First-tier Tribunal Rules Insurance Premiums Were Unreasonably Incurred

OUTCOME: Allowed

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : LON/00AM/LSC/2023/0156 HMCTS code : P:PAPERREMOTE Property : [ADDRESS], [POSTCODE] Applicants : [redacted] [NAME_1] (2) [NAME_1] (3) [NAME_1] (4)

Representative : [NAME_2] Respondent : [redacted] : [NAME_4] ([NAME_5]) Type of application : An application under sections 27A and 20C Landlord and Tenant Act 1985 Tribunal : Judge Pittaway Mr S [NAME_6] Date of Decision : 13 May 2024

DECISION

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DECISIONS OF THE TRIBUNAL (1) The Tribunal determines that the insurance premiums charged by the respondent for the service charge years from 2013/2014 to 2022/2023 were not reasonably incurred.

(2) The Tribunal determines that the insurance premiums payable by the applicants for each of the service charge years should be based on the following;

Renewal Date

Premium June 2014

£907.81 June 2015

£955.59 June 2016

£1.029.02 June 2017

£1,105.93 June 2018

£1,148.38 June 2019

£1,214.32 June 2020

£1,348.75 June 2021

£1,389.99 June 2022

£2,319.44

(3) The reasons for the Tribunal’s decision are set out below.

(4) The Tribunal makes an order under section 20C of the Landlord and Tenant Act 1985 so that none of the landlord’s costs of the tribunal proceedings may be passed to the lessees through any service charge.

BACKGROUND 1. By an application dated 22 March 2023 the applicants sought a determination under section 27A of the Landlord and Tenant Act 1985 (the ‘1985 Act’) as to liability to pay and reasonableness of various service charges. The applicants also sought an order under section 20C of the 1985 Act so that none of the landlord’s costs of the tribunal proceedings may be passed to the lessees through any service charge 2. The application initially related to the service charge years September 2020 to 2021 and September 2022 to 2023. By an application dated 13 July 2023 the applicants requested that the application be amended to include the reasonableness of the insurance costs for the years 2013/2014 to 2021/2022 and this request was granted by the Tribunal on 19 July 2023.

3. By 17 February 2024 the Tribunal had been informed that the parties had reached agreement on all issues except for insurance in respect of which they were content for the Tribunal to reach its decision on the basis of written representations.

4. By Directions dated 11 March 2024 the Tribunal directed the exchange of statements of case by the parties limited to the insurance charges in

3 dispute and the provision to the Tribunal of a hearing bundle by 22 April 2024.

5. The Tribunal stated that it would determine the matter during the week commencing 7 May 2024 on the basis of the digital bundles provided (i.e. without a hearing), unless a hearing was requested. No hearing was requested. THE HEARING 6. This has been a remote hearing on the papers which has been consented to by the applicant and not objected to by any respondent. The form of remote hearing was P:PAPERREMOTE. A face-to-face hearing was not held because no-one requested a hearing and all issues could be determined on paper. The documents to which the Tribunal was referred are in an electronic bundle of 307 pages.

7. The bundle included the applicants’ statement of case, the respondent’s statement of case and the applicants’ reply. THE PROPERTY 8. The Property is described in the application as 4 individual flats in a converted house. THE TRIBUNAL’S DECISIONS AND

REASONS FOR THEM 9. The Tribunal reached its decision after considering the parties statements, including documents referred to in that evidence, and taking into account its assessment of the evidence.

10. This determination does not refer to every matter raised by the parties, or every document the Tribunal reviewed or took into account in reaching its decision. However, this does not imply that any points raised or documents not specifically mentioned were disregarded. If a point or document was referred to in the evidence or submissions that was relevant to a specific issue, it was considered by the Tribunal.

11. The law referred to is set out in the Appendix to this decision Reasonableness of insurance premiums. The applicants’ case 12. The applicants stated that since they had acquired the right to manage the Property (on 4 October 2022 according to [NAME_5]’s witness statement) they had been responsible for insuring the Property, through the agency of their managing agents [NAME_7]. In 2022 the insurance premium charged by the respondent, through its agent [NAME_8] was £6,544.80 on the basis of a reinstatement value of the Property of £1,313,000. For the year 2023-34 [NAME_7] approached two independent brokers, [NAME_9] and [NAME_10] and obtained quotes

4 from [NAME_11] of £2,319.44, based on a reinstatement value of £1,496,820, and [NAME_12] of £2,580.54, based on a reinstatement value of around £1,400,000. Both quotes had regard to the claims history of the Property (provided by [NAME_8]), and the loss of rent cover provided by [NAME_11] is superior to that offered by the [NAME_13] insurance policy effected by the respondent in the previous year. The applicants proceeded with the [NAME_11] insurance policy arranged through [COMPANY_14]. The applicants’ statement included an Appendix which set out a comparison of the [NAME_13] and the policy which they had taken out. The applicants submit that any small advantages of the [NAME_13] policy are eradicated by the £4,225 differential in premiums.

13. The applicants submitted that few insurers are prepared to quote for block insurance, that the respondent has always placed its insurance with [NAME_13] points to other companies declining to quote, and that it is not possible to test the market where other insurers decline to quote.

14. The applicants have calculated the factor by which they submit the respondent was overcharging them on the renewal of the [NAME_13] policy in June 2022, by taking their June 2023 premium of £2,319.44 against the [NAME_13] 2022 premium of £6,544.80. The [NAME_13] premium was 2.82 times more than the [NAME_11] premium. They have then applied this factor to the insurance charges charged by the respondent for the previous nine years, and submit that the figures obtained, as set out below are reasonable charges for insurance premium in each of the years in question. Their schedule is set out below. Renewal date UP charge RTM current policy UP charge reduced by 2.82 multiplier Difference Jun-23 2,319.44

Jun-22 6,544.80

4,225.36 Jun-21 3,922.17 1,389.99 2,532.18 Jun-20 3,805.78 1,348.75 2,457.03 Jun-19 3,426.46 1,214.32 2,212.14 Jun-18 3,240.40 1,148.38 2,092.02 Jun-17 3,120.63 1,105.93 2,014.70 Jun-16 2,903.60 1,029.02 1,874.58 Jun-15 2,696.39 955.59 1,740.80 Jun-14 2,561.57 907.81 1,653.76

TOTAL 20,802.58

15. The applicants submitted that 16% commission paid to the freeholders for placing their insurance with [NAME_13] was excessive. 16. The applicants referred the Tribunal to the fact that their current premium represents 0.0015% of current reinstatement value, and submitted that an alternative approach to determining what was a

5 reasonable premium in each year in question was to use this multiplier against the reinstatement value for each year.

17. In an e mail in the bundle dated 8 March 2024 [NAME_5] set out the reinstatement value used by the insurers in each year. He offered to accept an adjustment to the premium in each year based on the reinstatement value stated by the insurance brokers for each year multiplied by 0.0034. This multiplier has been calculated by taken a quote which he submits the RTM company obtained from [NAME_15] in 2022 (£4,495.78) as a percentage of the reinstatement value for that year. In response the applicants submitted that [NAME_15] did not quote for the freeholder at that premium in 2022. The respondent had been unable to obtain a quote at this figure. The applicants submitted that this was because of the respondent’s insistence on a block policy. They submitted that the fact [NAME_5] was prepared to offer this discount indicates that they have been overcharged in the previous years.

18. The applicants referred the Tribunal to the decision in [NAME_16] v [COMPANY_3]/19UD/2020/0077 (‘[NAME_16]’), which involved the same respondent, as pointing to the possibility that the overcharging by the respondent in the earlier years may have been greater than by the factor of 2.82. The applicants also cited this case as approving the use of a factor calculated by reference to the premium charged by the respondent and the comparable obtained by the applicant for calculating a reasonable premium in the preceding years. The respondent’s case 19. The respondent’s case is set out in copy e mails and the witness statement in the bundle of [NAME_5] of [COMPANY_8] dated 3 April 2024. In it he states that the respondent sources buildings insurance in accordance with the Lease provisions, through their insurance brokers [COMPANY_21]. [NAME_5] submits that [NAME_13] provides added value benefits which are exclusive to the respondent’s group block policy and not generally available in the market, and lists these in his statement. [NAME_5] submitted that all the added value benefits he lists fall within the concept of ‘comprehensive’ risks as contemplated by the leases. [NAME_5] submits that the quotes obtained from [NAME_17] will not have included the added value benefits. 20. [NAME_5] submits that the rise in cost in 2022/23 was as a result of the reinstatement value being increased from £861,903 to £1,313,000 and as a result of claims in February and March 2021. 21. [NAME_5] submitted that applying a blanket reduction multiplier across eight years does not consider intrinsic components and that it is not a fair and reasonable method of calculation, not least because it does not take into account past claims history.

6 22. [NAME_5] submitted that the 16% commission received by the freeholder is to cover policy administration costs, regular meetings with brokers and negotiating improved policy terms.

The Tribunal decisions and reasons for them 23. The [NAME_16] case is not binding on the Tribunal but it refers to the Upper Tribunal decision in Cos Services Limited v Nicholson and Willans [2017] UKUT 0382 (LC) (‘Cos’) which is binding on the Tribunal.

24. Paragraphs 48 and 49 of Cos state as follows, ‘48. Context is, as always, everything, and every decision will be based upon its own facts. It will not be necessary for the landlord to show that the insurance premium sought to be recovered from the tenant is the lowest that can be obtained in the market. However, the Tribunal must be satisfied that the charge in question was reasonably incurred. In doing so, it must consider the terms of the lease and the potential liabilities that are to be insured against. It will require the landlord to explain the process by which the particular policy and premium have been selected, with reference to the steps taken to assess the current market. Tenants may, as happened in this case, place before the Tribunal such quotations as they have been able to obtain, but in doing so they must ensure that the policies are genuinely comparable (that they “compare like with like”), in the sense that the risks being covered properly reflect the risks being undertaken pursuant to the covenants contained in the lease.

49. It is open to any landlord with a number of properties to negotiate a block policy covering the entirety, or a significant part, of their portfolio. That occurred in [[NAME_18]] itself, and the landlord satisfied the Tribunal in that case that the charges had been reasonably incurred. It is however necessary for the landlord to satisfy the Tribunal that invocation of a block policy has not resulted in a substantially higher premium that has been passed on to the tenants of a particular building without any significant compensating advantages to them.’

25. The Tribunal has had regard to the decision in Cos in reaching its decision. 26. The onus of proving on a balance of probabilities that the charges were reasonably incurred rests on the landlord. It is likely to discharge the burden of proof upon it if it can show that the premium was negotiated at arms- length in the market. The landlord is not obliged to find the

7 cheapest insurance in the market but is likely to discharge the burden of proof upon it if it can show that the cost of the insurance cover is within a range of costs for similar cover available in the market.

27. The Tribunal finds that it has no evidence before it as to what actions the landlord took to obtain alternative quotes. The applicants invited the Tribunal to consider that since the respondent always uses [NAME_13] to insure that they have not been able to obtain alternative quotations from other companies, due to the size and nature of the portfolio insured by the block policy. The applicants submitted that they had no evidence that the respondent undertook a formal tendering exercise every three years as had been indicated to them by the ‘insurers’. 28. [NAME_5] in his witness statement lists a number of insurers as typical of the companies that might be approached but does not give evidence that they were approached. He states that ‘most of the insurers that are approached decide not to offer a quotation for various reasons, including the size and nature of the portfolio and the side cover that is required by [NAME_19] across their group portfolio.’ 29. [NAME_5] refers the Tribunal to an e mail from [NAME_20] of 8 April 2021 as evidence of a tendering process every three years but the only correspondence from [NAME_20] in the bundle is dated 16 June 2017 and it does not contain this evidence.

30. In the specimen lease in the bundle before the Tribunal the landlord covenants at paragraph (4) of the Sixth Schedule, ‘To keep the Property insured to its full reinstatement value against loss or damage by fire and the usual comprehensive risks in the name of the Lessor…...’ The underlining is that of the Tribunal.

31. The Tribunal finds that to the extent that the benefits are exclusive to the respondent’s group policy, as claimed by [NAME_5], they cannot be considered to be ‘usual’ comprehensive risks as contemplated by the lease.

32. On the evidence before it the Tribunal finds that here the use of a block policy has resulted in a substantially higher premium being passed to the tenants of the Property without any significant compensating advantage.

33. The Tribunal determines that the insurance premiums charged by the respondent for the service charge years from 2013/2014 to 2022/2023 were not reasonably incurred.

34. The Tribunal has to decide on the evidence before it what a reasonable premium for each of the relevant years would be.

35. On the evidence before it, and in particular the comparison of the cover afforded by the [NAME_13] policy and that taken out by the applicants provided by the applicants, the Tribunal finds the policies to be

8 genuinely comparable. On that basis the Tribunal finds the premium of £2,319.44 to be a reasonable premium for the year from June 2022.

36. The Tribunal then has to decide how to use that premium in assessing a reasonable premium for the preceding years.

37. The first alternative proposed by the applicants was to discount each of the premiums charged by a factor of 2.82, calculated by reference to the premium achieved by the applicants in 2023 against that charged by the respondent in 2022. The second alternative was to calculate a multiplier by reference to the rebuilding cost insured and the premium charged for that cover to the applicants in 2023 and apply that multiplier to the rebuilding cost in each preceding year. This was the methodology also suggested by [NAME_5], albeit based on different figures.

38. Neither methodology requires the Tribunal to consider the reasonableness or otherwise of the commission received by the freeholder, nor the impact of the revaluation of the Property to which [NAME_5] referred.

39. The Tribunal finds that there is no evidence before it to support the multiplier used by [NAME_5] if the second method is adopted whereas there is evidence before it to support the use of the multiplier proposed by the applicants if the second method is used.

40. The Tribunal has calculated what the relevant premiums would have been using both methodologies which produce similar results. The Tribunal prefers the first methodology proposed by the applicants as that relates to a premium that they obtained against one actually charged by the respondents.

41. The Tribunal finds that the premiums proposed by the applicants for each of the service charge years as set out in paragraph 14 to be reasonable, being the premium charged by the respondent in each year reduced by the 2.82 multiplier. Application under s.20C 42. The applicants applied for an order under section 20C of the 1985 Act in their original application. It is not clear to the Tribunal whether this remains to be determined. If it does, taking into account the determination above, the Tribunal determines that it is just and equitable in the circumstances for an order to be made under section 20C of the 1985 Act, so that the respondent may not pass any of its costs incurred in connection with the proceedings before the tribunal through the service charge. Name: Judge Pittaway Date: 13 May 2024

Rights of appeal

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By rule 36(2) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, the tribunal is required to notify the parties about any right of appeal they may have.

If a party wishes to appeal this decision to the Upper Tribunal (Lands Chamber), then a written application for permission must be made to the First- tier Tribunal at the regional office which has been dealing with the case.

The application for permission to appeal must arrive at the regional office within 28 days after the tribunal sends written reasons for the decision to the person making the application.

If the application is not made within the 28-day time limit, such application must include a request for an extension of time and the reason for not complying with the 28-day time limit; the tribunal will then look at such reason(s) and decide whether to allow the application for permission to appeal to proceed, despite not being within the time limit.

The application for permission to appeal must identify the decision of the tribunal to which it relates (i.e. give the date, the property and the case number), state the grounds of appeal and state the result the party making the application is seeking.

If the tribunal refuses to grant permission to appeal, a further application for permission may be made to the Upper Tribunal (Lands Chamber).

10 The Appendix

Landlord and Tenant Act 1985

19 Limitation of service charges: reasonableness. (1)Relevant costs shall be taken into account in determining the amount of a service charge payable for a period— (a)only to the extent that they are reasonably incurred, and (b)where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard; and the amount payable shall be limited accordingly.

27A Liability to pay service charges: jurisdiction (1)An application may be made to the appropriate tribunal for a determination whether a service charge is payable and, if it is, as to— (a)the person by whom it is payable, (b)the person to whom it is payable, (c)the amount which is payable, (d)the date at or by which it is payable, and (e)the manner in which it is payable. (2)Subsection (1) applies whether or not any payment has been made. ( 3 )An application may also be made to the appropriate tribunal for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs and, if it would, as to— (a)the person by whom it would be payable, (b)the person to whom it would be payable, (c)the amount which would be payable, (d)the date at or by which it would be payable, and (e)the manner in which it would be payable.