LEGAL EXPENSES & RENT GUARANTEE INSURANCE: THE UNSUNG HERO OF THE PANDEMIC?

Few insurance products have faced as much destabilisation in the face of the pandemic as Legal Expenses & Rent Guarantee insurance (LERG). Throughout the past twenty-one months, many of the foundations on which the product is built have changed, forcing the market to quickly adapt and develop its products to ensure continued sustainable support for landlords and letting agents.

In our latest blog, Richard Finan charts the ups and downs of LERG and explains how the market has had to evolve.

What is LERG?

LERG offers peace of mind when renting out properties and offers rent protection to landlords and letting agents in the event of a tenant defaulting on their tenancy agreement; it also covers legal expenses incurred, such as in evicting a tenant.

Under Government legislation prior to March 2020, once a tenant had been in arrears for two months, a landlord could issue a Section 8 notice of the Housing Act 1988 (also known as a Notice of Possession) to commence eviction proceedings. Once commenced and a claim lodged, if there was a reasonable prospect of successful eviction, most policies would cover rent payments for up to 12 months or £25,000, with an eviction completed within a few months.

Enter Covid-19

Last February we heard the first whispers of a UK-wide lockdown and the threat of economic devastation caused by forced business closures. With the prospect of mass redundancy and unemployment we expected to see a surge in LERG claims as tenants became unable to afford their rent.

In response, and to offer a measure of support for tenants facing eviction due to an inability to keep up with rental payments, the Government passed the Coronavirus Act 2020 (Act) which came into force on 26^th March 2020 and increased Section 8 notice periods on all grounds to 3 months; this was in force until 28^th August 2020.

Between 29^th August 2020 and 21^st May 2021 most Section 8 notice periods were extended to 6 months, although there were some exceptions for certain grounds – one being where over 6 months’ rent was owed at the date the notice was served, in which case the notice period was 4 weeks.

Between 1^st June 2021 and 30^th September, the Section 8 notice period was amended to 4 months – again, with some exceptions, notably where over 4 months’ rent is unpaid at the date the notice is served, in which case 4 weeks-notice is required.  Other notice periods were applicable for other arrears of rent.

There are also new prescribed forms of notice under Section 8 and Section 21 from the 1^st June 2021, which reflects the changes to the procedure for obtaining possession from tenants. In addition, landlords and letting agents would only be able to commence proceedings if they could evidence alternative methods of resolution had been explored, e.g., mediation.

These extended notice periods however were compounded by a subsequent suspension on all housing possession actions; a much-restricted capacity within the County Courts and the inability for bailiffs to enter properties to carry out these actions.

Though the Act rightly offered greater protection to tenants facing hardship, the extended notice periods and limitations on evictions would undoubtedly lead to significantly higher claims costs to insurers as rent payments under the policies continued whilst the tenants remain in arrears and in possession of the property.

With a drastically changing risk profile, the majority of the market was forced to suspend new policy sales as landlords and letting agents started to insure their tenancies in increasing numbers to protect against the risk of rent arrears. At Arc Legal, we began to review our own LERG solution in partnership with our clients to find the best way to continue to support both them and their policyholders in a sustainable way.

Throughout this time, we continued to pay valid claims, but interestingly this was not a consistent view across the market as some insurers tried to avoid their liability, stating that there was no longer a reasonable prospect of successfully evicting tenants.

A new solution

In response to the measures outlined in the Act, we reconfigured and relaunched our LERG product and introduced a robust mediation process for all claims. This gave landlords and letting agents access to an expert mediation facility that would work with them and their tenant to come to a fair agreement; once these methods had been exhausted the landlord or letting agent’s case would be referred to solicitors ready for eviction proceedings to commence as and when possible.

A year in LERG claims

While claims almost tripled in the first few months of the pandemic, we saw the majority of these quickly resolved, we believe, due to better mediation and cooperation with landlords and lettings agents.

Shortly after, claims returned to pre-Covid levels and have now in fact reduced slightly. The optimist in me would like to think negotiation and mediation has now become better ingrained in the process leading to quicker resolution, but a more likely reason is that employment levels have begun to recover, leading to less people falling into arrears.

Despite the claim volumes returning to near normal, the average cost per claim has increased significantly. Though courts have re-opened, they are facing serious backlogs in cases, and bailiffs are still unable to enter homes where the tenant claims to be suffering from Covid. The extended notice period also remains, although this has now been reduced slightly, and is due to return to normal from 1^st October 2021.

Future challenges

LERG has been an unsung hero of the pandemic, helping thousands of landlords and letting agents to protect their income despite economic uncertainty, but there are still obstacles that will need to be navigated.

New measures have been introduced to protect tenants from hardship. The Debt Respite Scheme (Breathing Space) will give someone in problem debt the right to legal protections from their creditors, in this case, landlords and letting agents.

This Autumn we expect the Government to publish its whitepaper on the Renter’s Reform Bill which is designed to bolster the protections available to tenants. It is highly anticipated that the Bill will repeal the Section 21 notice of the Housing Act 1988 (also known as a Notice to Quit). The Section 21 notice allows landlords and letting agents to issue a notice of eviction once a tenant comes to the end of their tenancy agreement, without this, landlords will have to rely on a breach of the tenancy agreement by the tenant which can appeal. These reforms will make it much harder for landlords and letting agents to legally evict tenants.

At Arc Legal we pride ourselves on our ability to act quickly but sustainably, in response to market changes, ensuring our products remain ‘fit for purpose’ and offer excellent value and protection to our clients and their customers.  We will be keeping a close watch on the market, and though claim volumes have returned to normal, we also expect that average claims costs will remain much higher than pre-COVID levels well into 2022.

Richard Finan, Director of Strategic Development, Arc Legal Assistance

If you require any further information in relation to this update, or details of our products and services, please contact your Corporate Relations Manager or email marketing@arclegal.co.uk.