium, a business-use exclusion or conditions. So the right response is to challenge 'repudiation', ask the broker to quantify the proportionate adjustment, and obtain evidence of what the premium would have been. This is a negotiation, not a dead end.
The wiring point. A faulty workmanship exclusion normally bites on defective work and its immediate consequences, not on a later fire caused by the contractor's negligence. That is arguable both ways on the wording, so read the clause. If the insurer declines on this ground, consider a claim against the contractor and its insurers.
Who bears the loss. The covenant to insure is an obligation to insure, not an absolute warranty that insurance will pay. But if the landlord - or, if you placed or checked the cover, your firm - failed to insure properly, the landlord may face a damages claim for the shortfall. That is a real exposure. Do not tell leaseholders the landlord will simply absorb the loss, and do not tell them they will be recharged it, until the lease and legal advice are in front of you. Meanwhile: make safe and secure the building, preserve evidence, notify the broker of all material facts for the future, and handle the claim promptly and fairly as the regulator requires.
2. The sum insured is probably inadequate and £1.1m of cladding work is pending. Can that be recovered through the service charge, and what do you do about the insurance rent?
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Reinstatement value. Indexation tracks general inflation; it does not capture a two-storey extension, a change of use or the step change in regulatory cost on cladding. A 2017 figure is therefore probably well below the true cost. The consequence is 'average': if the declared value is a fraction of the real reinstatement cost, the insurer may reduce every claim by that fraction - including the £380,000 fire claim, so underinsurance makes the current claim worse.
Commission a professional reinstatement valuation now on a day-one basis, including demolition, professional fees and current building-regulation compliance; increase the sum insured; then deal with the premium.
Cladding recovery. As a 28-metre building it is a 'relevant building' under the Building Safety Act 2022. Costs of remediating 'relevant defects', including unsafe cladding, are generally not recoverable from qualifying leaseholders through the service charge, and non-cladding building safety costs are subject to a cap and the leaseholder deed of certificate regime. So do not budget the £1.1m as a service charge item until a solicitor has confirmed the building's status, which leases are qualifying, and what certificates exist. Pursue the other routes - Building Safety Fund, developer, warranty, landlord funding - and tell leaseholders the recovery route is being determined. Never issue a demand you may have to refund.
Insurance rent. Recovery of the increased premium depends on the lease's insurance rent clause: whether it is a fixed proportion of the premium actually paid, and whether mid-year supplementary demands are permitted. If it is service-charge-like, the s20B and reasonableness rules apply. If in doubt, put the increase into next year's budget rather than sending a surprise demand. Separately, the landlord's failure to keep the sum insured adequate may make it liable for any shortfall on this claim.
3. Two lenders have written asking for evidence of cover. How do you respond, and what must you avoid saying?
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Answer promptly and factually - a lender's query signals a mortgage at risk, and delay turns a problem into a complaint.
Provide:
- the certificate of insurance and policy schedule;
- insurer identity and financial strength rating, the sum insured, the perils covered and the excess;
- a clear, neutral statement that a claim is in progress and that a coverage point is disputed and being pursued with the broker and insurer;
- what is being done to correct the position - reinstatement valuation, sum insured uplift, disclosure of all material facts, revised policy on renewal.
Avoid:
- any assurance that the building is 'fully covered' or that the claim 'will be paid';
- speculation about the outcome or about the leaseholder's own liability;
- legal or insurance advice to the lender - only the landlord, through its solicitor, can give an assurance about reinstatement;
- silence: unanswered lender correspondence is the single most damaging thing on the file.
Also tell the landlord in writing that lenders are enquiring, and consider a short written FAQ for all leaseholders and a meeting, because rumour will outrun the facts. Record every communication: a complaint that you misled a lender or a leaseholder is a bigger problem than the original coverage dispute.