How the E&J Ruling Impacts Real Estate and Captive Insurance

Ruling on E&J’s Insurance Over-Charging: Learnings for residential Real Estate Landlords and Captive Insurance Operators

The recent landlord/tenant tribunal case involving E&J Estates highlighted issues faced by landlords in ensuring a fair recharge of insurance premiums.

The ruling, was issued by the First Tier Tribunal – Property Chamber on May 17, 2024 and in this article, JPIC delves into the Tribunal’s findings and offers guidance on what the Tribunal tells us about how to ensure transparency and competitive fairness in insurance premiums that are recharged to residential tenants.

Background to the Case

E&J Estates faced challenge from a number of its residents over insurance recharge practices at Hollin Bank Court, a site managed by FirstPort. The insurance was placed by AJG Insurance brokers utilising mainstream real estate insurers and backed by a reinsurance arrangement through E&J’s captive insurer, Augustus Insurance.

Key Findings from the Tribunal

The Tribunal’s decision identified a number of factors that should be considered by every residential landlord, including:

• Transparency and Credibility: The evidence provided by E&J’s witnesses was found to be insufficient and contradictory. The Tribunal noted that the processes used to ensure fair and competitive premiums were not adequately explained or documented for the benefit of the tenant or for presentation to the Tribunal.

• Reasonableness of Premiums: The Tribunal was not convinced that the premiums charged were reasonable and highlighted the connected nature of the parties involved, which they surmised, in the absence of evidence to the contrary, may have led to artificially inflated premiums.

• Absence of Competitive Evidence: There was no documentary evidence provided to the Tribunal by either the insurance broker or the landlord to suggest that the premiums were competitive. The expert witnesses from the broker pointed out that no other insurers were interested in insuring the properties at any rate but were unable to provide documents to confirm this. The only evidence open to the Tribunal was a quote obtained by the tenant which may or may not have been on a like for like basis compared with the premium charged by the landlord, but the absence of alternatives backed by documented evidence, meant that the Tribunal had little choice but to assume this to be a Bona Fide competitive quote.

• Excessive Profit Margins: The Tribunal pointed out the disproportionately high profitability of Augustus Insurance. The profits were significantly higher than typical insurance companies, indicating an imbalance in risk and reward, again highlighting the need for justification of the premium distribution within the insurance programme and the necessity to ensure that captives are truly risk bearing.

JPIC Group Commentary on Tribunal Findings

Several important observations emerge from this ruling:

• Evidence-Based Decisions: The Tribunal based its judgment on the evidence presented. The broker’s failure to provide comprehensive documentation on premium fairness led the judge to rely on the claimant’s alternative (indicative) quote, despite it not necessarily being a like-for-like comparison. Proper documentation of quotes and importantly, refusals to quote might have significantly altered the outcome of the case.

• JPIC’s advice to clients is to instruct brokers to fully document all interactions with the insurance market every year, ideally in a formal Renewal Report and where decisions are taken not to re-market an insurance programme, the reasons for these decisions are fully documented.

• The use of a captive and the implications this has on the cost of insurance need to be carefully considered and clear reasons articulated for the use of such alternative risk financing vehicles.

• VAT Considerations: The Tribunal considered at length the question of whether it was fair to add VAT to the reinstatement values but accepted the point that a prudent landlord must insure for the worst case scenario even if total destruction of a property is unlikely. Landlords should take care in establishing sums insured for properties that are not registered for VAT because partial damage of say 80% of the building could still result in a total rebuild, rendering VAT irrelevant to the final claim value. JPIC is aware of some insurers agreeing to ignore VAT in calculating sums insured.

The key message is that landlords need to be prudent and also be able to justify the way Sums Insured are calculated.

In Summary

The E&J Estates Tribunal ruling underscores the importance of transparency, competitive fairness and proper documentation in the recharging of premiums to tenants.

The responsibility for providing clear documented information lies with the landlord but it is incumbent upon insurance brokers to make sure that they are able to fully justify and document the work carried out in negotiating and placing insurance.

The important role that captives often play in insurance programme placements should not be under estimated. However, a captive must be risk bearing and should be able to prove that it is not artificially inflating premiums to the sole benefit of the landlord.

NOTE:
This article reflects the viewpoint of JPIC Group. For more detailed information on the tribunal decision, refer to the full ruling here.