Landlords: what to do when a tenant challenges the insurance commission

There has been a lot of talk recently about insurance commissions retained by landlords and a lot of media frenzy about the apparent injustice that such commissions are even paid. There have even been suggestions of mass tenant actions, along the lines of the PPI claims. The common misconception among tenants appears to be either that commissions are not allowed or they are inherently unfair. This article seeks to dispel that myth for landlords who may be faced with tenants reclaiming insurance payments.

Parties’ obligations

As with everything in the world of landlord and tenant, the starting point is the lease itself. The lease will typically impose an obligation on the landlord to place the insurance and an obligation on the tenants to pay for the cost of that insurance.

It is often overlooked that placing insurance for blocks of flats is not anywhere as easy as placing insurance for individual homes. There are usually a number of complex factors to be considered, including the number of flats, the value of the estate, and the interplay between any residential and commercial elements (generally, blocks of flats tend to be a higher risk as they have a higher number of kitchens).

Insurers are also unlikely to want to take the ‘entire hit’ on a catastrophic claim on a large estate and, therefore, unlike with a domestic house, there can be multiple insurers on one policy, with one lead insurer. The placing of insurance for a block of flats or an estate involves substantial time not just for the landlord but also for the broker who has to test the market and collate all of the insurers. As with everything, that time has to be paid for.  Nobody works for free.

There are essentially two methods by which the cost of that time can be collected:

1. The tasks are carried out and then the tenants are charged for that time under the lease; or
2. A commission or fee is paid by the insurer to the landlord when placing the insurance (the more common approach).

It is that commission that tenants are seeking to challenge.

The leaseholders’ position is usually that the commission was a rebate or discount and did not form part of the true cost of insurance or insurance services.  When challenging insurance commission, tenants will usually run the argument that:

1. The fees and commissions paid to the landlord by the insurer were a discount for insuring the estate;
2. As a result, that discount reduced the cost of the insurance; and
3. That saving should, in principle, be passed on to the leaseholders.  

It is also a common complaint by leaseholders in almost every insurance case that the First-tier Tribunal (FTT) has to determine that they are in a vulnerable position which may result in them paying more insurance than is reasonable.

However, what tends to be overlooked is that, if an insurer had to carry out the tasks that are carried out by the landlord/broker, then the insurer might not have discounted the gross premium because it would have had an additional expense to meet. Such works usually include liaising with the broker, negotiating premiums, reviewing policies, arranging valuations and administering claims.

Provided, therefore, that any payment by the insurance company to the landlord is not a rebate or discount to bring in business but is to reflect the work carried out by the landlord, then there is nothing wrong with it in principle and the tenants should not be entitled to any return of the monies. 

Property Tribunal Test

The test when determining insurance commission cases is essentially a threefold test:

1. Whether the cost of the works carried out by the landlord were costs that the leaseholders were obliged to contribute to under the terms of their leases;
2. If so, were the relevant costs within the meaning of Section 18.2 Landlord and Tenant Act so as to be subject to the statutory limit in Section 19.1; and, if so
3. Whether the costs had been reasonably incurred.

The burden will be on the landlords to show what work had been done to justify that commission and why that commission itself was reasonable.

What next for landlords faced with an insurance commission challenge

Landlords may find themselves faced with claims by groups of tenants seeking the return of an insurance commission. In some cases, that could amount to hundreds of thousands of pounds. In those cases, landlords would be well advised to seek early legal advice to ensure that their position is adequately protected.