The role of managing agents in arranging insurance has attracted growing scrutiny following the Financial Conduct Authority’s review of commission share and, in response to increasing insurance rates, often triggered by escape of water losses and insurers’ concerns about fire safety and build quality.
Increasing Allegations of Negligence
The enhanced scrutiny increases the likelihood that a managing agent will be on the receiving end of an allegation of negligence in relation to arranging insurance.
Here’s two simple examples of situations where an allegation could arise:
- The property insurance excludes losses arising from the storage of e-bikes within the building. Nobody notices the exclusion; nobody enforces a policy about e-bike storage, and the building is damaged by fire due to a faulty battery. The loss isn’t covered.
- A £25,000 flood excess that was introduced to reduce premium by a couple of thousand pounds suddenly becomes costly when extraordinary levels of rain leave leaseholders covering the first £25,000 of a claim following a ‘once in every 50 years flood’.
Fair Value – It’s Not About Finding the Lowest Premium
One of the measures of competency in arranging insurance is the ability to evidence ‘fair value.’ Providing fair value is not about just finding the cheapest quote. Instead, it is measured against whether the cover, service quality, and overall cost provide a fair deal to the consumer.
Fair Value and the Reinstatement Value
The ultimate test of fair value comes when a policy has to respond to a claim. At this point the accuracy of the reinstatement valuation can be critical. If it’s under what it should be; insurers may have the right to reduce the settlement in a claim by an equivalent percentage. It’s known as the averaging clause.
An accurate sum insured underpins fair value; it determines whether the building is properly protected, whether leaseholders are exposed to underinsurance, and whether the premium being charged is genuinely fair and proportionate. A £50,000 premium may appear to offer better value than a £75,000 premium but is that the case if the former relates to a valuation of £5m when the true value is £7.5m?
The Human Cost of the “Average Clause”
It is recognised that the blocker to getting an updated reinstatement valuation and then insuring the property for the correct amount may sometimes be the residents themselves. Faced with increasing service charges in a challenging economic environment it is understandable that some people may push back on further costs, particularly if they have a general mistrust of insurance and find the language used to describe it and the reinstatement valuation itself opaque.
We’ve often heard of residents challenging an RCA because it is significantly higher than the collective ‘market’ value of the individual homes in the block. In that situation it might be hard to explain to someone why market value has very little bearing on how much it might cost to rebuild.
The Facts and Figures
In these situations, explaining to a resident how the Averaging Clause works in practice may be helpful.
A block has a correct rebuild value of £10m, but it is only insured for £7m (70%). A fire causes £1m of damage. If the Averaging Clause is applied, the insurer would only pay 70% of the claim: £700,000.
The £300,000 shortfall would then be collected from leaseholders via an emergency charge or, if your business is found to be negligent the loss would (hopefully) be covered by your PI insurance.
This is the real cost of underinsurance.
But Properties Are Still Underinsured
The data on underinsurance remains alarming with research consistently stating that the majority of UK properties are underinsured, with many properties covered for barely two-thirds of their actual reinstatement cost. Underinsurance arises for a number of reasons as highlighted by this article from BCIS and it affects all forms of property from our homes through to multi-million pound office blocks.
Underinsurance isn’t a new problem, but the scale of the issue has worsened as rebuild costs have escalated in response to a multitude of factors from the impact of war on materials pricing, to rising labour costs to cost increases associated with implementing new legislation.
For a managing agent, this could be a professional liability minefield especially when cover under a lot of professional indemnity policies for arranging insurance is at best sketchy (that’s a topic for another day).
The Block Manager’s Protection Toolkit
How to move from ‘arranger’ to ‘advisor’ and shield your firm from exposure.
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The Three-Year RCA Mandate
Relying on “desktop” valuations or annual percentage uplifts is no longer defensible. Establish a firm policy that every block in your portfolio undergoes a RICS-regulated Reinstatement Cost Assessment (RCA) every three years. This shifts the “valuation risk” from your shoulders to a qualified surveyor.
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The “Day One” Safety Net
Ensure your policies include a “Day One” uplift (often 15% to 50%). This isn’t just extra cover; it’s a buffer that protects the building against inflationary spikes that occur during the policy year.
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Audit the “Demolition & Fees” Gap
Many outdated valuations focus purely on “bricks and mortar.” In 2026, professional fees (architects, surveyors, legal) and the cost of site clearance/debris removal can account for 15-20% of a claim. Check that your Sum Insured specifically accounts for these costs.
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Changes to the property
If the property has undergone a major refurbishment or an extension has the RCA been updated to reflect this?
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Evidence the “Fair Value” Journey
Retain an easily accessible record of your recommendations. If the Management Company rejects a professional valuation to save on costs, document their refusal and retain evidence to demonstrate that the risks of underinsurance have been clearly explained.
The same guidance should be applied to any decision that’s taken to try and limit the cost of insurance e.g. increasing the self-insured excess.
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Look Beyond the Rebuild: Alternative Accommodation
If a major loss occurs, leaseholders may be out of their homes for 24-36 months. Review your “Alternative Accommodation” limits. Many standard policies cap this at 20% of the sum insured; in high-value areas or complex blocks, this is frequently insufficient for a long-term rebuild.
Reassuring Your Clients: A Proactive Stance
Arranging insurance is a big responsibility that can carry significant risk. It requires a considered approach that is not driven solely by price. Overlooking key details or relying on outdated valuations can have serious consequences for both your business and your residents.
Where a Managing Agent is competent to do so and has, both the appropriate regulatory cover and suitable professional indemnity insurance, providing a proactive, advisory led approach to managing property insurance on behalf of residents should help to consistently deliver fair value.
Businesses that can’t meet all three requirements should pass the responsibility to a carefully selected insurance broker who can provide the necessary expertise and protection. This ensures buildings are properly insured and managing agents stay firmly within their professional remit.
