Subsidence leads to an insurance fall-out: Transfer of property freehold leaves flat owners without full cover

A LONDON household is celebrating a U-turn by an insurance company that means the occupants no longer have to foot half a pounds 25,000 bill for subsidence repairs.

The case raises important issues for the occupants of leasehold flats over the liabilities of insurers in costly and complex subsidence claims.

It is questionable whether this claim would have been settled satisfactorily without the intervention of the Independent on Sunday.

But, according to John Samson, a partner and property specialist with solicitors Nabarro Nathanson, people in this situation are in a weak legal position.

Julian Tollast, an architect, and his wife, Karen Elliott, moved into their Clapham flat in 1987. There are two other flats in the building, and the buildings insurance is arranged by the owner of the freehold. As is often the case with leasehold flats, the freehold on the property changes hands often - it has done so several times since Mr Tollast and Ms Elliott moved in.

Evidence of subsidence began to appear in the summer of 1990. At that time, the building was insured with New Zealand Insurance (NZI), a subsidiary of General Accident. It had previously been insured with Commercial Union.

NZI would only agree to pay half the claim for repairs to the property, arguing that much of the damage occurred before it started providing cover. Mr Tollast and his fellow leaseholders appealed to Commercial Union, but it refused to pay up on the grounds that its contract had been with a previous freeholder.

Mr Tollast was stunned. He and the other occupants of the block had paid hundreds of pounds in premiums to NZI and Commercial Union.

'We have paid insurance premiums for continuous cover, yet when we come to claim on that insurance we receive only partial settlement,' he said.

Barry McHugh, the present owner of the freehold on the property was also furious. 'I do not think this is fair,' he concurred. Mr McHugh bought the freehold of the Clapham building in May 1991, when the property was already insured with NZI.

He fears that with leasehold reform legislation imminent, many leaseholders will buy their freeholds and form management companies that will take over the insurance, in effect becoming new policyholders. 'Insurers will be able to wash their hands of existing subsidence claims,' he said.

After being contacted by this newspaper, NZI agreed to pay the claim in full and try to recover half of it from Commercial Union. A spokesman for NZI said the company had simply reconsidered the case.

Commercial Union said it believed it may have acted hastily in abdicating responsibility for half the claim and should have talked to NZI earlier.

Subsidence claims can frequently involve two or more insurance companies. At present, industry practice is for the current insurer to pay up then recover money from previous insurers, but only where the policyholder has not changed. If there is more than one policyholder and more than one insurer, companies take the view that they are only liable to pay claims to the policyholder with whom they had a contract.

Mr Samson said this was an extremely difficult legal area: 'Insurance companies are only liable to matters that arose during the period of their cover. So if the damage started before you took out the policy, the insurer will say it is not liable.

'When you are buying a property, you should negotiate with the vendor that all rights under his insurance be assigned to you. This is almost never done.

'The ideal way is to get your solicitor to put a clause in the purchase contract saying that all rights accrued to the vendor on the policy are assigned to the purchaser. The purchaser should give notice of this assignment to the insurer.'

Insurers have tended to pay up in the past, said Mr Samson. But now they may be taking a tougher stance.

Leaseholders should ask their landlord to pass the benefit of his entitlement under the policy to the subsequent freeholder because 'without that you are not properly covered'.

Many leaseholders think, as Mr Tollast did, that if their interest is formally noted on an insurance policy, their position is protected. 'This offers virtually no protection,' warned Mr Samson.

(Photograph omitted)