Commercial property represents a significant investment, so it’s vital that the building is adequately insured with the right cover.
Owner-occupiers running a business from their premises will naturally arrange and pay for their own building insurance, but the situation becomes a little more complicated for commercial properties that are rented out.
Here we answer the key questions for landlords and tenants on arranging commercial property buildings insurance.
- Who pays for building insurance on commercial property?
- Why is the landlord responsible for commercial building insurance?
- Who pays for building insurance on a mixed-use property?
- What is covered in commercial property insurance?
- Do tenants need building insurance for commercial property if the landlord already has it?
- What insurance should a commercial tenant be responsible for?
- Can a commercial landlord request their tenants pay for building insurance?
- How to insure an empty commercial property
The property owner or landlord, is responsible for arranging building insurance on commercial property that is rented out.
Under the terms of most commercial lease agreements, the landlord will often pass on the cost of building insurance to the tenant.
As the owner of the property, the landlord – and not the tenant – is the one with an insurable interest in the building.
In other words, the landlord is the one who will suffer a loss to their investment if anything happens to the building and it is not adequately insured. They are also the one that will benefit from a successful claim. This is their ‘insurable interest’.
By arranging the insurance themselves, the landlord can be sure that the policy is in force, the premium has been paid, the level of cover is adequate, and they can deal directly with the insurer in the event of a claim.
Read more about a commercial landlord’s responsibilities.
Paying for building insurance on a single property let to a single tenant is straightforward, but what about a building let to multiple tenants?
Each tenant should pay a fair proportion of the overall cost of insuring the building, which may not be entirely dependent on floor space occupied.
Other factors could come into play, such as the use of each part of the building. One part may be occupied by a workshop undertaking welding and other hazardous activities, and they may be required to pay more than a flower wholesaler in another part of the property.
Similarly, if the property is part-residential and part-commercial (for example, a shop with a flat above), then the level of risk for each part of the building will be different and therefore the premium should be allocated accordingly.
The amount of premium allocated for each part of the building should be obtained from the insurer.
The allocation of the insurance premium the tenant is responsible for should be made clear in the lease agreement.
Commercial building insurance covers loss of or damage to the building and anything attached to it, including permanent fixtures and fittings.
As well as damage to the building, landlords would benefit from business interruption to cover loss of rental income following an insured event, terrorism cover which is often requested by mortgage providers, and legal expenses cover.
Landlords will also need property owners’ liability insurance, which protects the owner’s legal liabilities resulting from third party injuries or property damage.
For example, part of the building may fall and hit either a person or their property, causing injury or damage. This could be the fault of the landlord depending on who is responsible for maintenance under the terms of the lease.
It is also a legal requirement to have employers’ liability insurance if you employ anyone in relation to the building, for example if you employ someone for maintenance.
Read our guide to commercial property insurance for a more comprehensive view.
It is a usually requirement of your insurance that you comply with your legal obligations as a landlord in order for the policy to be valid.
No, it is the landlord’s responsibility to arrange building insurance, even if they then pass on the cost to the tenant.
The tenant has no insurable interest in the building, and a property cannot be insured twice by two different parties.
Tenants are responsible for insuring their own contents and so will need to take out an appropriate policy.
While tenants should not insure the building itself, they may also want to take out tenant’s improvements cover if they have made any permanent alterations to the building.
This could include fitting a new kitchen, a mezzanine floor, heating, or any other improvements which wouldn’t be covered under the landlord’s building insurance policy. In this case, it is the tenant with the insurable interest.
Yes, it is standard under most leases for the landlord to recoup the cost of building insurance from their tenant.
There may be times when a property lays empty, either when the owner is looking for a new tenant or renovation work is ongoing.
Whatever the reason, landlords will need to take out unoccupied commercial property insurance if the building is vacant for more than a set period – usually 30 days.
When a property becomes vacant, insurers will usually provide a short period of full cover before you will need to move the property to an unoccupied commercial property policy. This may come with restrictions and additional security requirements.
An empty commercial property can be more difficult to insure because of the increased risk of vandalism, arson, break-ins, or the lengthy time it could to when evicting squatters.
Because of the increased risks, unoccupied property insurance tends to be more expensive than for an occupied property.
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