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Should Insurers Deny Home Insurance Cover in High Risk Flood Areas

The UK Insurance industry recently announced that the amount of money the government has allocated in the coming years for flood defences is not enough and it may consider not providing building and contents insurance for people in high risk flood areas. The insurance industry also announced bills for insurance would rise for homeowners generally to spread the overall cost of flooding as the future risk of flooding rises.

The announcement in this year's Government spending round in the Pre-Budget Report, of over £2.15billion pounds for flood defences by 2011 was not warmly welcomed. The association of British insurers said: "We really want to carry on being able to provide this service. [flood insurance] But obviously we can't keep providing it at significant loss." The trade association said that the chancellor of the exchequers recent statement showed the government had 'completely failed to grasp the importance" of improving the country's flood defences in the wake of this summer's floods. Lenders are currently having to deal with significantly more claims (around £3 billion pounds in 2007 alone) due to the record flooding in the Summer. Most worryingly the ABI stated that insurers may not wish to provide cover for people living in flood plains. This may impact over 550,000 people who would not be able to protect their homes using building home insurance (regardless of how much money they have to buy a policy).

So is there a moral obligation by the Government to fund the insurance industry's flood related losses due to claims from policy holders? The UK government is already spending huge amounts of taxpayers money on flood defences to protect high risk areas. Other western countries are not matching these investments. Should new homes be built on floodplains in the first place?. Should the construction industry foot the bill for adequate new local drainage systems where run off from new developments only makes the potential flooding impact worse?.

There is currently an informal compromise agreement between the UK's leading insurance organisations, the private sector and the Environment Department of the Government, (known as the Statement of Principles) which sets out to jointly define shared responsibilities for paying for the UK's flood defence infrastructure. The agreements states that insurers will renew flood cover for existing customers, provided 'adequate' flood defences are in place.

What 'adequate' flood defences actually means is a matter of debate. The antiquated drainage systems of the United Kingdom need to be upgraded to cope with the additional run off from heavy rainfall as climate change creates more and more freak weather conditions. The announcement that insurance companies may not provide cover for potentially millions of people in affected areas has been attacked as an extreme action to take. David Blunkett, the former home secretary: 'It will lead people to conclude that the industry wishes to remove any commercial risk to their own profits and place that risk instead on current and future home insurance policy holders." The essential political negotiation between the government and the insurance industry continues behind the scenes as well as in the media.

The loss of electricity to almost a million people in the area of Tewksbury (due to the fact a key sub power station almost had to close due to rising flood waters) highlighted the fact that some government installations were at high risk of severe flooding. The incident also highlighted there is confusion amongst the local authorities and the Department of the Environment with regards to crisis management and prevention strategy. There is no legal obligation for all Government installations to be protected form flooding.

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