Rising Cost of Flooding – We Are All in It Together

Over the last decade we have witnessed increasing headline making floods.  This has culminated in the wettest January on record and widespread flooding across the south of England this year. No one can be in any doubt that flooding is a real issue in today’s property market. Indeed the cost of damage sustained as a result of flooding in 2007 is estimated to be in the region of £3.2 billion.  This year’s floods may prove to be even more costly once the waters finally recede.

Flood risk is indiscriminate and will impact all types of premises from residential and business premises to retail and industrial buildings. Industry estimates are that 1 in 6 UK properties are at risk from flooding and this is likely to rise in the future.

In the continuing uncertain economic climate, and although the matter is a current political “hot potato”,  it seems unlikely that there will be any increased government spending on the flood defence network. Addressing the issue is therefore of paramount importance to all property owners, investors, developers, lenders and property professionals.

Current position

Previous agreements between the government and the insurance industry, securing the availability of affordable flood risk insurance to all but the highest of risk properties, were due to expire in 2013.  These have been retained until a new solution named “Flood Re” is finalised sometime in 2015.   Until then the position will continue to be that all insured property owners will subsidise affordable insurance for those at ‘significant risk’ (up to a 1 in 75 year risk of flooding).

What is Flood Re?

Flood Re is a new scheme backed by government to create a dedicated £180m fund to cover domestic flood claims.  This will come from a levy being charged on all households initially estimated at £10.50 per household, through their existing household insurance.  Those at the most risk will also pay an additional premium, based on their Council Tax band but subject to a cap.  Amounts are expected to be between £210 per annum for a Band A home rising to £540 per annum for a Band G home where the property is at ‘significant risk’.

Under Flood Re the government will become insurer of last resort for domestic flooding claims therefore ensuring at risk properties remain, in theory at least, insurable.  It should be noted that the fund is intended to cover flooding claims and is not for the building of flood defences which will still be funded (if at all) through general taxation.

What does it mean for businesses?

Flood Re will not cover commercial premises so commercial owners must continue to seek insurance in the open market without this additional backup for flooding risk. Commercial properties at ‘significant risk’ could see their premiums increase or even find flooding insurance becomes unavailable.

Risk Assessment

The quality of information available to insurers, property owners and professionals can be poor and misleading.  It is, however, improving as better data becomes available and as the industry places increasing emphasis on the importance of flood risk.  In the meantime, all those involved must be aware of the potential impact of flood risk on their properties.

How can I assess the risk?

The steps available for those in the property market for assessing the risk include:

• awareness of the risks associated with coastal property, the proximity of watercourses, surface water and ground water flooding;
• Environment Agency flood risk maps – these are however not definitive; and
• specialist reports from flood risk consultants where property is thought to be at high risk.

The costs associated with initial risk assessment by means of environmental searches and enquiries will be tiny compared to the value of a property and potential costs associated with flood damage.

Uninsurable properties

More worryingly, you may find that a property found to be at ‘significant risk’ is uninsurable or subject to accelerating insurance costs.  Uninsurable properties will not be valid security for lending and this could make then unsalable.

If a property is located in an area identified as at ‘significant risk’ then you need to consider the following:

• Can flood resistance measures be installed at the property at an acceptable cost, in order to mitigate risk?
• Can you obtain a flood risk survey to provide more detailed information and analysis of the availability of insurance?
• insurance costs and availability.

If you are at risk of flooding or would like further help or advice please contact either Kate Sutton on 0191 211 7973 or Richard Nixon on 0191 211 7924.