As we look forward to what we hope to be a warm and dry summer it is easy to forget the devastation caused by the terrible flooding of recent years. Events of this kind are expected to become more frequent, with severe flooding likely to be a phenomenon we will have to learn to live with.
It is estimated that 1 in 6 properties are at risk of flooding with the average claim for commercial property being between £50,000 and £112,000. The effect on a pharmacy business will go way beyond damaged property, including for example, loss of stock and inability to trade. There may also be long term loss of customers and goodwill. Business interruption cover will not always be adequate to cover the full effect of flood damage.
Flooding is not caused solely by proximity to natural flood sources such as a river. Ground water and surface water flooding are increasingly prevalent and can occur some distance from a watercourse. In fact, surface water flooding accounts for more than half of the flooding in England and Wales.
Since 1961 the Government and the Association of British Insurers have secured cost effective insurance against the risk of flooding for most homes and small businesses. This agreement was due to expire in June 2013 with a move towards a full risk based market with the preferred choice being Flood Re.
Flood Re will ensure that flood insurance remains available and affordable for occupiers of high flood risk residential properties. Under the scheme participant insurers will collectively pay an annual levy of £180m which will be recouped via a surcharge on all insurance policies – whether or not the property is prone to flood risk.
The draft regulations to establish Flood Re were put before Parliament on 24 March this year. However, as the regulations did not obtain positive approval before the general election in May consideration of the draft regulations will be held over to the new Parliamentary session. It seems likely that operation of the scheme will therefore be delayed and may prompt a change of approach.
FLOODING IN COMMERCIAL PROPERTY
As many types of property will not benefit from Flood Re, including all commercial property, insurers will be free to decide whether or not to offer flood risk insurance and the terms on which such insurance is provided. This is bad news for commercial tenants who are usually required to reimburse landlords for such premiums and uninsured excesses in the event of a claim.
A typical “full repairing and insuring” lease requires a tenant to keep a property in good and substantial repair and condition. Any damage caused by an insured risk should ideally be excluded from a lease so that flood damage is not the tenant’s responsibility. However, a landlord’s obligation to insure a property will usually exclude risks that are not insurable on reasonable terms and will be subject to any usual excesses, exclusions and limitations imposed by the insurer. As a result of more frequent flooding, flood damage may commonly be an “uninsured risk”.
When considering purchasing or taking a lease of a pharmacy it is important to assess the potential risk of flooding to understand how this may affect the property. As part of the investigation of the property, it is useful to obtain a flood risk survey to identify the risk of the main types of flooding (i.e. river, coastal, ground water and surface) and to check whether insurance will be available and likely to be on standard terms. Detailed enquiries should also be raised with a seller or landlord regarding any history of flooding. Of course it is only possible to check this at the date of purchase or new lease and the situation might become more difficult over the full term of the lease. This should be taken into account.
In lease negotiations – including a renewal of an existing pharmacy lease – pharmacists should check that the lease adequately protects the pharmacist in cases where flood damage arises and is not covered by insurance. A purchaser or tenant aware of a flood risk may also be able to renegotiate the price or rent to be paid for the property.
Where a pharmacy has been affected by flooding, or the risk of flooding in the area has increased, it would also be worth considering the benefit of installing flood defences such as a roller shutter door or removable barriers. There are some fairly sophisticated options but low-cost alternatives are also available and could dramatically reduce the impact that flooding may cause on the property and business as well as the insurance premium.
A pharmacy tenant will need to consider whether the installation of flood defences requires the consent of its landlord under the terms of its lease. We would anticipate that a landlord would not unreasonably refuse consent to these protective works but it is necessary to check the pharmacist’s and the landlord’s rights under the lease.