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Weathering the storm

Posted: 11/02/2014


What you need to know about flooding

At least 5.2 million properties in England are estimated to be at risk of flooding, and the effects of climate change and unremitting urban development mean that the probability of flooding is likely to increase in the future.

In the wake of the recent floods, there has been a proliferation of newspaper reports about Government cuts to flood defence works. The Environment Agency has warned that cuts to its budget announced last month will impact on its flood risk work, including vital flood modelling research that underpins strategic decisions such as where to build flood defences and homes.  

Impact of flooding

Householders whose homes have been seriously flooded spend an average of six months to two yearsin temporary accommodation, placing an enormous strain on family life. Many businesses that experience flooding never recover.

Owners and occupiers of properties with a history of flooding find it harder to get insurance at competitive rates. The Council of Mortgage Lenders requires flood insurance as standard and lenders may refuse outright to lend on a property that has flooded in the past, or only offer loans on a reduced loan-to-value ratio. Difficulty in obtaining mortgage finance and/or obtaining insurance at a reasonable premium reduces the number of potential buyers and depresses value. Long term damage to the structure of property, fixtures and equipment further affects value.

Flooding brings misery to businesses and householders alike, and can depress property values.

Types of flood risk

There are different types of flood risk, not all of them obvious. Coastal and river flooding are well recognised, but what caused the most damage in the floods of summer 2007 was surface water flooding. This occurs when drainage systems cannot cope with large amounts of rainfall. It is much worse in urban areas where the ground consists of mostly hard surfaces such as concrete or tarmac, causing the rainwater to flow straight off rather than soak away into the ground, resulting in what is known as “flash flooding” when the drains become overwhelmed.

Groundwater flooding is also poorly understood. This is where the water table rises, leaving fields flooded for weeks at a time, because there is nowhere for the water to drain to.

You don’t need to be near a river or by the coast to experience flooding. Surface water has been the largest cause of flooding in recent times.

What should be done?

It goes without saying that new flood defences need to be built, existing ones maintained and local drainage systems improved. Budgets, both nationally and locally, need to be increased, not cut.  Britain should stop building on floodplains (these absorb water in times of heavy downfall, allowing it to be reabsorbed slowly) and developers should leave areas around houses permeable.

All this has been known for some time, but land is scarce and attitudes slow to change. In the UK, insurance companies currently bear the brunt of flood damage, with losses in excess of £3 billion following the 2007 floods. If the insurance industry operated a free market, then in areas of high risk, a £2,000 premium with excesses of up to £10,000 would be about average for residential properties. The industry has hitherto shied away from this approach.

UK insurance market

Instead, the Association of British Insurers (ABI), which represents the majority of insurers in the UK, reached an agreement in 2000 with the Government that its members would make flood insurance available as a standard part of household and small business policies, subject to certain limitations and conditions. One of these was a Government commitment to building new flood defences, which the ABI claims has not been met. The arrangement was due to expire in June 2013 but at the eleventh hour it was extended until summer 2015 to allow time for an alternative scheme, known as 'Flood Re', to be put in place.

Tell me more about Flood Re

Flood Re will be a not-for-profit scheme designed to ensure that flood insurance remains widely available and affordable, by imposing a levy on all policy holders, estimated at around £10.50 per property. Properties at low risk of flooding (98%) will subsidise those at a higher risk (about 2%). 

The details of Flood Re are set out in the Water Bill 2013.  There are some significant exclusions which the British Property Federation and Council of Mortgage Lenders are lobbying hard to overturn as the Bill makes it way through Parliament.

Exclusions

  • All commercial buildings
  • New-build homes constructed after January 2009 (as is the case under the existing arrangement)
  • All leasehold properties
  • The entire private rented sector
  • Housing association homes
  • Council homes
  • Council band H properties

Until Flood Re is established in 2015, insurers are under no obligation to make insurance affordable: they are free to charge higher premiums and larger excesses.

Commercial properties

Flood Re will not cover any commercial properties, and the existing arrangement with the ABI only covers small businesses. Insurers expect larger businesses to take flood mitigation measures.

Under-insurance is a common problem, particularly business interruption insurance.  Many businesses only cover themselves for three months but are likely to be out of their properties for much longer.

What we do on your behalf

  • As part of our due diligence, we make enquiries of the seller. The Law Society introduced a new Property Information Form last year for residential property sales, with more sophisticated questions about different types of flooding.
  • We now consider flooding on every property transaction and can commission a flood search on your behalf. Although we cannot interpret the results for you, a flood report is a very good indicator of whether additional enquiries or surveys are needed. They contain invaluable information, including an assessment of the risk of flooding to a particular property. Insurance companies use the same information to set their premiums and conditions so we strongly recommend that you have one done.

What can you do?

Property insurance

Once you’ve found a property you want to buy or lease, investigate the terms on which insurance is available with a number of different insurers. Historically, buyers and tenants have tended to get a quote just before they exchange contracts but you should not wait until then. If you cannot get a quote or find out that you will have to pay a hefty premium and/or a large excess, you need to know early on to avoid wasting time and money.

Speak to your surveyor

Discuss the level of risk with your building surveyor. If the search result indicates a high risk of flooding, you may need to approach a flood risk assessment consultant for a specialist survey. This will provide further information about the flood risk, and information about steps that can be taken to mitigate exposure to flood damage.

A negotiating tool

A negative flood search result is not necessarily a deal-breaker. There are alternatives. For instance, you can try to reduce the purchase price, leaving money to carry out flood protection measures to improve the flood resistance and flood resilience of the property, and to repair flood damage when it occurs.

The future?

Predictions about climate change, the seemingly limitless need for new housing and public spending cuts all suggest that things are set to get worse, not better.

In the future, lenders may insist on flood resistance and resilience works and impose retentions until these have been carried out.  Insurance companies are shouldering the burden of flood risk at the moment, but they will expect the Government, and individuals, to play their parts.

Our unequivocal advice to you is:

Do not ignore the risk of flooding or you may find yourself up the proverbial creek without a paddle.

Please get in touch if you want to discuss flood searches in more detail.

 

 

 

 


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Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority.

Penningtons Manches Cooper LLP