The UK is facing an ongoing challenge with water, with average rainfall continuing to rise alongside increased building on our floodplains the threat of flood is on the increase.
Statistics from the Met Office show that we have had four out of the five wettest years on record since 2000, with only 1954 being the exception, and overall rainfall is increasing.
When the worst happens you will expect your insurer to cover your losses and get you back to normal as soon as possible. In 2102 policyholders claimed £1.19bn for flood and storm damage with the average claim being £18,200. Insurers paid out even more in 2007 with losses tipping £3bn with 185,000 claims made. This cost is likely to rise in future years of heavy rainfall, and looking at the trends over the past 50 years (table above) rainfall is on the increase. Source – Insurance Times 18-24 April 2013
Rainfall is not the only factor. More homes continue to be built on floodplains putting not only the new homes at risk of flooding, but neighbouring communities too that had previously been protected by these natural defences. Hard landscaping has improved the look of our homes, however concrete drives, block paving, even new roads have all prevented the ground from absorbing rainfall. It has to go somewhere, and runs off the surface increasing the impact to neighbouring land.
Homes near the sea are also affected, such as the flooding in Boscastle in Cornwall in 2004 with costs reported at £50M. A £6M scheme to reduce flood risk to Lincolnshire has just begun, 60 years after the East Coast Floods of 1953. http://www.thisislincolnshire.co.uk/Thousands-homes-protected-6-million-coastal-flood/story-18881855-detail/story.html#axzz2StrONe7Q
- 12% of England’s total land area is floodplain, accounting for 8% of all properties**
- Development of the floodplain between 2001 and 2011 was 12% compared with 7% outside the floodplain.** www.parliament.uk/briefing-papers/SN04100.pdf
We need to consider the impact of building on floodplains. Developing a small area of floodplain may not be considered as a major impact on flooding. You may think that your neighbour paving over their previously grassed front garden would have minimal impact but the accumulative affect cannot be ignored.
Property and business owners will buy insurance cover to protect them. It is important to ensure that you buy the right cover to meet your individual needs. You should also be aware of the terms and conditions applied to your policy, including definitions of flood and the excesses that apply. This year the way insurers provide cover for flood may change.
What is a flood (in insurance terms)?
The Financial Ombudsman states ‘that a flood does not have to be a sudden and violent event’ and that ‘flooding can happen where water enters (or builds up in) a property slowly and steadily’ It does ‘not necessarily have to be caused by the forces of nature…water escaping from something inside a property could be the cause of a flood just as a river bursting its banks can.’ The Ombudsman’s main concern is the ‘fact that water has built up and caused damage’. Damage caused in this way is normally known as a peril ‘escape of water’. The Ombudsman states that they ‘think this definition of a flood is in line with consumers’ expectations’.
It is important to note, that insurers do not always define ‘flood’ within their policy wordings. Many simply state that they cover ‘loss or damage by flood’. It would also be important to consider the meaning of a ‘change in water table’ to flood claims, could it potentially exclude cover for all floods?
Case study – Oxford Floods 2012
There is a claim that has recently been declined following the floods in Oxford in November 2012. The insurer declined the claims due to the exclusion in their policy wording – due to a ‘change in the water table’. The owner of the property has now begun to repair the damage estimated to be more than £50,000 himself.
The insurer’s opinion is that the damage was not caused by the flooding but by ‘gradual seepage’ through the tanking over a period of time as the surrounding water levels fluctuate. Having sought expert advice from both the architect and builder, they believe this is not the case and the tanking is ‘up to the job’. The Loss Adjuster also made this comment based upon the original specification for the works.
A similar claim for flooding at the property was made in 2007 and paid in full. It appears that the drains were unable to cope with the pressure of excessive quantities of water. There is much photographic evidence in the Oxford press during November and December 2012 including this report http://www.oxfordtimes.co.uk/news/10073937.FLOODS__Neighbours_trapped_as_busy_road_is_engulfed/, which states the situation was much worse in 2012 than in 2007.
We believe that this claim should be upheld, and based on the evidence we have it fits the Financial Ombudsman’s view on the definition of a flood.
Rohan Investments v Cunningham (1998)
Rohan Investments v Cunningham (1998) was upheld by the Court of Appeal, although initially declined because the insurers’ opinion was that it was not a flood. Water entered the property following 0.5 inches of rain following a blockage in the roof drainage causing 3 to 4 inches of water flooding within the premises. The cause of the water entering the premises may have been a blockage, however this did not prevent the ingress from being a flood. Lord Justice Auld said “flooding may or may not result from such weather extremes [as storms and tempests]” adding that “it is the water that enters and damages the property that is important, not the area or depth of flooding outside that counts”.
June 30th 2013 – Statement of Principles
In 2008 an agreement between the ABI (Association of British Insurers) and the government was put in place known as the Statement of Principles. It is due to expire on June 30th 2013.
It currently enables home owners, property owners and small businesses to buy insurance with flood cover at affordable premiums, with a condition that the Environment Agency would ensure preventative flood measures are provided. Unfortunately due to lack of government funding this has not happened.
As we go to press the ABI and the government are in talks over a proposal for a new scheme that will continue to provide affordable insurance to those at high risk. Homes and businesses built after January 1st 2009 are not protected by this current agreement.
What happens if a new agreement is not reached?
If a new agreement is not negotiated, insurers would have several options available to them. Decisions on providing cover will probably go to the open market with some insurers declining to cover high risk areas, with other insurers offering cover but applying terms that may include a high excess. Some may exclude flood cover altogether. Insurers may also require other measures, such as risk improvements including flood defences or resilient reinstatement after a claim.
If a property owner accepts a large excess for flood (or indeed any other cover) they need to consider the impact this may have on them should an incident occur. Whilst they may perceive the risk to be low, in a year of high rainfall the financial impact could hurt. It is worth understanding that an insurer will have data that supports a decision on applying terms, such as previous claims, flood defence information, etc., and therefore the policyholder should understand the risk.
A competitor’s landlords insurance was shown to us by a client considering moving at renewal. The premium was very competitive for a home in a flood area, however the terms included a flood excess of £4,000. Would a policyholder have this amount in savings should a flood occur? The insured may also find themselves a victim of more than one incident and should also factor that into considering the affordability of accepting a high excess.
Whilst we are in recession it is understandable for policyholders to wish to purchase cover at as low a premium as possible, but they must ensure they read the terms and conditions and ensure that they can easily afford the impact of the excess.
Mortgages and property prices
Lenders will normally provide finance on a property on condition that insurance covers risks including flood, storm and escape of water damage for the property. Some homes may not be suitable for a mortgage if flood insurance is unavailable, or if the terms are too onerous. This has an added impact on an investor wishing to sell. If insurance is not readily available it restricts the ability to find a buyer perhaps depending on cash buyers, probably affecting the sale price.
Landlords renting out their properties will need insurance cover, since most tenancy agreements require cover to be in place as part of the due diligence of the letting or managing agent. All costs, including insurance premiums have an effect on rental yields. Combine potential lower yields with an impact on capital growth in a property, impact on investors could be damaging.
Hopefully a solution will be agreed upon before the June 30th deadline, and flood cover will continue to be widely available at affordable premiums. The ABI has proposed a levy of around £8 per home on an insurance policy to create a £150m a year flood fund to cover those at high risk. They also need the government to provide additional funding such as an overdraft facility to assist in cases of severe and extreme flooding however at present the government is reported to being reluctant to do this.
Providing insurance cover is only part of the picture. Investment in flood defences and risk management is required. Whilst we are living in lean times, prevention is important not only for financial reasons but also to prevent the devastating impact on those experiencing floods. Scotland’s example of flood management might be worth looking at.
Scotland – a demonstration of good practice?
Scotland had its highest rainfall in 2011 since 1910, however no major floods have been recorded. Winter rainfall increased between 1961 and 2004 by over 50% in the West of Scotland.
The only areas in Scotland suffering serious flood damage since 1994 are Moray and the Borders. Scotland’s management of flood has involved Flood Liaison and Advice Groups (FLAGs) that work with insurers and other key stakeholders including property developers, landowners, water authorities and land use planners to manage flood risk. This has proved invaluable in stopping floodplain development, providing Scottish planning authorities with advice and forming best practice.
The only area that refused to establish a FLAG was Moray. Development continued in the flood plain, and now many residents are finding difficulty obtaining flood insurance due to the serious flood issues in the area.
Scottish legislation also ensures resilient reinstatement after a flood or storm, including risk improvements and preventative measures such as putting electrical sockets higher up the wall, and the fitting of plasterboards horizontally rather than vertically.
Those of us thinking we will always be safe from floods should be aware that as rainfall increases and the floodplain is developed this may not always be the case.
Written by Debbie McIntyre Cert CII
NW Brown Insurance Brokers Ltd