High Court will hear legal claim on lawfulness of ‘secret commissions’ in building insurance premiums

Leaseholders in blocks of flats have seen the cost of insurance premiums rise by 1,000% in the most extreme cases, as information about the widespread use of combustible cladding and poor construction practices have come to light.

But while some of this increase has been driven by the insurance industry’s view of the heightened risk of high-rise buildings, some of it relates to spiralling commission charges from the brokers that arrange the insurance.

Some of this involves the broker paying a share of the commission to the building’s managing agent or freeholder. The FCA highlighted how brokers were “often unable to articulate” why this money had been shared.

The FCA reported in February that £1.6bn was paid out by leasehold homeowners in insurance premiums between 2019 and 2022. 

The estimated average ‘hidden’ commission charged was 30% of the premium, and there was evidence that some leaseholders were facing an uplift of up to 60%.

Liam Spender, head of real estate litigation at Velitor, recently successfully challenged a £100,000 insurance commission taken by his own freeholder, relating to the block of flats where he lives. This alerted him to the issue faced by many other leaseholders across England and Wales.

Mr Spender said: “I was able to expose and recoup the secret commissions through which freeholders took money from unknowing leaseholders.

“Through this group action, Velitor is now looking to help others recover secret commissions they may have paid. The plight of leaseholders and their unconscionable and unlawful treatment by some freeholders is nothing short of a national scandal. This legal action will be a significant step in addressing it.”

Velitor estimates that the same issue may affect up to 900,000 flats owned by the largest freeholders. The aim of this action is to recover secret commissions paid by other leaseholders.

The claim, to be pursued in the High Court on behalf of leaseholders who opt in, will seek to reclaim the hidden commissions, any resultant increase in insurance premium tax, and interest going back at least six years. It is hoped this six-year period could be extended, if the High Court agrees.

The claim is open to any leaseholder who owns, or has since 1997 owned, a leasehold flat in England and Wales. Interested leaseholders can find out more here.

Giles Grover, a leaseholder, investigated the insurance commission charged to residents in his own block in Manchester. His home was found to have the same type of cladding as Grenfell Tower and, as a result, the building’s insurance premiums rose 500%.

He said: “It is disgraceful that, while residents were dealing with unsafe cladding in the aftermath of the Grenfell tragedy, insurance brokers and freeholders were splitting hidden commissions on our building insurance.

“In just three years, our insurance costs rose more than five times, to over £440,000 a year. Charging high rates of commission on such huge sums for doing next to no work will have made them a packet. I would say they are nothing but freeloaders, profiting from the misfortune of others.”

Secret commissions will become unlawful as a result of the Leasehold and Freehold Reform Act 2024. However, the act is not yet in force and is not retrospective.

Michael Gove, the former housing secretary, had previously written to the British Insurance Brokers’ Association and called for “inflated broker commissions and unjustifiable payments” made to third parties to stop.