Real Estate Insurance Commission – To Be Or Not To Be?…

Landlords have long benefitted from the ability to retain a proportion of commission and other income derived from the placement of property insurance on the buildings they own.

This income often comprises one or all of the following:

• Commission as a percentage of the total premium charged by insurers
• Risk Management bursaries from insurers
• Work transfer fees paid by insurers

As lease agreements permit the recharge of insurance premiums to lessees, it is the lessee who ultimately foots the bill for these costs.

The FCA issued a report last year on commissions in property insurance, which concluded:

• Premiums on multi-occupied buildings continue to increase;
• There is weak competition in the marketplace
• There is a lack of transparency for leaseholders in the costs that make up an insurance premium

The Government reacted to this report in the form of a letter to the FCA from The Secretary of State for Levelling Up, Michael Gove, which stated that the government would “take action to ban managing agents, landlords and freeholders from taking commissions and other payments when they take out buildings insurance, replacing such payments with transparent fees.”

So, is this more akin to “Much Ado About Nothing” or is the Real Estate industry about to enter “The Tempest”?

It certainly is not the former.  From a lessee perspective, the make-up of an insurance premium has long been opaque and in some cases, murky.  Now is the time for the industry to treat its customers fairly and provide them with simple and clear information on what makes up the premium they pay.

Reasonableness and transparency are key; any charges or fees that are included on top of or within an insurance premium must be defined and the reasons for them clearly articulated.

It is important to note that Mr Gove has not said that landlords cannot receive income for placing insurance; only that the way money is received must not be through commission payments.

Note the ban will be on “managing agents, landlords and freeholders”, not brokers. So landlords should review the position with their broker and strip commissions to a minimum, thus reducing the IPT impact. If you do not already do so, you should consider a method of communicating openly with residents to show what makes up their premium (including fees) and indicating how this is competitive and the benefits of a “group” insurance programme.

In a rent tribunal involving the Canary Riverside development in December 2022 it was suggested that there were inherent conflicts of interest in the way that the insurance of the flats was placed and that leaseholders had no control of the insurance that they pay for.  There is no doubt that this is true in the case of some property owners.

This is the first time that the courts have openly recognised the imbalance between landlord insurance recharges, especially to residential occupiers, and the lack of transparency from some landlords, in how such charges are calculated.

Most landlords will incur costs in arranging insurance, including internal management time and external adviser costs (for example insurance broker fees). JPIC believes these costs, if fair and reasonable, could be added to the premiums charged to lessees as they do not represent a commission payment. However, there needs to be clear justification and transparency on any costs that have been added to or included within the premium.

It is understandable that landlords will always wish to retain responsibility and control over the insurance of the buildings they own. There is also strong evidence to show that a landlord will usually be able to obtain better levels of insurance cover at a more competitive cost than individual lessees will be able to.

This issue is not going to go away, and neither should it.

Landlords who embrace the new environment of transparency and reasonableness have nothing to fear.  “The Tempest” can end with “All’s Well That Ends Well”.

JPIC has conducted a number of landlord insurance income audits which assist clients in understanding what is acceptable, fair and reasonable in calculating recharges to occupiers.

For more information on JPIC’s Landlord Insurance Income Audit, please do contact us.