Flood insurance: Government's leaky plan has Catch-22

WITH large parts of Britain still submerged and more rain forecast, albeit in smaller doses, in coming days there are fears that the nationwide clean-up operation will end up taking months rather than days or weeks.

So what does the future hold for the insurance industry and people living in areas at risk of flooding?

After the deluge, the bill

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PwC has revised up its forecast for the cost of flooding in December and January to £630m, including a £500m bill for insurance, notes Hilary Osborne in The Guardian. But this could easily increase. "If the rains continue into March or April, it's not impossible for this to become a £1bn event," says Justin Gott of insurer Hiscox.

Household insurance claims in affected areas are expected to hit £30,000 to £40,000 each, according to Deloitte, and premiums may have to go up across the board to cover the cost. Meanwhile, there are growing concerns about the Government's very leaky new insurance plan for properties at risk.

Bad news for Old Rectories

A 2000 agreement with the insurance industry gave most homeowners in flood hit areas access to "affordable" cover, says Rachel Rickard Strauss on Thisismoney.co.uk. Without it, hundreds of thousands of properties would have been effectively "worthless". But the agreement is set to expire and its replacement – a not-for-profit scheme called 'Flood Re' due to start in 2015 – has "new limitations".

The proposals exclude new-build properties dating from 2009, and all leasehold and buy-to-let properties. Wealthy homeowners could also be whacked, says solicitor Victoria Davies of Harbottle & Lewis, The new deal only guarantees cover against damage to houses in council bands A to G, excluding the most valuable properties in band H. "This could make it hard for households in that band to get cover at all, or make it prohibitively expensive."

...and for leaseholders

To rub salt into the wound, these households will still "have to pay a levy" for Flood Re, says the Daily Telegraph: owners of all of high-risk properties must cough up a £540 premium to fund the scheme – even if they don't qualify for its protection. No wonder even some insurers dismiss it as "unworkable".

Arguably worse off, are some 50,000 leaseholders in affected areas, says Alistair Gray in the FT. To be eligible for Flood Re, the property must "be occupied by the policyholder"; but leaseholders "are prevented from buying buildings insurance under the terms of their lease". Talk about a Catch-22.

A version of this article appears in the 15 February 2014 edition of The Week