Freeholders charge ‘rip-off’ insurance fees

Flat owners have been overcharged billions of pounds for buildings insurance in an “endemic” problem that takes advantage of the leasehold system.

It is usually the responsibility of the freeholder to arrange buildings insurance, but under the terms of the lease the cost is passed on to the leaseholders as part of their ground rent or service charge.

The freeholder, or their managing agent, usually arranges this cover through a broker, which takes a commission from the insurer.

But unscrupulous freeholders or their representatives can get brokers to negotiate a higher commission, creating a kickback for them.

Brokers, which do not want to lose the business to a rival firm and miss out on their own commission, factor this into the overall insurance cost, leaving the leaseholder with a larger ground rent or service charge bill.

The kickback typically adds 20pc to 25pc to the insurance cost but in extreme cases can even account for the majority of the premium.

Neil Holloway, of insurance claims company M2 Recovery, said a recent example was a large block of flats in north-west London. Of its £40,000 annual premium, £16,000 was made up of these hidden commissions.

Another block of eight flats, also in north-west London, was charged £18,000 a year in buildings insurance, of which £13,000 was the secret kickback. In both cases the costs were paid by leaseholders for years before M2 was hired to recover the excess.

Sebastian O’Kelly of Leasehold Knowledge Partnership, a property reform group, said: “Excessive insurance commissions are absolutely endemic. There is one example after another of outrageous rip-off insurance commissions charged by freeholders.”

In most cases the leaseholder has no idea they are being charged extra. Because leaseholders are not normally party to the insurance arrangement, they will be unaware of the extra commission.

Mr O’Kelly said he had seen hundreds of examples going back years and that the overpaid insurance would total billions of pounds.

Even if savvy leaseholders suspect they are affected, they are on the back foot when it comes to tackling the problem. If they become suspicious and ask insurers for details of the commission, companies are not obliged to reply.

One option is to go to the First-Tier Tribunal’s property chamber, which handles land disputes, and argue that the cost of the insurance is too high. However, Mr O’Kelly said this was hard to prove. Leaseholders must compare their situation with that of others and prove their insurance was overpriced, which can be tricky.

Leaseholders can also go to the Financial Ombudsman Service, but this will require written consent from all other leaseholders on the same freehold, and there could be dozens.

Another option is to use a company that will try to claw back the overpaid money for a fee.

There is a financial incentive for insurance brokers to inflate commissions in this way.

Mr Holloway said: “The property and managing agent world is quite a small marketplace. If word gets round that a certain broker gives you 40pc or 50pc commission, everybody flocks to that particular broker.

“There are certain brokers who specialise in big commission payments.”

Owners of flats may be paying too much for insurance thanks to greedy freeholders