20 December 2022 by Aysel Ibrahim

Insurance Provisions in Leases

Landlords almost always seek to ensure the leases they enter into with tenants include appropriate insurance provisions.  These can financially safeguard the property, the tenants and the landlord itself from several potential risks.

Among other things, well-drafted insurance provisions ordinarily set out whose responsibility it is to pay for the insurance policy and what the parties are required to do in the event of an insurance claim.

Whose Obligation to Insure?

Although not always the case, it is common for the landlord to be responsible for obtaining insurance because:

  • the landlord will wish to be sure that the premises are adequately insured;
  • the landlord will wish to ensure the level of insurance is high enough to protect its interests and will fully cover the cost of rebuilding the property;
  • the landlord will wish to be sure that the insurance is through a reputable insurer;
  • the landlord may wish to take advantage of the high levels of commission or discounts associated with purchasing bulk insurance.

The Policy Holder

The lease may dictate in whose name the insurance policy is to be placed.  It is vital a landlord observes all requirements under the lease, as failure to comply will result in a breach of the lease and may render the insurance policy void.  This may further result in the landlord being unable to recover the insurance costs from its tenants.

The Cost of Cover

Other than what may be specified in the lease, there is no limit in law on the value of insurance cover a landlord may purchase. Additionally, there is no requirement for a landlord to shop around and purchase the cheapest insurance policy.

Obligations if an Insured Event Arises & The Liability to Pay Excess

A lease will usually make express provisions for:

  • the party responsible for any excess payable in respect of a claim;
  • the party who must notify the insurance company of a claim;
  • the steps to be taken when an insured event arises;
  • the way in which the insurance monies are to be spent;
  • the party responsible for reinstating the development.

The terms and conditions of the insurance policy will usually stipulate:

  • the amount of excess payable in the event of a claim;
  • the way in which the insurance company is to be notified of a claim;
  • the time within which the insurance company is to be notified of the claim following an insured event arising.

The above lists are non-exhaustive and the parties to the lease and insurance policy must ensure compliance with their individual terms to prevent a potential breach of the lease and the insurance policy.

Commissions and Discounts

It is common for a landlord (or tenant if they are required to arrange the insurance) to negotiate a commission or discount with insurance providers. The lease should set out who receives the benefit of any discount or commission received for arranging the insurance.  The RICS Service charge residential management Code and advice to landlord, leaseholders and agents 3rd edition recognises that this is a commercial reality and suggests that tenants should be notified annually of any remuneration, commission or benefits received in connection with insurance to promote transparency.

Insurance and Under Insurance

Over insurance occurs when the landlord insures for a higher value than necessary, more property than is necessary or a greater number of risks than is provided for in the lease.  If the over insurance results in an increased premium, tenants are not required to contribute towards the additional cost that would otherwise not have been incurred.

Under insurance occurs where the landlord fails to arrange an appropriate insurance in line with requirements of the lease.  In such circumstances, the landlord would technically be in breach of the lease.  However, if it sought to remedy the shortfall (depending on the terms of the lease), it could offset the shortfall via the service charge.

Insurance & Service Charge

An insurance premium is defined under s18 of the Landlord and Tenant Act 1985 as a service charge,

which means it is subject to the test set out in s19(1)(a) of the same Act.  This test states that a service charge is only payable to the extent that it is reasonably incurred.  To establish whether it has been reasonably incurred involves a consideration of:

  • whether the decision to incur the cost was reasonable;
  • whether the service charge is reasonable in amount.

If you have any queries about the insurance provisions in your lease, please contact Hansel Ariburun in our Real Estate Disputes team.

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