In July 2008 we commented on the growing problem that flooding presents to the insurance market and outlined how the Government were proposing to tackle the issue in England and Wales following the major floods of 2007. Nearly three years have passed, and this year saw the enactment of several provisions of the new Flood and Water Management Act 2010 (FWMA) with the first provisions being brought into effect on 31 August. The FWMA implements many of the recommendations of the Pitt Review of 2007, in that it:
- Designates responsibilities for flood and coastal risk management;
- Implements reservoir safety measures;
- Designates the Environmental Agency as the body responsible for overseeing a strategic Flood Management Plan with partners in local authorities; and
- Brings water companies within the existing insolvency regime.
Flooding and the effects to insurers
Insurers have concluded that the effects of climate change, the frequency and scale of recent claims, and the inadequate provision for national flood defences are a major problem. No longer can flooding be considered an uncertainty. For a number of years now insurers have been purchasing commercial flood data and refining their risk profiling to better manage their spread of the risk. Historically flooding was considered to be a problem affecting only riverside and coastal areas but ground and surface water floods are increasingly prevalent, with heavy and prolonged rainstorms forecast to become more frequent due to climate change. The result is that some properties in the UK are already uninsurable against flooding, and the number will only increase if we see claims on the scale we saw in 2007 (widely reported to have cost insurers over £3 billion). It is foreseeable that another large-scale flood of that magnitude would give re-insurers cause to consider whether it is economic to underwrite the market.
Unfortunately, the FWMA and indeed the Pitt Review both fail to specifically address the causes of flooding or how best we can protect against it. Issues remain to be addressed following the response of the Association of British Insurers to that. The ABI Statement of Principles of 2008 (SoP) made clear that cover for flooding would only continue to be provided to certain categories of properties and only for the next five years.
The SoP applies to residential properties and small businesses. Commercial properties do not enjoy this clarification in respect of insurance availability; the exclusion of any reference to the commercial property market is concerning. The principle points are:
- Flood risk cover generally will be limited for the next 5 years with annual review, subject to re-insurance being available
- Cover is conditional on the Government meeting its obligations (financial, planning and strategic) in relation to flood defences
- Properties considered to present more than a one in 75 year risk of flooding will not automatically be insured unless improvements are planned within five years, otherwise there will be no cover to a new owner
- New developments will not automatically be insured.
The ABI have been lobbying the Government to ensure that planned expenditure on flood defences is not cut as part of the Spending Review, but the Government faces problems at local levels too. The Environment Agency (EA) who are tasked with overall responsibility for flood defences in England and Wales, can still be ignored by regional bodies when it comes to formulating local planning policies. In London this has led to difficult discussions politically about the provision (and cost) of renewing London's flood defences, including the replacement of the Thames Barrier at locations beyond the city boundaries, and the commitment of public money towards long term infrastructure to protect against the causes of flooding in the capital.
Other examples of obstacles to the overall strategy
There have been as many as six planning permissions granted this year contrary to recommendations from the EA who highlighted the unsuitability of sites due to flooding or risk of flooding. The Court of Appeal recently decided a dispute between a landowner and Oxfordshire District Council, upholding a planning permission for Taylor Wimpey to develop in an area designated in Flood Zone 2, which is categorised as low to medium risk of flooding.
Whilst it is true that developers can build in flood defences, the absence of availability of flood insurance could provide a barrier to the successful onward sale of a development. New RICS guidance will for the first time place a requirement on surveyors to have regard to sustainability and climate change issues that carry a risk of damage on a property and then comment on the ability to transfer that risk. The topography of a site and its situation regarding flooding, if found to be poor, will affect value and subsequently mortgageability if insurance cannot be obtained to transfer the risk.
For those in the business of buying and selling property there are steps you can take to better protect yourself. Lawyers can consider the relevance of flood insurance with their clients at an early stage and draw attention to the need to consider the availability of insurance from the outset. This is particularly important in the context of acquisitions for development where the SoP states that cover is not guaranteed for new developments. Purchasers in areas at risk of flood may want to quantify the cost of additional flood defences, and purchasers intent on gaining planning permission may be well advised to check the local plan and carry out thorough due diligence and consider what improvements may be attached as conditions.
Insurers have been using commercial data for a number of years to supplement the EA flood plain maps and other publicly available information. Solicitors can instruct a desktop environmental search which includes this additional data and comments specifically on flooding. There are several providers of these searches but it is important to know where they source their data, and that the search displays its results in a format that is both readily extracted to allow follow up questioning, but also provide a useful commentary on the risks.
Sellers should also be prompted to comment on any insurance claims, flood damage or any preventative measures that they are aware of that have been taken to protect the property. Depending on the location and topography of a site, investigations outside the boundaries may also be relevant. It is worthwhile instructing surveyors to comment specifically on the location of a property and its immediate surroundings with regard to the threat that flooding may pose.
Where an issue over the availability of insurance arises, having a comprehensive search will assist brokers tasked with going to the market and obtaining specific insurance. Brokers with experience in the area and who have an understanding of the issues that impact on the availability of insurance will be particularly useful. It is not uncommon for some insurers to refuse insurance simply based on a postcode despite it covering a significant geographical area.
At the time of seeking flood insurance, purchasers should also enquire as to the on-going availability of the policy and whether it will be provided on similar terms to any future purchaser without the need for expenditure on additional flood defences. This then allows for the costing out of a flood management plan at the outset if required.