We continue to see images of the devastating impact of flooding in the UK. Environment Agency flood warning systems have helped unfortunate residents and small businesses cope as best they can by predicting flooding where possible and advising on preventative measures. Those who are affected will no doubt have contacted their insurers for help with the damage and costs of alternative accommodation.
Since 1961 the Government and the Association of British Insurers have effectively secured insurance against the risk of flooding for most homes and small businesses through a series of agreements. The last agreement, reached in 2008, provided for cheaper flood insurance to be available on standard terms even where the property is at a ‘significant’ risk of flooding, so long as there are plans to reduce that risk below significant within a five year period.
Whilst the agreement does not benefit new properties or those where there is not enough funding to permit the construction of flood defences to reduce the risk, it provides significant assistance to owners of hundreds of thousands of properties throughout England and Wales.
However, the 2008 Agreement expires on June 30, 2013. After that date insurers will not be subject to any specific commitment to provide insurance on standard terms against flooding, but have agreed that: “the industry will continue to work with existing customers to explore insurance options for domestic property and small business customers where the flood risk is significant and no public plans are in place to defend the property.”
Faced with huge losses from recent claims, decreased investment in flood defences, increased incidents of flooding due to climate change and other factors, the insurance industry says it can no longer afford to maintain such agreements to insure against flood risk. After the end of the current agreement the cost of insurance premiums are likely to more accurately reflect the risks to associated individual properties. Insurance premiums may increase substantially and policies may be restricted or withheld for a much higher number of the most at risk properties.
Know your property
With one in six properties in England and Wales at risk, and with only a few months to go before the 2008 agreement expires, it is important that property owners, tenants, investors and lenders start to review their potential exposure and obtain advice where necessary. Where ‘at risk’ properties are to be bought, sold, let or remortgaged, the relevant parties must be aware of the uncertainty regarding the availability of insurance and the potential implications of this.
If a property is close to waterways of any nature, specialist investigations are recommended. The results of these may affect the value of the property, which may need to be referred back to a valuer and revealed to insurers.
Whilst the Environment Agency flood risk maps cannot provide property specific information or advice, and only deal at present with flood risks from coastal and main rivers (rather than surface water risks and so on) they provide a good starting point for investigations. Independent flood risk reports are also improving by using better data and risk models than the Environment Agency. Often they can cover surface water flooding and predict some range of anticipated flood depth. These desktop reports are also relatively cheap to obtain, with prices starting from £30. They add a useful level of knowledge before engaging a more expensive flooding expert.
Actions and consequences
The Government is looking at certain proposals from the insurance industry which it hopes would see cover being made available, regardless of flood risk, after the 2008 Agreement expires. However, it is still wise for parties to be aware of the implications of a high flood risk now and to take precautions accordingly.
Negotiations to buy or let a dental practice with a high flood risk need not be abandoned, but at least by knowing the risk of flooding a purchaser or tenant will be able to negotiate the price or rent paid for the property. Dentists should also consider installing flood resistance measures or taking practical steps to minimise the impact of flooding (such as consideration of the structure of the development and flood defences).
Standard loan documents may be breached when borrowers find themselves unable to insure for specified events, or for events that a prudent property owner would insure against. An inability to insure may not amount to an event of default of itself, but there may be an impact on the loan to value ratio which the borrower is obliged to maintain.
Landlords or tenants may find that where a property becomes uninsurable against flooding, depending on the terms of the lease, they could be liable for repair costs and the costs of alternative accommodation. Tenants will however remain liable to insure or make provision for their contents.
When negotiating terms to buy or let a dental practice, it is important that both parties take specialist legal advice regarding any flood risk and steps to take in the event that insurance is not available.