Do I Need Buildings Insurance for Share of Freehold?

Do I Need Buildings Insurance for Share of Freehold?

The short answer is yes — if you own a share of the freehold of a building containing flats, you collectively need buildings insurance for the whole structure, and you are jointly responsible for arranging it. Buildings insurance for share of freehold protects the building from the same risks as any other freehold property; the difference is that the duty to insure sits with the shareholding leaseholders as a group, usually acting through a residents' management company.

How Share of Freehold Works

In a share-of-freehold arrangement, the freehold of the building is owned by a company in which the leaseholders are shareholders. Each flat owner still has a long lease on their individual flat, but they also share in the ownership of the freehold itself. The company — usually a residents' management company (RMC) limited by guarantee or shares — takes on the freeholder's responsibilities, including the duty to insure the building.

The Insurance Duty Survives

Switching from a third-party freeholder to a share-of-freehold structure does not remove the obligation to insure the building. The lease still requires comprehensive buildings cover, and the freeholding company is now the entity responsible for arranging it. In practice this means that the directors of the RMC need to:

• Arrange a block buildings insurance policy in the name of the company
• Set the sum insured at the full reinstatement value, supported by a recent RICS assessment
• Collect the premium through the service charge in the proportions set out in the leases
• Provide a summary of cover to leaseholders on request
• Review the policy annually at renewal

What the Policy Should Cover

A share-of-freehold buildings policy is structured just like any other freeholder buildings policy. It should cover:

• The full structure of the building — walls, roof, floors and foundations
• Communal areas: entrance hall, stairs, landings, shared gardens
• Fixed installations: pipes, wiring, central heating and any communal plant
• Outbuildings, boundary walls, fences and paths
• Standard perils, including fire, storm, flood, escape of water and subsidence
• Property owners' liability of at least £2 million
• Loss of rent and alternative accommodation cover for each flat
• Employers' liability if any staff are employed, including a part-time cleaner or caretaker

Do I Need Separate Buildings Insurance for My Flat?

No — and you should not buy a second buildings policy. If you took out a personal buildings insurance policy on your own flat in addition to the block policy held by the freeholding company, you would have two policies covering the same risk and end up in a difficult position at claim time. Instead, individual leaseholders in a share-of-freehold block should:

• Pay their service-charge contribution towards the block buildings policy
• Arrange their own contents insurance for furniture, electronics, clothing, jewellery and personal items
• Consider tenants' improvements cover if they have made significant internal improvements to the flat
• Include personal liability cover within the contents policy

The Mortgage Lender's Position

If you have a mortgage on your share-of-freehold flat, your lender will require evidence that the building is insured to the full reinstatement value with their interest noted on the policy. The RMC's block buildings policy satisfies this requirement, but you will need to be able to produce a summary of cover when your lender asks for one. Many lenders will accept the policy schedule and confirmation that you contribute to the premium through the service charge.

What Happens If There Is No Cover in Place?

If the freeholding company has failed to arrange buildings insurance — which sometimes happens in small share-of-freehold blocks where the leaseholders have not appointed directors or have not actively managed the freehold — the consequences are serious:

• Every leaseholder is in breach of their lease
• Mortgage lenders are within their rights to call in their loans
• If the building is damaged or destroyed, the cost of reinstatement falls on the leaseholders directly
• Property owners' liability claims are uninsured and fall on the directors of the company in some circumstances

The fix is to put a specialist block buildings policy in place immediately, calculate and demand the appropriate service-charge contributions, and put governance in place to ensure the policy is reviewed and renewed each year.

Small Blocks and Self-Managed Buildings

Many share-of-freehold buildings are small — three or four flats in a converted Victorian house — and the leaseholders manage the freehold themselves without a professional managing agent. Specialist freeholder buildings insurance is still available and is generally just as easy to arrange. The key is to work with an insurer or broker who writes this type of business regularly and understands the share-of-freehold structure.

For more background see our guides on share of freehold buildings insurance, shared freehold insurance and buildings insurance for shared freehold flats.

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