Right to Manage (RTM) company insurance UK

A Right to Manage (RTM) company allows leaseholders to take over the management of their building from the freeholder without needing to prove fault. This process, established by the Commonhold and Leasehold Reform Act 2002, empowers leaseholders but also brings with it significant responsibilities, including the need for appropriate insurance. This guide explains the essential insurance considerations for RTM companies in the UK.

Understanding the RTM Company's Role and Responsibilities

When an RTM company takes over management, it assumes all the freeholder's management functions, rights, and responsibilities, except for those relating to forfeiture and the sale of the reversionary interest. This includes:

• Maintaining the structure and common parts of the building.
• Arranging repairs and improvements.
• Managing service charge funds.
• Ensuring compliance with health and safety regulations.
• Dealing with disputes and complaints.

These responsibilities carry inherent risks, making comprehensive insurance a critical safeguard.

Key Insurance Policies for RTM Companies

The insurance needs of an RTM company are broad and overlap significantly with those of a traditional landlord or property management company. The main policies include:

Buildings Insurance (Block of Flats Insurance)

This is arguably the most crucial policy. Under the terms of most leases, the freeholder (and by extension, the RTM company) is responsible for insuring the building itself. This must cover the full reinstatement cost – the expense of demolishing and rebuilding the property from scratch – not just its market value.

• Coverage: Typically includes damage from fire, flood, storm, subsidence, escape of water, impact, theft, and malicious damage.
• Valuation: It is essential to have an up-to-date professional valuation for insurance purposes. RICS (Royal Institution of Chartered Surveyors) professionals can provide these. Undervaluation can lead to significant issues under the 'average clause', where insurers may only pay a proportion of a claim if the sum insured is inadequate.
• Common Inclusions: Most block of flats insurance policies will include property owner's liability, lifts and machinery, damage to underground services, and alternative accommodation for residents if the building becomes uninhabitable due to an insured event.

Property Owners' Liability Insurance

As the party responsible for the common parts and overall safety of the building, an RTM company faces potential claims for injury to third parties or damage to their property arising from the common areas. For example, someone slipping on a wet floor in a communal hallway or being injured by a falling roof tile.

• Coverage: Protects the RTM company against legal liability for accidental death, injury, or property damage to third parties occurring on their property.
• Sum Insured: Typical limits range from £2 million to £10 million, with higher limits advisable for larger or more complex properties.

Directors' and Officers' (D&O) Liability Insurance

Members of an RTM company's board are often leaseholders themselves, acting in a voluntary capacity. They make decisions on behalf of the company, manage funds, and carry out statutory duties. Directors' and Officers' liability insurance protects these individuals from claims arising from wrongful acts, errors, or omissions in their management duties.

• Coverage: This policy can cover costs associated with defending legal actions, settlements, and damages awarded.
• Why it's crucial: Without D&O cover, individual members could be held personally liable, potentially leading to significant financial loss. This is particularly important given the increasing regulatory scrutiny and the complex legal landscape RTM companies operate within.

Fidelity Guarantee Insurance (Employee Dishonesty)

RTM companies handle significant sums of money, primarily service charges. While directors are typically unpaid, they have access to company funds. This policy protects the RTM company against financial loss due to dishonest acts by any individual or group of individuals involved in handling the company's money or property.

• Coverage: Theft of money, fraud, or embezzlement by directors, officers, or any employed staff.

Legal Expenses Insurance

Disputes are a common occurrence in property management. Legal expenses insurance can provide cover for the costs of pursuing or defending various legal actions.

• Coverage: Including contract disputes (e.g., with contractors), property disputes, debt recovery (e.g., unpaid service charges), and employment disputes (if the RTM company employs staff).
• Benefit: Can significantly reduce the financial burden of legal challenges, which can quickly accumulate.

Special Considerations for RTM Companies

• Lease Requirements: Always review the lease document carefully. It will stipulate the insurance obligations, including the type and sum insured for buildings insurance. An RTM company must comply with these terms.
• ARLA/RICS Best Practice: While not specifically regulated by the FCA for their management functions, RTM companies should ideally adhere to the best practices set out by professional bodies such as RICS and ARMA (The Association of Residential Managing Agents) as these often inform what constitutes prudent management.
• Managing Agents: Many RTM companies employ professional managing agents. While the agent may have their own Professional Indemnity insurance, the ultimate responsibility for ensuring adequate insurance for the building and the RTM company itself lies with the RTM company directors.
• Specific Risks: Consider any unique risks associated with your building, such as being listed, having a historic structure, or being in a high flood-risk area. These may require specialist endorsements or policies.

Common Questions

What happens if our RTM company doesn't have sufficient insurance?

Lack of sufficient insurance can have severe consequences. If a major incident occurs (e.g., a fire) and the buildings insurance is inadequate, the leaseholders could be left with substantial personal financial liabilities to cover the shortfall for rebuilding. Similarly, insufficient liability cover could mean the RTM company (and potentially its directors personally) would have to pay damages and legal costs out of pocket, potentially leading to bankruptcy. Furthermore, failing to comply with leasehold insurance obligations could put the RTM company in breach of the lease terms.

Can an RTM company use an existing freeholder policy?

When an RTM company takes over, it assumes the responsibility for arranging insurance. The previous freeholder's policy will no longer be adequate or appropriate. The RTM company must arrange its own comprehensive block of flats insurance, naming the RTM company as the insured party, and ensuring it meets all leasehold requirements. It is a fresh start for insurance, though often existing brokers may be able to provide new quotes based on the property history.

How does the FCA regulate RTM company insurance?

RTM companies themselves are not directly regulated by the Financial Conduct Authority (FCA) in their capacity as property managers. However, insurance brokers arranging policies for RTM companies are regulated by the FCA. This ensures that the advice you receive, and the products offered, are suitable and transparent. When choosing an insurance broker, ensure they are FCA authorised and regulated – you can check this on the FCA Register.

Related Property Managers insurance guides

• What insurance does a UK property manager need?
• Property managers' professional indemnity insurance explained
• Block of flats / freeholder insurance for managing agents
• Insurance for letting agents vs property managers
• Directors' & officers' cover for residents' management companies

Speak to a UK insurance broker

Premier Insurance has been arranging UK property managers insurance since 1983. We are FCA regulated, BIBA members, and place cover with 200+ insurers including Lloyd's of London. Call 020 8908 2426, WhatsApp 07954 331362, or email hello@premier-insurance.co.uk. See our Property Managers Insurance page for full cover details.