When is an insurance premium reasonably incurred?

In Avon Estates (London) Limited v Sinclair Gardens Investments (Kensington) Limited [2013] UKUT 0264 (LC) [not online yet we have a transcript] the Upper Tribunal considered the question of whether an insurance premium had been reasonable incurred.

Avon Estates was the leasehold owner of a flat within a Victorian terrace house that had been converted into three flats. Sinclair Gardens was the freehold owner of the property. Avon Estates’ lease required it to contribute a third of the service charge expenses which included, amongst other things, the cost of insuring of the property. Sinclair Gardens applied to the LVT for a determination that the service charge in respect of the three flats for the year 2010/11 was payable.

Sinclair Gardens used its own insurance agency, which charged a 12% handling fee, to deal with claims management and a broker to obtain the premium. The overall cost was £4,154.25 to insure the property.

Avon Estates contended that the insurance premium was not reasonably incurred within the meaning of s.19, Landlord and Tenant Act 1985. It relied on a quote it had obtained which would have insured the property for a quarter of the price. It also argued that 12% handling fee was, in any event, unreasonably incurred because it had not been negotiated at arms’ length in the market place and nor was there any evidence that it was representative of the market rate.

The LVT decided that, while cheaper insurance may have been obtained, Sinclair Gardens was not obliged to “shop around” to obtain the cheapest premiums; it was merely required to prove that the rate was representative of the market rate or that the contract had been negotiated at arm’s length and in the market-place (Havenridge Ltd. v Boston Dyers Ltd. [1994] 2 EGLR 73, CA). For those same reasons, however, the 12% handling fee had not been reasonably incurred.

The Upper Tribunal dismissed Avon Estates’ appeal, which was heard by way of a review. There was no evidence before the LVT that the insurance premium had not been arranged otherwise than in the normal course of business and Avon Estates had failed to adduce any evidence to the contrary. The LVT was entitled to reach a view that the contract had been negotiated at arm’s length and in the market place.

Sinclair Gardens was not, however, permitted to cross-appeal against the decision in respect of the handling fee as they had failed to seek permission to do so.

Comment

This decision goes to show how hard it is to challenge insurance premiums put through the service charge. Provided the landlord can show that it has been negotiated at arm’s length and in the market place, it will have been reasonably incurred. In a previous decision (Forcelux Ltd v Sweetman [2001] 2 EGLR 173) the Lands Tribunal said this meant demonstrating that the landlord had properly “tested the market” and it had been thought that this might mean something more, but here the Upper Tribunal – perhaps ducking the issue slightly – say it does not. As such, where a landlord has instructed a broker to find an insurance quote it is going to be nigh on impossible to challenge it.

Posted in FLW case note, Housing law - All, Leasehold and shared ownership. RSS feed for this post and comments.

About

S is a barrister, based in London, who practices predominantly in housing and local government law.

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