Freeholders issued legal papers over ‘national scandal’ of secret insurance commissions

Legal letters have been issued to four of the UK’s largest freeholders as part of a leaseholder group class action claim to recover unlawfully charged insurance commissions. 

Insurance risk advisory firm Artex has also been notified of legal proceedings to secure disclosure of its landlord clients, which purportedly advised landlords to set up offshore captive insurers to hide secret commissions.

Leaseholder Action, which is organising the claim as the representative of effected leaseholders, issued the documents – known as letters before action – in an ongoing class action lawsuit, led by City solicitor Liam Spender and his law firm Velitor, which has secured multimillion pound funding for the no win, no fee claims.

The group action is targeted at landlords and insurance brokers who have profited from secret insurance commissions paid to property managing agents. Letters explained how landlords had a duty to not profit from service fee arrangements and not charge leaseholders more than the market rate for insurance.

Freeholders of multioccupancy buildings or their property managing agents are the parties that place buildings insurance with brokers.

Leaseholders within these properties, on the other hand, are beholden to the choices of their freeholders where buildings insurance is concerned – despite the fact that the cost of the policy is covered by service fees levied on them by freeholders.

This setup allowed freeholders or their agents to agree higher premiums for cover with brokers, benefiting the underwriter and allowing brokers to take a larger service fee themselves, which was then often cut back to the freeholder as a commission. Leaseholder Action explained that secret commissions amounted to as much as 60% of premiums paid by leaseholders.

The Leasehold and Freehold Reform Act 2024 was brought through Parliament last year to remedy the issue, but the main provisions of the act will not have effect until secondary legislation has been passed. A government consultation on strengthening leaseholder protections over charges and services is currently open, with an end date set for September this year.

National scandal

Leaseholder Action noted that thousands have already joined the group action claim on behalf of homeowners who pay buildings insurance arranged by their landlords and added that a second tranche of letters would be issued before the end of the year. 

It is expected that more than 20 landlords, responsible for the leaseholds of nearly a million homes, may eventually be targeted by the claim. 

David Walsh, a member of the group, said: ”This is nothing short of a national scandal. Hundreds of thousands of leaseholders have been struggling with ever increasing service charges, mortgages and, like everyone else, the cost of living crisis.

”So, it is even more shocking that our landlords have been milking us for cash by jacking up insurance premiums with hidden commissions. I’m looking forward to unscrupulous landlords being held to account and paying back what they owe.” 

Spender added: ”We have now reached a critical milestone in the legal process to get homeowners their money back.

Thousands have signed up enabling us to get to this point. If you are a homeowner in a block of flats and your landlord arranges your buildings insurance, we’d encourage you to sign up to the claim. This first set of landlords are now on notice of this claim and they are now going to have to answer in court.”

The claim seeks to recover a minimum of six years’ worth of commissions from landlords. However, an application to the court to suspend the usual period of limitation could see the claim stretch back as far as 1997 in some cases.

The FCA has investigated secret commissions received by some insurance brokers between 2019 and 2021. It concluded that the average commission was 30% of the premium and that brokers shared an average 50% of their commission with third parties.

There is evidence that some brokers were charging up to 60% in hidden commissions and that this commission was shared with third parties such as landlords and managing agents.