December 19, 2024

Who pays for building insurance on commercial property?

Lisa Baker, Editor, Welsh Business News & News from Wales July 15, 2021
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Building insurance on a commercial property is arranged by the property owner. This could be the landlord or an owner-occupier. In the case of a rented property, the landlord might pass off the premiums to the tenant to pay as part of the rental contract. Otherwise, the commercial property owner pays for building insurance.

Building insurance funds the cost to repair damage to the structure of the building as well as anything permanently attached to it should one of the qualifying incidents occur as stipulated by the contract of insurance, usually:

  • Fire
  • Flood
  • Storm
  • Lightning
  • Explosion
  • Earthquake
  • Vandalism
  • Riot
  • Civil disorder
  • Theft
  • Burst pipes
  • Oil leaks

Items covered include not just structural fixtures such as pipes, cables, drains, car parks, walls, windows and doors, but items fitted inside the property such as bathrooms and kitchens.

Some items inside and out will fall under contents insurance and not building insurance. These are set out by the Financial Ombudsman as items that could be removed and taken elsewhere without unreasonable damage. So carpets and curtains are classed as contents, but wooden or tiled flooring falls under building insurance.

Do I need building insurance for commercial property if landlord already has it?

If you are a tenant renting a commercial property you do not need building insurance. It is the property owner’s responsibility to organise this. Sometimes landlords will pass the cost of building insurance on to the tenant as part of terms set out in the tenancy agreement.

While building insurance is not needed by a tenant, they may wish to take out tenant’s improvements insurance if they have made permanent alterations at the property. This pays for any repairs to work carried out by the tenant which has been agreed to be covered by the insurer. For example, if a tenant had fitted a new kitchen and break room with fixed items such as cabinets and built-in seating, this would not be covered by the landlord’s building insurance if an incident destroyed the goods. And with the items not falling under contents insurance either because they are permanently fitted to the building, tenant’s improvements insurance would cover the cost of repairs.

Does the landlord insure commercial properties?

The landlord insures some aspects of commercial properties but it is also down to the occupier to arrange their own insurance as a landlord’s cover does not safeguard against everything.

The landlord/owner-occupier will always arrange the building insurance of a property, and may also wish to take out rent guarantee and loss of rental income to protect their income should a tenant be unable or unwilling to pay rent.

A landlord will also take out property owner’s liability insurance to protect against compensation claims and associated legal costs should someone at the premises injure themselves or have property damaged due to a fault at the premises. For example, a sign falls and hits someone. If the landlord is held liable they could be forced to pay out thousands of pounds in damages.

Contents insurance covers any contents owned by the policy holder only. A landlord’s contents insurance would cover only their contents on the premises, and the same can be said for a tenant’s contents insurance. Both parties might need to buy contents insurance.

Tenants may also look at tenant’s improvements insurance (as explained above) business interruption insurance and accidental damage.

Business interruption insurance reimburses a policy holder if a specified incident stops them from trading. This policy covers the estimated loss of income, as well as the extra costs incurred. For example, if a premise was flooded and a business couldn’t operate this insurance would cover the money it won’t be able to make for a time, as well as contingency plans to try and get back up and running, such as a temporary office.

Accidental damage and legal expenses cover are other additional extras some landlords and occupiers decide to take out.

How to insure an empty commercial property

An empty commercial property is more difficult to insure than an occupied one because it faces much higher risks such as vandalism, break-ins or squatters. If a property becomes empty temporarily, regular commercial property insurance should still be valid – although it’s wise to check the terms and conditions. However, should the premises be vacant for a set amount of time – usually more than 30 days – an insurer may demand the policy is moved to an unoccupied premises insurance instead.

Some providers do not offer this insurance as they believe it is too risky, so a landlord may need to shop around. A broker can also help to find a policy. Because of the increased likelihood of an incident, unoccupied property insurance is more expensive than regular commercial property insurance. Although because rent guarantee and loss of rental income are not required, some money can be saved here.

 

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