Brady Solicitors review the recent appeal of COS Services Limited v Nicholson and Willans, which considered whether insurance premiums payable under a block insurance policy were reasonably incurred.

In 2014 the freeholder, Cos Services Limited, took out an insurance policy which covered multiple developments.

The leaseholders in one of the blocks complained that the costs applied to their block were unreasonable, in particular because the insurance policy had increased compared to earlier years. Section 19 of the Landlord and Tenant Act 1985 provides that service charges (including insurance) are only payable to the extent that they are ‘reasonably incurred’.

The FTT agreed with the leaseholders.

It found that the insurance policy was unreasonable and reduced the amount payable. There were cheaper policies available which the landlord ought to have considered.

The appeal

The freeholder appealed on the basis that evidence, which had not been before the FTT at the initial hearing, showed that the increase in premium was justified because the new policy offered additional benefits. The leaseholders argued that the differences were insufficient to justify the difference in premiums and the service charges were still unreasonable.

The Upper Tribunal agreed with the leaseholders a second time. In addition to deciding whether the landlord had acted rationally, the FTT considered whether, in all the circumstances, the sum was a reasonable charge.

Whilst freeholders are entitled to take out block policies, the premiums must be in line with comparable quotes offering a similar level of cover.

In this case the freeholder had failed to show this was the case and the appeal was dismissed.

It referenced earlier decisions which decided that the freeholder must show that the premium charged was representative of policies available on the open market.

Impact on freeholders and management companies when choosing a block policy

Though a block policy can be beneficial, you must still take into account the benefit that leaseholders will receive, bearing in mind the costs.

If you are a freeholder or management company with responsibility for arranging insurance, whilst you are under no obligation to take the cheapest quote we would always recommend getting a number of comparable quotes. If insuring a development under a block policy, you should also obtain quotes for a standalone policy to ensure that leaseholders receive value for money.

Good recordkeeping will be helpful should you ever face a challenge of reasonableness at the FTT – whether for insurance costs or any other aspect of the service charge.

For advice on how to prevent challenges to insurance premiums and other service charge contributions, please do get in touch.