Desmond and Frank dominated the festive season and their after effects will blight the lives of the misfortunate property owners and occupiers affected by the flood waters. Not just months of clean-up and repair, but potential longer-term adverse effects of valuation and insurance costs.
Professionals need to understand the part they can play to help clients avoid ending up in a similar position. Lenders need to consider their exposure.
Government data indicates we should expect more heavy rainfall (in particular, shorter bursts of heavy rain) and a significant rise in sea levels this century.
There will never be enough public money for effective flood defences for all, “austerity Britain” or otherwise. So the message from the Department for Environment, Food & Rural Affairs (DEFRA) is that property owners need to take more responsibility to protect themselves and developers should not be permitted to build in flood-prone places without serious attention to flood attenuation in the design.
The changing face of flood insurance
The historic protection lies in buildings and contents insurance, with flooding one of the many standard risks. Insurance solves the financial cost of clean-up, lost profit and relocation, but does not assuage the other effects. However, the insurance landscape will change dramatically when Flood Re opens for business in April 2016.
Little media focus has been given to the fact that this joint industry/government-sponsored scheme cannot solve the adverse insurance position of many flood-prone properties (see box). It offers a very valuable safety net of both accessible and affordable insurance (with capped premiums and excess) to only a restricted basket of residential properties.
Moreover, Flood Re’s chief executive has signalled that Flood Re may have to withdraw capped cover from properties at very high risk of flooding, or which flood repeatedly but where the owner will not put in protective measures.
Owners and occupiers of flood-prone properties that fall outside Flood Re will face the full glare of open market, risk-based pricing for their cover. It is not yet known how each insurer will react. Some may choose not to cover flood-prone properties at all; some will doubtless make a niche market out of providing cover despite the risk, but at high premiums or excess. They may treat commercial property differently to residential. They may insist on flood protection measures being installed before cover is offered.
Each insurer will decide whether a property is at unacceptable risk for normal cover and rates. Some will have sophisticated information to do this, others much more basic. Their sensitivity benchmarks will differ, so using a decent broker will be key to finding out what is available.
If getting flood insurance turns out to be difficult or very expensive, it would be reasonable to assume that this would put off some buyers/tenants, or reduce what they offer. Only time will tell.
Requests made to DEFRA and the Association of British Insurers to expand Flood Re to cover commercial property were dismissed. Their party line was there was no empirical evidence that flood insurance for such property was hard to get, or more costly.
Surveys by the British Insurance Brokers’ Association and the British Property Federation tried to garner such evidence, but the government was not convinced, and said it would keep it under review. The media coverage of small businesses unable to obtain or afford flood insurance and now facing ruin led the prime minister to say he would investigate. There are new surveys in place post-Desmond, so the evidence may start to filter through.
None of this will be quick, so professionals need to know what to advise in the current market.
Professional standards and recognising types of flooding
It is important to note that neither the Royal Institution of Chartered Surveyors (RICS) nor the Law Society have issued definitive guidelines on what members should do. It is a matter of professional judgment.
The Law Society Practice Note (December 2014) recommends solicitors mention flood risk to clients, encourage them to check the insurance position, suggest they liaise with their surveyor, and liaise over appropriate flood searches and investigations.
The RICS information paper of March 2015 targets residential practitioners. Section 4 reminds them of the guidelines for reflecting known flood risk in valuation; section 6 suggests when and how to find out about that risk. Commercial property surveyors would be well advised to follow similar lines.
Few clients will know what is out there to help protect them from unwittingly buying or leasing a property at flood risk, or paying too much for it if they proceed. Reliance on enquiries of the seller or on apparent common sense (“the sea is miles away”, “there is no river nearby” or “no one remembers there being any flooding for years”) is simply not enough.
Flooding can arise for many reasons. River and sea flooding are easy to appreciate. Downstream river catchments collect run off from uplands and the river may not be able to contain all of this at times of prolonged heavy rain.
The flooding in December 2015 shows that past flooding is not a reliable litmus test of the extent or depth of repeat flooding. Surface water flooding is more unpredictable. It too is caused by run-off that cannot escape into the drains or percolate into the soil. Instead it congregates in depressions, often distant from the river. It runs down roads and veers off into properties alongside. While it dissipates more quickly, the damage is still done.
Lastly, as the Thames Valley discovered in 2014, ground water flooding can be just as ghastly and lasts longer, but the property professional will not know which soils are prone to act as a sponge.
Lenders beware
Lenders need to be more vigilant too. Their security may be at risk for two reasons.
First, if the borrower fails to insure against flooding, or the cost of flood repairs falls below their excess, they may not be able to afford repairs. Their business may founder and they may default on repayments.
Covenants in the mortgage to maintain a minimum level of flood insurance will be meaningless unless enforced. The Council of Mortgage Lenders handbook was amended at the end of November 2015 to prohibit lenders continuing to set bespoke insurance requirements to be checked by their solicitor. Now they only check there will be buildings insurance in place at completion. More detailed checks of the cover offered and renewal are up to the lender.
Secondly, when the lender tries to realise the security, prospective buyers who are more clued up than the lender about the flood risk may offer a reduced price, which may not cover the outstanding loan. Wise lenders should consider establishing more up front (requiring a decent flood search to be done, either by solicitor or valuer), reducing loan-to-value ratio so they have a bigger buffer, or imposing a retention until the borrower installs flood resistance or resilience measures (known as property level protection (PLP)) and promises to maintain them.
Since the lender can charge the cost of a flood search to the borrower (as for all other due diligence searches) and the borrower benefits from the information unearthed by the search, insisting on one holds little downside for the lender. DEFRA think this would be a good idea.
Flood searches and PLP
The Environment Agency (EA) website has free flood risk maps for river, sea and surface water flooding. While much better than five years ago, they still suffer from several problems (see box).
Commercial searches use EA data alongside more sophisticated flood and topographical information. These databases are updated more frequently than the EA. The results can be tied to the particular property. Even better is that good searches offer a professional assessment of the overall risk, backed by professional indemnity insurance.
Since interpreting the data is very difficult (and most solicitors and surveyors will not have the expertise) it is very helpful to the client to have a simple summary of whether the property is safe, has flood risk that can be alleviated by PLP, or is at high risk. Frankly it is not worth buying a search without such an assessment, no matter how cheap.
If a search discloses a problem, the provider can often put the client in touch with an expert to advise what PLP would be effective. Sometimes it is enough to have flood barriers across openings to keep water out. Where the water has to flow through, then using flood resilient materials reduces recovery time and cost.
Doing PLP may help reduce insurance costs. Even if the client shuns PLP, at least he knows to store precious items at higher levels and make a flood plan.
Flood Re will not justify inertia. Advisers should discuss flood risk and insurance with clients more frequently and it may well become as routine to order a flood search as it has become to order an environmental search.
Lenders may drive this trend. Either way, advisers need to select their search wisely.
Flood RE does not cover
- All commercial property and mixed-use property
- All homes built on or after 1 Jan 2009
- Buy-to-let properties where the landlord arranges buildings insurance
- Purpose-built blocks of flats
- Most houses converted into flats
Drawbacks to EA data
- The maps are badged as suitable only for looking at risk to an area, not a particular property
- There is a disclaimer of liability
- There is no overall assessment
- Ground water flooding is not covered
- The level of detail in the maps (particularly regarding surface water) differs from area to area
- Updating to reflect new defences is slow
- The terrain model (showing areas as elevated and at lower risk) is less sophisticated
Sue Highmore is an editor with Practical Law Property and a freelance writer
• Click here for more detailed information on flood searches.
