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Posted in Market developments, UK

UK: Flood Re – how will the scheme work?

The Department for Environment, Food and Rural Affairs (DEFRA) has recently published a note setting out the details of the government’s approach to flood insurance.

The note covers important aspects of the scheme and provides background into the detail of how the scheme will work. It is intended as a guide and may not represent the final position reached. This blog post covers the key points coming out of the note. More information on the background to Flood Re is covered in our client briefing.

Scope of Flood Re

There has been much comment and press coverage on the scope of Flood Re since the scheme was first proposed. We have seen almost daily press articles commenting on the proposed exclusions to Flood Re with debate between the insurance industry, the ABI, the government and the property industry on this issue. “Has he or hasn’t he?” reports of whether the Prime Minister was considering a U-turn on the council tax band H exclusions, have been the recent hot topic. So, at a time of great debate between all interested parties, the DEFRA note sets out how it envisages that insurers will distinguish between domestic and commercial policies for the purposes of determining eligibility for Flood Re.

(a)             What will be covered by Flood Re?

Flood Re is designed to cover the 1-2% of households at the greatest risk of flooding. The majority of homes will not need to be in Flood Re. The definition of “household premises” will be set out in the relevant legislation and eligibility requirements will be set out in the Flood Re Scheme Rules to ensure consistency across the industry. Points to note are:

  • Band H properties are excluded because Flood Re is designed to be progressive with the benefits targeted towards lower income households.
  • Properties built after 1 January 2009 are excluded because new housing developments should be located to avoid flood risk. Note also that any commercial building converted to a residential property after 1 January 2009 would not be eligible for Flood Re.
  • Commercial properties are excluded because the Government does not want consumers to subsidise commercial insurance. In distinguishing between domestic and commercial policies the industry will use this criteria:

Domestic Properties:

  • are insured in the name of an individual;
  • have a Council Tax Band;
  • are used for residential purposes;
  • have an individual premium; and
  • are occupied by the policy holder or their immediate family.

(b)             Contents Policies

All domestic contents insurance policies (save those in Council Tax Band H or built after 1 January 2009) are eligible for Flood Re.

(c)             Buildings Insurance Policies

The note provides a list of the types of buildings insurance policies which are in scope. Rather than repeat the list in its entirety here, it worth pointing out that in essence a policy that covers an owner-occupied residential freehold property (excluding Band H properties and those build after 1 January 2009) are generally eligible. There are specific provisions relating to leasehold properties.

Commercial buildings insurance policies are ineligible.

Where the building is not used solely for residential purposes the policy will generally be ineligible, for example:

  • Pubs (including those where residential accommodation is above the premises).
  • Post offices.
  • Premises of microbusinesses, small businesses, charities or co-operatives.
  • Bed & Breakfasts paying business rates.

Where the building is not insured in the name of an individual or under an individual premium the policy will generally be ineligible, for example:

  • Owner-occupied leasehold flats.
  • Commercially managed blocks of residential flats.

Where the building is not occupied by the policy holder or their immediate family the policy will generally be ineligible, for example:

  • Properties that are rented out.
  • Holiday homes that are let out.
  • Farm outbuildings.

With the appointment of an interim CEO for Flood Re (reported by the ABI in early March), and the broker procurement which took place in February this year, steps are being taken to get the scheme up and running. We will continue to report here in our blog on developments as progress is made.