How you get scammed on insurance
3.06.12 It is a brilliant (not-so-little) earner and one that – astonishingly – isn’t illegal.
Buy up residential freeholds, charge enormous commissions for arranging the insurance and pass the bill on to leaseholders, who – and this is the really brilliant bit – have no legal right whatsoever to find out what the commissions are.
The Sunday Times earlier this week recommended that the wealthy buy up freeholds for the ground rents, adding: “Additional income comes from commissions for arranging building insurance …”
In fact, loading the insurance is the best gig in town.
Sometimes a Leasehold Valuation Tribunal will reduce the commission – as happened at Charter Quay, Kingston, last November when the LVT ruled that the 23.5 per cent commission on an £84,000 insurance contract be reduced to 10 per cent.
Sometimes, the Office of Fair Trading wonders whether it should do something, but it never does.
The root of the problem is that insurance premiums must only be disclosed to the client – the freeholder – who issues the instruction, and not to the leaseholders, who ultimately pay it through their service charges.
As a result, there is no way of knowing what the insurance commissions are.
A leaked document from Estates and Management casts some light, however.
It shows that in 2007, underlying commissions at numerous properties around the country – including Charter Quay, Royal Charter, both in Kingston, and Putney Wharf, in London, were 42.5 per cent.
Such a figure, if known, would undoubtedly upset the residents and it does not have to be disclosed.
Charges by the landlord for their work in arranging the insurance can sometimes include a number of opaque payments to ensure that placing the insurance pays an even more handsome dividend.
There are contingent commissions paid to the client at the end of the premium period when certain agreed criteria have been met – such as claim levels falling below a certain level.
These payments would not be linked to individual policies, but based on the overall portfolio.
As a result, leaseholders would never know when a contingent payment has been made or not.
And, of course, as leaseholders have not placed the insurance, although they have paid for it, they don’t benefit at all.
Here are three examples of the practice:
1/ A landlord arranges to over insure a site(s) knowing this would give a lower claim level relative to the premium, and therefore the insurance company/broker would be willing to agree a bigger contingent commission.
2/ Insurance claims are suppressed by getting the managing agent to place costs through the service charge. How would you know if a problem on the site is charged to service charge, rather than made as an insurance claim until years after the event? Just because a staff member says an insurance claim is being made does that mean that’s what happens.
3/ The company taking out the insurance may choose to omit certain items from the policy so that while the policy looks very comprehensive it actually excludes certain detailed matters on issues where a claim is more likely. Perhaps that why many landlords choose a bespoke policy wording?
Then there are soft commissions, which are when a company taking out insurance gets an indirect benefit.
An example would be, say, when a freeholder insures several sites the insurance of his offices are thrown in at low cost, or for free.
A potential variation on the soft commissions is perhaps hinted at in the 2006 securitisation for the Peverel retirement interests for £352 million.
“The properties are insured on a full reinstatement basis and rental value loss currently for three years (but not loss of transfer fees)”.
Leaseholders pay to insure the buildings, but have no way of knowing if the landlord has thrown in three years’ insurance cover for his “rental value loss”.
The Royal Institution of Chartered Surveyors looked into insurance commissions in February 2010.
It concluded that there was no real issue, but urged “transparency” – now such a galumphing cliché even the Association of Residential Managing Agents trots it out.
RICS even quoted an unnamed LVT panel member making the preposterous assertion that “in many cases allegations of unreasonable fees and commissions were unfounded”.
That total nonsense was exploded at the LEASE annual conference in 2010.
Here leaseholders got rather more transparency than they bargained for when Gary Murphy, the vice chair of the RICS auctioneering group, cheerfully pointed out that landlords could help themselves to up to 50 per cent of the total insurance premiums in commission, and that leaseholders have no legal right to know the level of payments.
And this invitation to clean up was made at a conference organised by LEASE, which is supposed to protect vulnerable leaseholders!
The potential to profit from insurance is enormous.
Of course, disclosure of commissions is required under the RICS “Service Charge and Residential Management Code”.
“Insurance commissions and all other sources of income to the managing agent arising out of the management should be declared to the client and to tenants.”
The only problem is that it isn’t managing agents who receive these commissions, it is the landlord!