Terrorism insurance is an increasingly contentious issue in service charge cases; in short, many leaseholders think it is unnecessary and simply serves to increase the their service charges (and, potentially, acts as an additional source of commission for landlords, itself a very contentious issue). Well, in Qdime Ltd v Various Leaseholders at Bath Building (Swindon) and others [2014] UKUT 261 (LC), the Upper Tribunal has given an unqualified endorsement of terrorism insurance and, in the process, may well have greatly extended the number of properties which are now required to obtain such insurance.

The case concerns a development of 13 flats in Swindon. The appellant is the freeholder and, under the terms of the lease, was required to “… keep the Building including the Demised Premises insured to its full reinstatement value against loss or damage by fire and the usual comprehensive risks in accordance with the CML recommendations in that respect from time to time and such other risks as the Landlord may in its reasonable discretion think fit to insure against…” with the costs recovered as a service charge. So, a duty to insure against fire and the usual comprehensive risks in accordance with the Council of Mortgage Lenders recommendations and a power to take out such other reasonable insurance.

The appellant took terrorism insurance as part of the general insurance package; the leaseholders contended that it was unnecessary and successfully challenged the same in the LVT. In summary, the LVT held that:

(a) the Company was contractually obliged to pay an insurance premium;

(b) but that would only extend to terrorism insurance if the lease expressly or impliedly so provided;

(c) terrorism was “acts or persons acting on behalf of, or in connection with, any organisation which carries out activities directed towards the overthrowing or influencing, by force or violence, of Her Majesty’s government in the United Kingdom or any other government de jure or de facto;

(d) there was no express obligation to insure against terrorism;

(i) the covenant to insure against loss or damage by fire did not include terrorism;

(ii) the covenant to insure against usual comprehensive risks also did not include terrorism; further, there was no evidence of any particular risk of terrorist activity;

(e) there was no evidence of any “conscious or express decision” to insure against terrorism and had not exercised any discretion;

(f) it that was wrong, then it was unreasonable to insure against terrorism, given that there was no evidence of any risk of terrorist activity.

The landlord appealed on both the duty and the discretion point. On the “duty” point, it argued:

(a)   there was a duty to insurance in line with the CML guidelines;

(b)  those included “explosions” as a usual risk;

(c)   that was, on its ordinary meaning, apt to include explosions caused by terrorism (with support derived from Commonwealth Smelting v. Guardian Royal Exchange Assurance [1984] 2 Lloyd’s Rep. 608 and para.11-094 of Woodfall);

(d)  further and in any event, one insured against risks, not particular causes of the risk (Enlayde Ltd v Roberts [1917] 1 Ch 109).

On the “discretion” point:

(a)   it had led unchallenged evidence that it had made a conscious decision to obtain terrorism insurance;

(b)  the discretion was a reasonable one as (i) it had obtained evidence from its brokers that Swindon was in the same “risk” category as central London; and, (ii) the RICS Code strongly suggested that terrorism insurance should be obtained.

The Upper Tribunal agreed. The CML recommendations included “explosion”. A terrorism attack was within the ordinary meaning of that word. That was enough to dispose of the appeal. However, in case that was wrong, the LVT had also been wrong to find that there was no discretion exercised in this case; there plainly had been and, for the reasons given, it was a reasonable discretion. In particular, the RICS Code was important; as a code given the force of statutory guidance (s.87, Leasehold Reform, Housing and Urban Development Act 1993), the proper approach to the Code was the same as in the public law sphere, i.e. that it should be afforded great respect and that departures from the terms of the guidance need to be well-reasoned and justified.