How it works
Buildings insurance covers the cost of rebuilding or repairing your property in the event of it being damaged or destroyed. Normally where the property has been purchased with the assistance of a mortgage this type of insurance cover is required by the mortgage lender. In respect of leasehold properties normally the landlord is responsible for purchasing buildings insurance and this is usually a requirement of the lease, however it is a little known fact that under this arrangement it is usually at the expense of the lessees.Without the knowledge of most lessees the landlords, managing agents and insurance brokers are profiting from the purchase of buildings insurance. Insurance brokers are paid for their services with a commission, which is inflated and agreed in advance with the insurance company and taken out of the premium paid by the lessees. Since these insurance premiums are normally reserved under the lease as additional rent, most lessees are entirely unaware that the insurance premium that they pay to the landlord includes these inflated commissions, least of all that they are paying for these commissions out of their own pockets.
Lessees are not the only parties losing out. Mortgage providers and other lenders, who are co-insured alongside a lessee with the landlord, are also invariably not informed about the commission received by the insurance brokers for purchasing the insurance, since insurance brokers, landlords and managing agents make no disclosure about these arrangements. Due to the hidden aspect of these commissions paid by the insurance broker to the landlord or managing agent, they are known as ‘secret profit commissions’.
How do secret profit commissions operate?
By way of an example, consider the following situation. A landlord decides to purchase a property and secures the necessary finances through a lender. The landlord then arranges insurance through his chosen insurance broker, who receives commission for placing the cover. As part of this transaction the insurance broker and landlord have entered into a commission sharing arrangement.
The managing agent is instructed on behalf of the landlord to re-charge the insurance premium to the lessee as allowed for under the terms of the lease. The insurance premium is reserved under the lease as additional rent. Of course, neither the landlord nor the insurance broker are transparent about the commission arrangement in place.
The insurance broker and the landlord share the commission and neither the lessee nor the lender has any knowledge of the arrangement that exists between the landlord and the insurance broker.