Whilst the sun is (currently) shining we all saw the images of the devastating flooding suffered by many during the wettest April on record recently. Environment Agency flood warning systems helped unfortunate businesses and homes cope as best as possible but those who were affected will no doubt have looked to their insurers for help with the damage, loss of income and costs of alternative accommodation.
Current Protection
Since 1961 the Government and the Association of British Insurers ("ABI") have effectively secured insurance for most homes and small businesses through a serious of agreements. The 2008 agreement effectively provided for flood insurance to be available for most homes and small businesses, even where the property is at a "significant" risk of flooding (i.e. where flooding is expected once in every 75 years), so long as there are plans to reduce that risk below significant within the next five years. Whilst the agreement is not of assistance for new properties, commercial entities that are not "small businesses" or where there is not enough funding to permit the construction of flood defences to reduce the risk, it does provide significant assistance to hundreds of thousands of properties throughout England and Wales.
After the 2008 Agreement expires, insurers will not be subject to any specific commitment but have simply agreed that:
"Thereafter, 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"
Changes Ahead
Faced with huge losses from recent claims, decreased investment in flood defences, increased incidents of flooding due to climate change and the increasing development of affordable homes on low-lying marginal land which connect to Victorian era plumbing systems, the insurance industry can no longer afford to maintain such agreements. As we approach the end of the current agreement on 30 June 2013 it is becoming evident that the flood insurance market will soon start to reflect more accurately the risk to individual properties, with insurance premiums increasing substantially to reflect this, and insurance being restricted or withheld for a much higher number of the most at risk properties.
The Environment Agency identified 5.2 million properties at risk of flooding in England and Wales in 2009, and the ABI has warned that 200,000 homes could struggle to affordable flood insurance after the agreement expires - taking into account commercial premises which will also be affected, the problem will be huge.
Know Your Property
With one in six properties in England and Wales at risk, and a little over 12 months until the present agreement expires, it is important that property owners, 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.
Where a surveyors report or knowledge of the property highlights proximity to waterways of any nature, specialist investigations would be advisable. These may of course provide results that affect the value of the property, which may therefore need to be referred back to a surveyor.
Whilst the Environment Agency flood risk maps cannot provide property specific information or advice, and they only deal at the moment with flood risks from coastal and "main" rivers (rather than surface water risks etc), they provide a good starting point and the Royal Institution of Chartered Surveyors recommends that surveyors have reference to these maps when valuing properties. Flood risk reports are improving, however by using better data and risk models than the Environment Agency, and often they can cover surface water flooding and predict some range of anticipated flood depth. Such desktop reports are also relatively cheap to obtain, with prices starting from £30 and will add a useful level of knowledge before engaging a more expensive flooding expert.
Actions and Consequences
If searches expose a higher risk of flooding this does not necessarily need to end a negotiation, but at least knowing the risk of flooding a purchaser will be able to negotiate the price paid of the property, their insurance premiums, and consider installing flood resistance measures or taking practical steps to minimise the impact of flooding (such as choosing not to house computer servers or precious belongings in basements).
Unwary lenders could also find that flood risks could cause their security to be worth significantly less than they believe, and the property could accordingly be difficult to sell. Prudent lenders should now be reviewing their existing due diligence requirements and standard instructions to valuers and lawyers in light of the increased implications of significant flood risks.
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 is unlikely to amount to an event of default of itself, but there may be an impact on the loan to value ratio within the borrower is obliged to maintain.
Landlords may find that where a property becomes uninsurable against flooding, depending on the terms of the lease, they could be liable for loss of rent, repair costs and the costs of alternative accommodation. Tenants however would still have to seek insurance for (or make provision for) their contents and, where relevant, business continuity.
The Government is currently looking at certain proposals from the insurance industry which it hopes would see cover being made available to homes, regardless of flood risk, after the agreement expires, but it is still wise for parties to be aware of the implications of a high flood risk now and to take precautions accordingly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
