Flat owners planning legal claim over 'secret' insurance charges

Thousands of people who own flats are seeking millions of pounds in compensation as part of planned legal action against the companies that own their apartment blocks.

Legal letters, seen by BBC News, allege freeholders - those who own the blocks of flats - took secret commission fees for arranging buildings insurance policies.

The letters claim the commission was then added to the service charges paid by the owners of the flats – or leaseholders – without their knowledge.

Lawyers suggest each flat owner could get up to £2,000 in compensation. The companies all deny they broke any rules.

The fees were paid to the freeholders by insurance companies for buying their products.

Leaseholders allege they were then added to the cost of the buildings insurance by the freeholder or their agents, and the total amount was charged to them in the form of service charges. They say this was done without their knowledge.

For instance, if the insurance on a block of flats cost £80,000, the insurer might pay £20,000 in commission to the freeholder for buying its product.

But they claim the entire £100,000 would then be charged to the leaseholders, without them knowing the total included the commission fee.

Legal firm Velitor Law has written to four large freeholders – E&J Estates, Consensus Business Group, Long Harbour and Ground Rents Income Funds – on behalf of 2,500 flat owners.

They allege the companies received commissions for arranging insurance policies that were "unlawful because it amounts to a secret commission received without our clients prior informed consent".

They are seeking not just the return of the commission, but also interest and any Insurance Premium Tax their clients have paid.

As insurance costs on blocks of flats have spiralled since the Grenfell Tower fire, and commissions are usually a percentage of the insurance costs, the lawyers allege that property owners have benefitted as a result of the disaster.

More companies are likely to be targeted, says Liam Spender, from Velitor Law, as 20,000 leaseholders have already signed up to the class action lawsuit.

"We started with those [four] for a variety of reasons – the number of claimants and to get the best spread across the country. But we think there might actually be 20 different landlord groups we could potentially go after."

A report from the regulator, the Financial Conduct Authority (FCA), which was published in April 2023, found that commission rates on insurance could be as high as 62%.

The FCA found the average commission paid to an insurance broker increased from £1,785 per policy in 2019, to £2,595 in 2022.

"Most of the brokers in our sample," it wrote, "did not give us adequate evidence to show that they deliver fair value consistently for multi-occupancy buildings products."

Since January 2024, insurers and brokers are required to disclose how much insurance commission they are paying to freeholders.

David Walsh, who owns a flat in south-west London, is one of those who has joined the lawsuit.

The annual buildings insurance costs for his apartment block, which contains 144 flats, have tripled in recent years, he says, to more than £150,000 mainly because the building is assessed as having dangerous cladding. The service charge this year is almost £5,000.

Despite asking the freeholder, E&J Estates, how much commission it is receiving, Mr Walsh, 50, says he's still waiting for a response.

"They just ignored us for months, then they declined to comment, then they said 'no, that's not how we see it,'" he told the BBC.

"So I've never got to the bottom of the commissions. I've now signed up to the class action lawsuit but I was unaware until very recently that that's how the game was played."

The BBC approached the freeholders who are subject to the planned legal action. A spokesperson for Ground Rents Income Funds told the BBC that "we do not consider there to be any valid basis for a claim against GRIF."

Penult Capital Partners, which arranges insurance for E&J Estates, said "the various claims made by Velitor are fundamentally misconceived".

Consensus Business Group said any legal action "will be vigorously defended."

Homeground, which provides insurance products for Long Harbour, said its services are "subject to the Financial Conduct Authority's regulatory regime" and that "it receives commission in line with that strict regulatory framework".