Toby Rogers puts property owners' insurance under the microscope.
Property owners' insurance (POI) covers risks from single property buy-to-lets to portfolios of hundreds of commercial premises. Here we consider some common scenarios to look out for to mitigate the risk of an unexpected shortfall or failure of cover.
High risk tenants -- What level of detail do insurers expect a landlord to provide in relation to commercial tenants? Under the Insurance Act 2015, the onus is likely to be on the insurer to ask for details of the tenants' trades at inception/renewal. However, problems may still arise if the occupancy changes mid-term and the insurers are not informed.
Illegal activity -- A few years ago there was a spate of claims involving cannabis factories being set up, without the landlord's knowledge, in residential or small commercial premises. Fires were common. Many policies now contain an illegal activities exclusion that would remove cover in such circumstances. Landlords need to vet tenants and inspect the premises during the term of the lease.
Damage by tenants -- POI is not intended to cover minor damage that is the province of 'tenant's dilapidations' under the lease. At the other end of the scale, malicious damage caused by the tenant is often excluded (or a low sub-limit applied). Between these extremes, the policy will respond to accidental damage. Determining into which category damage falls can be far from straightforward -- see Mandalia v Beaufort -- and can lead to costly disputes.
Breach of conditions by tenant -- Landlords may find themselves in breach of policy conditions -- eg the obligation to inspect the electrical installation every five years -- where they are reliant on the tenant to ensure compliance. Th e fact that a particular task may be the obligation of the tenant and not the landlord under the lease does not automatically excuse the landlord from a breach of a policy term.
A cornerstone of POI is the non-invalidation clause and this can go some way to assisting with the issues above. It states that the policy shall not be invalidated by any act, omission or alteration unknown to or beyond the control of the insured, provided notification is promptly made upon discovery. Despite previous uncertainty, The Seashell of Lisson Grove v Aviva case confirmed that it can apply to breaches of warranty or condition precedent and to nondisclosure or misrepresentation (but it would not apply to exclusions). An unexplored legal issue is the level of due diligence required of a landlord to invoke the protection of the clause -- the courts are unlikely to allow a landlord to benefi t from having poor procedures in place to check on tenants and enforce compliance with policy obligations.
Other issues to be aware of are:
Noting of interests vs joint names -- Landlords should be aware that if they are under a covenant to insure in joint names and they simply note the tenant's interest, the landlord may be in breach of covenant and liable to repay the tenant's premium contributions following a Lands Tribunal decision in Green v Archway.
Loss of rental or alternative accommodation -- Following major damage that renders the property uninhabitable, and where the lease contains a rent cessor clause, there can be tension between a landlord who would rather move the tenant on and claim for loss of rent, and a tenant that wants alternative accommodation. Th e insurer will only pay once for the same loss, so if the policy is in joint names this can create problems around who decides how the policy should respond.
Toby Rogers is partner at Clyde & Co LLP