The Environment Agency estimates that over five million properties in England alone are at risk from flooding. With Met Office records showing a trend towards ever wetter weather in the UK that number is likely to increase. Since 2013, the Government and insurance industry have been in negotiations to ensure that affordable and comprehensive insurance is, and remains, available to those homeowners whose properties are in high flood risk areas. The introduction of Flood Re in 4 April 2016 is the outcome of those negotiations and marks a move by the Government to safeguard homeowners against insurers either refusing cover to homes in high flood risk areas or only providing cover with a high premium or excess.
Prior to 4 April 2016, the provision of flood insurance by the insurance industry was governed by a Statement of Principles that was agreed between the Government and the Association of British Insurers (ABI) in 2002 then revisited and amended in 2007. The Statement of Principles effectively enabled the insurance industry to provide flood insurance to domestic property and small businesses at competitive rates where the flood risk was significant whilst incentivising the Government and local authorities to invest in flood defences. With a marked increase in the severity and incidents of flooding and growing pressure on public finances, the Government has made it clear that it is no longer prepared to effectively subsidise the insurance industry and a change of approach to flood risk and its insurance was required.
On 4 April 2016, Flood Re came into effect as a not-for-profit insurance scheme that replaced the Statement of Principles. The main aim of Flood Re is to ensure that eligible homeowners (see list of exclusions below) can still obtain flood insurance with cover at a set price, even after a flood claim has been made. It is funded by an annual tax that is paid by all home insurers in the UK that is paid into the Flood Re central fund and from which all flood claims will then be paid. The premium threshold for flood cover under Flood Re will be reviewed annually in accordance with the Consumers Prices Index (CPI) and the maximum excess could change at any time.
There are numerous exclusions from Flood Re. Perhaps the most important being businesses but the following residential properties will also be excluded from the protection it affords:-
- All property built on or after 1 January 2009
- All buy-to-let residential property
- All residential properties insured on a block policy
- All purpose-built blocks of flats
- Any property converted in to 4 flats or more
- Any property converted in to 3 flats or less unless the insured or the insured’s family live in one of the flats or their flat is left unoccupied
- Any property where the insurance is taken out in the name of a management company or corporate landlord
The Government is also looking to introduce further legislation to incentivise homeowners in affected areas to take active measures to flood proof their homes. Whilst not yet legislated for, it is anticipated that a homeowner may be denied further cover where they have already made three claims against Flood Re for flood damage suffered to their home. The rationale being that if you fail to protect your home following flood damage, Flood Re will not repay the loss suffered in perpetuity. It surely has to be questionable, however, to what extent a homeowner can prevent further flood damage even having taken appropriate measures where the cause of the damage may lie far beyond the boundaries of their home.
Whilst Flood Re goes some way to rebalance the insurance market for eligible homeowners it is certainly not a panacea for all. For those owners of commercial and excluded residential properties the risk of being unable to secure insurance, or only secure it at a substantial cost, remains. Further as Flood Re is a transitional measure and will expire in May 2039, all homeowners of properties in high flood risk areas will be exposed to this risk in the future. This could, in turn, significantly devalue their asset or in the worst case scenario effectively make it unsaleable, unlettable or unmortgageable. The importance, therefore, of lenders, lawyers and surveyors advising clients in full of any flood risk on any property transaction is paramount.