Residents and local authorities in towns, cities and villages close to water could be left facing an £11 billion liability because of unfair and unaffordable insurance premiums, council leaders have warned.

The Local Government Association (LGA) has asked both Government and the insurance industry to urgently address the problem which may leave tens of thousands of homes uninsurable from next year.

A ‘safety net' arrangement between the Government and the Association of British Insurers (ABI) to provide cover to flood-risk homes expires in June 2013, and a new agreement has yet to be reached. The ABI warned last month that failure to reach a new deal would mean as many as 200,000 homes could struggle to get insurance.

Councils are concerned that huge swathes of the population in certain parts of the country could be hit with a 'double whammy' of increased risk of flooding, while being priced out of home insurance to cover them for a worst case scenario.

With the current arrangement between Government and the insurance industry coming to an end, some insurance companies are already either refusing cover or adding thousands of pounds on to premiums and excess policies.

People in areas including Nottinghamshire, Worcestershire, Devon, Kent and Huddersfield have been refused or priced out of home insurance because of flood risk. They include residents living in upstairs flats, social housing tenants and households who have spent thousands of pounds on flood defence measures like installing defence barriers and floodgates.

Cllr Clare Whelan, from the LGA's Environment and Housing Board, said:

"Councils are the organisations to which people turn to for help in their hour of need. However, we simply cannot afford to take the risk of being left to foot a multi-billion pound bill if we see more devastating scenes like those in Cockermouth three years ago.

"The insurance industry has a responsibility to help people manage risk and should not be allowed to hand pick low-risk homes while leaving those most in need high and dry.

"We all remember the wave of destruction the 2007 floods caused.

"It is imperative that the insurance industry commits as soon as possible to providing affordable and fair insurance premiums once the current safety net agreement expires next year."

In letters to the Environment Minister Richard Benyon and ABI Director-General Otto Thoreson, the councils have called for both parties to swiftly outline how affordable insurance will be provided. They have also asked insurers to start taking into account flood risk prevention measures on people's homes when setting premiums, such as anti-flood drainage systems and raised plug sockets, which are not currently recognised by insurers.

Nick Starling, director of general insurance at the Association of British Insurers, said members were determined that flood insurance remained as "widely available and competitively priced" as possible. However, he also said that the LGA needed to recognise its role in flood protection and ensure that there was no more “foolish development” in high flood risk areas.

The story has attracted wide coverage in the national press.