Commercial property in the UK has provided significant growth for investors over the past 20 years.
According to data collected by the Investment Property Forum, the value of commercial real estate has increased by more than 60% since 2003, with more than half of the property stock owned by landlords and rented out to businesses.
That equates to more than £500billion of commercial property that needs to be protected from a variety of risks, including fire, storm, malicious damage, and natural disasters.
Commercial landlord insurance provides an essential safety net; in this guide we answer all the key questions for commercial property owners.
- What is commercial property insurance?
- How does commercial landlord insurance differ from domestic landlord insurance?
- Who is responsible for commercial building insurance, landlord or tenant?
- Do I need commercial property insurance?
- What is covered under commercial property insurance?
- What additional cover is available under commercial landlord insurance?
- How much commercial property insurance do I need?
- Do I need to inform my insurer if my commercial premises are unoccupied?
- What if my commercial building has a flat roof?
- Commercial landlord insurance FAQ
What is commercial property insurance?
Commercial property insurance provides protection against a range of risks to safeguard a property owner’s investment.
Standard cover typically includes perils such as fire, storm, flood, escape of water, malicious damage, and subsidence. Insurers also offer extended cover for risks like accidental damage, terrorism, and legal expenses.
Commercial landlord insurance is intended for property owners who lease premises to third parties for commercial use, whether it’s a shop, restaurant, office, or industrial site.
How does commercial landlord insurance differ from domestic landlord insurance?
On the surface, both policies provide cover to protect a property owner’s buildings, but there are two key differences between commercial and domestic landlord insurance – the nature of the building, and the type of tenant.
Building types: Whereas many domestic properties are of standard brick and tile construction, commercial premises can vary widely in their construction.
This means premiums can also vary significantly to reflect the nature of the risk of covering buildings that could be constructed from timber, brick, or steel, or feature large flat-roofed areas, asbestos, or cladding. This will be reflected in the sum insured, which represents the full rebuild cost of the property.
Commercial buildings can also have a greater variety and complexity of heating and electrical systems which, again, affect premium rates.
Tenant types: Other than working from a home office, domestic tenants do not, generally, undertake business from their property.
But the risks to insurers increase for commercial premises, where all sorts of industrial equipment could be used, including potentially hazardous activities like welding, or the use of flammable chemicals.
Insurers need to provide the right cover at the right premium to cater to the individual needs of the property owner, depending on the type of building and the nature of the work undertaken.
Who is responsible for commercial building insurance; landlord or tenant?
Buildings insurance on a commercial property should be arranged by the property owner/landlord.
Many landlords choose to pass on the cost of insurance to the tenant as part of their rental payments but it’s the owner who has an “insurable interest” in the property – in other words, they have a financial interest in the property and will benefit from any claim. Tenants can take out building insurance, provided the policy notes the interest of the owner, but it is not recommended that landlords allow this as a tenant may choose to compromise on the level of cover.
If there is a mortgage on the property, the lender will almost always stipulate that buildings insurance must be taken out.
It’s important to remember that landlords must comply with their legal responsibilities or their insurance may be deemed invalid in the event of a claim.
Do I need commercial property insurance?
It’s not compulsory, but yes, you ought to have commercial property insurance to protect the investment you have made.
If you’re renting the property to a business, you are handing over the day-to-day responsibility of your building to a third party, which increases the risk of something outside of your control going wrong.
What is covered under commercial property insurance?
Commercial property insurance cover can vary between insurers, but the standard cover usually includes the following sections.
Commercial buildings insurance
Covers the costs of repairing/rebuilding the building due to a sudden, identifiable incident such as fire, lightning, earthquake, explosion, aircraft, storm, and subsidence.
Property owners’ liability
Covers your liability as a property owner for property damage, injury or damage caused to a third party or their property.
For example, if a visitor to your property trips on a poorly maintained pathway and is injured, then you may be liable if the terms of the lease make you responsible for keeping the property in good repair.
Similarly, if a loose tile falls from the roof and damages a visitor’s car, you may be liable to pay compensation.
Do my tenants have to buy contents insurance?
It’s not compulsory, but tenants are responsible for their own contents and will need their own insurance if they want it to be protected. They cannot rely on the landlord to insure their belongings as the landlord does not have an insurable interest in them.
What additional cover is available under commercial landlord insurance?
It’s important to remember that every policy is different, what one insurer offers as standard could be an optional extra with a different insurer. Utilising the experience of an independent insurance broker will help to ensure you get the right cover for your property.
Common extensions to commercial property insurance policies include:
- Malicious damage by tenants – covers the costs of repairing damage deliberately inflicted on your property by your tenants;
- Legal expenses cover – protection in the event of a legal dispute with your tenant, including a dispute over maintenance of your property, repossessing your property, and recovering outstanding rent;
- Business interruption – covers your loss of rental income if your property becomes uninhabitable following an insured event and the cost of alternative accommodation for the tenants;
- Accidental damage – covers damage to your building caused by accident and not a standard peril like fire, storm etc.
- Terrorism cover – insures you against damage caused by a terrorist attack. This may be requested by your mortgage provider.
- Employers’ liability insurance – legally required if you employ anyone in relation to the building, for example to maintain the property.
- Landlord’s contents – covers everything in the property owned by the landlord that doesn’t form part of the building. You will need contents insurance if you rent out a property that is well-equipped with your own fixtures and fittings.
How much commercial property insurance do I need?
The level of cover you need depends on several factors. We’ve highlighted the most common areas in this section.
Commercial building insurance: rebuild costs
You need to insure your building for the full cost of rebuilding it should it be totally destroyed.
If you insure it for less than its true rebuild cost, you would be liable to suffer the consequences of underinsurance – the ‘condition of average clause’.
Under this clause, insurers can reduce the amount they pay out by the same percentage that you’re underinsured. For example, if you insure a building that costs £300,000 to rebuild for £150,000, and then claim for £50,000 of damages, your insurer could only pay out £25,000 as you’re underinsured by 50%.
The Royal Institute of Chartered Surveyors has an online rebuild calculator tool to help you calculate the rebuild cost.
How long should my loss of rent indemnity period be?
You can choose how long you receive payments for loss of rent following an insured event destroying your building.
Typically, you can choose between 12, 24, and 36 months. Your decision will depend on how quickly you think your building can be back up and running in the event of a total loss, which will vary depending on the size of the property, its location, complexity, and it if has, for example, listed building status.
Property owners’ liability indemnity limit
Insurers offer limits of liability ranging from £1million up to £10million.
Your tenant should have their own public liability insurance to cover any damages caused by their commercial activities.
For more information and to get a quote, see our commercial property insurance page.
Do I need to inform my insurer if my commercial premises are unoccupied?
Yes, unoccupied properties present a greater risk to insurers than those which are occupied by a business.
They are more likely to be targeted for break-ins, and are more susceptible to malicious damage, including arson.
As a result, many insurers are reluctant to cover vacant properties – other than for brief periods such as a change of tenant – and cover can be restricted and be subject to certain conditions being met.
For longer periods of unoccupancy, such as where the property may be undergoing renovations, property owners will need to arrange a dedicated unoccupied property insurance policy.
What if my commercial building has a flat roof?
When you obtain a commercial property insurance quote from an insurer, you will need to provide full details of the construction of the property, including details of how much of the property has a flat roof.
Over time, flat roofs are more prone to leaking than standard slate or tile roofs, and so there is more potential for water damage.
Many insurers include a ‘flat roof warranty’ clause, which requires a minimum level of maintenance be carried out on any flat-roofed areas.
Do I need to inform my insurer if my commercial premises are let?
Yes, and you need to inform them of the exact nature of the business undertaken in the property, as this has a bearing on the risk rating, and therefore the premium charged.
Do I need to inform my insurer if my commercial building is a leasehold or freehold?
If you own the freehold, then you will be responsible for insuring the building. If, however, you only own the leasehold, then the building is likely to already be insured by the freeholder, so you won’t need to take out buildings insurance yourself.
If you are the leaseholder you should check the terms of your contract.
Do I need employers’ liability insurance?
If you employ somebody in relation to the property, such as to maintain it, you are required by law to take out employers liability insurance.
What do I do if the building is part domestic and part commercial?
Many commercial properties comprise multiple uses, for example, shops with flats above them.
Most insurers will be able to provide cover for such an eventuality, combining both uses.
Can I add other people to my commercial property insurance policies?
Interested parties can be noted on your commercial property insurance policy, but only those with an ‘insurable interest’ in the property, such as a mortgage provider.
How much does commercial building insurance cost?
The cost of your commercial landlord insurance will depend on a number of factors, including:
- the cost of rebuilding your property;
- the nature of the business carried out;
- the construction of the building;
- the location of the building.
How can I reduce my commercial property insurance premiums?
Insurers may provide discounts if you have taken extra precautions to prevent a claim, such as fitting a high level of fire protection.
You may be able to secure additional discounts by committing to a more rigorous risk management regime, but these will always be at the discretion of the insurer.
Can I claim commercial building insurance as an expense?
If you are self-employed, you can claim the costs of commercial property insurance as an expense against tax.
What happens if the commercial property needs a refurbishment?
Who pays for refurbishments will depend on the terms of the lease. A full repairing lease would make the tenant responsible for the properties’ maintenance and upkeep.
A list of building updates should be kept, and the insurer informed of any work you are carrying out, especially if the work means the property will be unoccupied.
Who is responsible for insuring tenant’s improvements?
Improvements made by the tenant should be reflected in the lease, which will also set out who is responsible for insuring them. In general, if there is a full repairing lease in place then the tenant is responsible for both the cost of the improvement and the insurance of it.
For more guidance and advice about insurance, and being a commercial landlord, visit our landlord insurance hub.