As long as the water heater and plumbing have been replaced with an a adequate substitute then there is no breach other than not obtaining prior consent, which you could not really withhold.
it is there choice who trio insure with but the policy must be held in their and your name.
You might agree to get a joint policy for both flats and save money but they are not obliged to do so.
Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.