The Legal Duty to Insure: Are You Compliant with the Right Valuation?

For Residents’ Management Companies (RMCs), Right to Manage (RTM) companies, and freeholders, the obligation to insure a leasehold property correctly is a legal duty.

Ensuring adequate and up-to-date buildings insurance is a fundamental part of protecting both the physical property and the financial interests of leaseholders and freeholders.

Policy accuracy relies on an up to date reinstatement cost valuation (RCV), often referred to as a reinstatement cost assessment (RCA). This figure determines how much it would cost to completely rebuild the property after a total loss. It must include everything from demolition and site clearance to professional fees and compliance with current building regulations.

If this value is underestimated or outdated, the result could be significant underinsurance – something that carries serious legal and financial consequences.

In this article, we highlight best practice guidance from industry bodies such as RICS, and offer practical steps to help you stay compliant and confident in your insurance cover.

The Requirement of the Law

The legal obligation to insure leasehold properties is set out in the Landlord and Tenant Act 1985, as well as within the specific terms of individual leases. Typically, leases will contain a clause requiring the building to be insured for its full reinstatement value, not its market value. This obligation applies whether the duty to insure rests with the freeholder, an RMC, or an RTM company.

Section 30A and Schedule 1 of the Landlord and Tenant Act provide that landlords (or those acting as such) must ensure the property is adequately insured. Failure to do so may be considered a breach of lease, and leaseholders may have the right to seek redress via a First-tier Tribunal.

The tribunal can compel the responsible party to take out proper insurance, or to reimburse leaseholders for any losses resulting from underinsurance.

Critically, this is not just about having an insurance policy in place. It is about ensuring that the sum insured (the maximum amount the insurer will pay out) is based on a current and professionally calculated reinstatement cost.

Risks of Incorrect or Outdated Valuations

An inaccurate reinstatement cost can have far-reaching implications. If the sum insured is too low, the policyholder (often the RMC or freeholder) may face:

• Underinsurance penalties

Most insurance policies contain an “average clause,” meaning claims may be reduced in proportion to the level of underinsurance.

• Increased liability

The RMC or freeholder may be held liable for any shortfall in cover, particularly if it arises due to negligence or failure to review the valuation.

• Leaseholder disputes

If the insurance fails to meet the lease requirements, leaseholders could take legal action or raise disputes at tribunal.

• Compliance issues

Mortgage lenders often check whether a property is correctly insured. Underinsurance could create problems for leaseholders trying to buy, sell, or remortgage.

Ultimately, what may seem like a minor oversight (such as relying on a five-year-old desktop valuation) could lead to serious financial consequences in the event of a major claim.

What the Guidance Says: RICS Best Practice

The Royal Institution of Chartered Surveyors (RICS) recommends that a full reinstatement cost assessment be carried out at least every three years, or more frequently in periods of economic fluctuation or following significant works.

The RICS guidance also advises that reinstatement valuations be conducted by a suitably qualified professional (ideally a RICS-regulated surveyor) and that these assessments should be based on a physical inspection of the property.

While desktop RCAs can serve a purpose for interim reviews, they should not be relied upon as the primary valuation for insurance purposes – particularly for complex or altered buildings. An onsite valuation offers the highest level of accuracy and is more likely to meet legal and insurer expectations.

Who Is Responsible for Commissioning the Valuation?

Responsibility for ensuring an accurate valuation depends on who holds the duty to insure, as outlined in the lease. For RMCs or RTM companies, this duty usually falls on the directors. For freeholders, the obligation typically sits with the property owner, although managing agents may be tasked with organising the insurance.

Regardless of who commissions the valuation, the key is to ensure it is conducted by a competent professional and reviewed regularly. Directors and freeholders have a duty to act in the best interests of leaseholders, and failing to obtain a current valuation may be seen as a failure in that duty.

How to Stay Compliant and Protect Your Leaseholders

To ensure compliance and provide peace of mind for leaseholders, RMCs and freeholders should take the following practical steps:

1. Commission a full onsite reinstatement valuation every three years or sooner if major works have taken place.
2. Maintain detailed records of valuations, insurance policies, and building works, and keep these accessible for inspection.
3. Engage a qualified surveyor, ideally one with experience in leasehold and block management.
4. Avoid relying solely on desktop estimates for long-term insurance cover.
5. Communicate with leaseholders about the valuation process and insurance updates to maintain transparency and trust.

These measures ensure compliance with legal obligations and also support good governance – reducing the likelihood of disputes, and offering reassurance to all parties involved.

In Summary

Accurate insurance cover is not just a box to tick, it is a legal and ethical duty. For RMCs, RTM companies, and freeholders, staying on top of reinstatement cost valuations is an essential part of protecting both the building and its residents.

By commissioning regular, professional valuations and keeping insurance sums aligned with current rebuild costs, property managers can avoid underinsurance, ensure compliance with the lease, and fulfil their duty of care to leaseholders. In doing so, they safeguard the financial stability of their development and uphold the trust placed in them by those who call it home.