Policyholders could be exposed to “significant financial loss”
The Building Cost Information Service (BCIS) has warned insurers that buildings insurance arranged for individual flats carries a significant risk of underinsurance.
Buildings insurance is commonly taken out on the whole block by the freeholder of the property and the premium split between the various leaseholders.
However individual leaseholders are sometimes left to arrange their own cover.
Leaseholders who take out buildings insurance for their individual flat often believe, in the event of a catastrophe, they will be protected and covered for the building to be restored to its original state.
However, unless all leaseholders in the block have adequate buildings insurance cover, this is not the case, the BCIS said.
It warned that if there were to be a total loss and not all of the flats were insured, there is a distinct possibility that the block could not be rebuilt.
In such a case, the insured leaseholders would receive a cash settlement from their insurer but the settlement would be equal to the rebuilding cost of the individual flat.
BCIS director, Andrew Thompson, said: “This is a serious issue and could lead to a significant financial loss for the policyholder, not to mention the reputation and commercial risk for the broker or insurer.
“In a total loss situation, policyholders may receive a payout far short of the market value of their flat but they would still need to continue to pay their mortgage.”