These homes are about to become worthless

Up to 200,000 British homes could soon become uninsurable, thanks to the end of a flood agreement between the Government and insurers.

Twelve years ago, in 2000, the Government and the insurance industry came together to produce a document called the Flood Insurance Statement of Principles. This governed insurers' treatment of policyholders in flood-prone areas and was renewed for five more years in 2008, but it is set to expire in June 2013. Also, the latest version does not cover homes built since January 2009.

Flood damaged

The trade body for insurance companies, the Association of British Insurers (ABI), has warned that the deal will not be renewed next year, as it 'grossly distorts' the market for home insurance.

The ABI's members no longer support this agreement, because policyholders in low-risk areas are paying higher premiums to subsidise those living on flood plains. The big insurers who signed this agreement are unhappy that they remain 'on the hook' for large numbers of high-risk homes. In other words, they no longer want to bear such a high proportion of flood claims.

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A double whammy: uninsurable and unsellable

At present, the agreement means that even people in the highest-risk areas can buy home insurance and, therefore, enjoy some protection against flood damage to their buildings and contents.

But what happens to them when the deal expires?

Politicians and civil servants in the Local Government Association (LGA) fear that the end of this 13-year deal will leave some households unable to buy cover for damage to their homes and contents.

In fact, up to 200,000 of the UK's 26 million homes could be uninsurable. This comes to one in 130 homes, or 0.77% of the UK's housing stock. While 0.77% is a tiny proportion, the 200,000 households at risk could suffer terribly. Unable to buy buildings and contents insurance, they could be exposed to big bills from the next round of floods.

For example, just imagine not having insurance when a flood causes £20,000-£40,000 of damage to your property. In effect, your home could become uninhabitable, forcing you to move out and abandon your nest.

What's more, homes in high-risk areas could become practically unsellable. After all, who would buy a property that cannot be insured, yet has been flooded, say, twice in the past 10 years?

Without insurance, no mortgage lender would be willing to lend against these properties, leaving only cash buyers in the frame. However, taking such a big risk would be sheer madness, forcing cash-rich homebuyers and buy-to-let landlords to reject these properties and look elsewhere.

According to the LGA, if the Flood Insurance Statement of Principles is not replaced next year, it could leave homeowners nursing an £11 billion liability. Divided by 200,000 homes, this comes to £55,000 per household.

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Is your home at risk?

Anyone whose home has been damaged by flooding in the past 12 years should be more than a little nervous. According to the LGA, those at risk of being priced out of the market for home insurance mostly live in Devon, Huddersfield, Kent, Nottinghamshire and Worcestershire.

In particular, those affected by the massive floods in Cockermouth, Cumbria in November 2009, or the devastating deluge that hit the Midlands and Yorkshire in 2007, should be most worried.

To find out whether your home is in a high-risk Flood Warning Area, simply check the flood maps shown on the Environment Agency's website or call Floodline on 0845 988 1188. These flood maps show the areas of the UK most at risk of flooding from rivers or the sea, as well as showing significant, moderate and low risks of flooding.

In addition, you can get help and advice from the National Flood Forum, a registered charity set up to help individuals and communities at risk of flooding. Also, read this guide to flood risk from the ABI.

[Related feature: When your home insurance refuses to pay out]

Dealing with catastrophe

Critics of the insurance industry argue that insurers should not be allowed to 'cherry pick' the lowest-risk customers while excluding high-risk homes. However, since the birth of insurance, underwriters have always reserved the right to reject excessive risks.

On the other hand, without some kind of compromise or replacement deal, up to 200,000 British families could be teetering on the brink, waiting fearfully for the next storm. Until Britain invests more in flood defences, these folk are living on the edge.

When members of a nation are faced with catastrophic risks, the best way to bear those risks is to place them on the broadest, strongest shoulders. For example, earthquake risk in Japan is partly covered by the huge Japanese Earthquake Reinsurance scheme introduced in 1966.

Likewise, the US operates federal flood insurance programmes, which helped in the aftermath of Hurricane Katrina in August 2005.

However, the Department for Environment, Food and Rural Affairs (Defra) does not want this flood burden to be paid for by an extra levy on hard-pressed taxpayers. Defra also argues that flood-hit homeowners should invest in their own defences, for example, buying sandbags and 'hard defences' such as embankments and walls.

Time for a new system?

With the Government refusing to subsidise flood insurance, another way to provide fair, affordable and widely available home insurance throughout the UK would be to introduce a compulsory levy on all such policies. This happens in France, where insurance premiums include a natural-disaster levy to meet flood costs, with the State acting as reinsurer to guarantee payment in extreme circumstances.

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