Owning and renting or operating from commercial property comes with a whole host of risks, whether that’s storm damage, fire risk, or somebody having an accident on your property. In these scenarios, you’re facing a modest repair fee at best, and at worst, a bank-breaking lawsuit or a sky-high rebuild cost, not to mention the loss of rental income in the process if your renting the property out. This is where commercial property insurance can help to protect you from commercial property associated risks.
Commercial property insurance is designed to protect property-owners against common claims. A commercial property might be a shop front, office space or even an industrial unit, which come with unique risks beyond the scope of your typical landlord or home insurance policy.
Types of Coverage
Different insurers provide different cover options. Broadly, the following types of commercial property insurance are available:
Property Owners’ Liability
One of the most overlooked, yet essential aspects of commercial property insurance cover is property owners’ liability, similar to public liability insurance. Should third parties sustain injuries or property damage owing to negligence, the fault lies with the landlord. It is your responsibility, and not your tenants’, to ensure that the property is maintained to a high standard.
For example; A postal worker trips over a loose step on the stairs up to your building when delivering a parcel. If that postal worker sustains an injury and decides to sue, you could be held liable for failing to upkeep the property to a safe standard. Part of your compensation payout might include the worker’s loss of earnings if they can’t work for some time due to their injuries.
Commercial Building Insurance
This cover is the main one which applies to business owners who own the building in which they operate. Landlords of this kind may take out a standalone commercial building insurance policy, which is also sometimes called commercial property insurance. It’s therefore essential to check the level of cover provided if you are looking for more extensive protection for a property you rent to business clients.
Commercial building insurance aims to cover the landlord for repair costs in the event of damage. If a severe storm damages the roof and it needs replacing, your commercial building insurance can pay for the replacement roof, minus your excess. If your property burned to the ground, building insurance could pay for the entire rebuild.
Loss of Rent
Following a serious event like a fire or storm damage, your property might become uninhabitable. If your tenants can no longer use your property while you repair the damage, you will lose rent. Loss of rent can cover you for the rent you can’t collect following an insured event.
Contents Insurance
Contents insurance can cover anything owned by the landlord which isn’t attached to the building itself. While doors, fixed cupboards and walls typically come under buildings insurance (including buy-to-let policies), anything unattached, such as tables and chairs, would require usually contents insurance. If you rent a property that is well kitted out, it is worth investing in contents insurance. If a leak or flood damages all the furniture you have provided, replacement costs could rack up quickly.
Contents insurance only covers you for the contents that you provided as the landlord. Any of the tenants’ belongings, such as office desks, if they brought them in themselves, would come under their business insurance policy.
Cover for Unoccupied Property
Insurance providers tend to exclude cover for unoccupied properties from their commercial property insurance policies. Vacant properties have a much higher risk of break-ins, vandalism or squatting. Many insurers offer separate cover under an unoccupied property policy.
If your property is temporarily unoccupied between tenants or due to renovation, you might have to switch to a vacant property policy if it stands empty for longer than a specified time – usually around 30 days.
Additional Covers
While policies do not always include the above features, these constitute the primary forms of cover sought out by landlords. Depending on the type of tenants or property you have, or the level of protection you’re after, you can usually find an insurer who will add the following extras:
- Accidental damage. Some policies may include this feature as standard, but most will require you to pay extra. Accidental damage might be accidentally drilling through a water pipe – any of the ensuing water damage would not come under your usual building insurance.
- Legal cover. If you take somebody to court for failing to pay, a legal cover add-on can help with your legal fees.
- Malicious damage by tenants. Sometimes, this can include theft by employees.
Assessing Need and Cost
Commercial property is an expensive investment. Whether it’s a property-to-let, or use as business premises it’s a good idea to get yourself covered. If you’re renting to businesses, your risk is even higher. You may be liable to compensate for their loss of earnings or pay to rehouse their business in another property during repairs. Commercial property insurance is therefore worth considering whether you’re renting warehouses, offices, or spaces used as pubs and restaurants.
How much you pay for your commercial property insurance depends on several factors. The building type and location are significant contributing factors, as well as the nature of your own business if you’re running it out of the property you own, or the likely business activities of your potential tenants.
How Can I Reduce My Premiums?
Many insurers will consider reducing your insurance premiums if you can prove that you have taken extra precautions to secure the property. If you fit the property with a high level of fire protection and burglar alarms, for example, you may reduce your premiums slightly.
You can speak to the advisers directly or use a broker to discuss other ways to reduce the cost. Some insurers will also charge less if you can show them that you have regular professional servicing in place to catch problems early.
Coverage Needed
The extent of cover you need depends on your property size and type, as well as the type of commercial tenants you have.
For example, if there’s a leak in the roof which damages your tenant’s stock and you are found liable, the compensation you would have to pay would be far higher if the tenant is storing televisions to sell than if they are storing plastic slides for children. Below are some considerations to take on board when choosing your level of cover.
Property Owners’ Liability
Most providers offer flexible amounts of cover. Property owners’ liability limits are usually £1 million, £2 million or £5 million but can generally increase up to £10 million on request.
Commercial Building Insurance
One crucial thing to remember when looking at how much commercial building insurance to go for is to make sure you secure an insured sum equal to the rebuild cost of the property, and not the value you bought it for or what it’s worth now. The rebuild cost refers to the amount it would cost to rebuild the entire property from scratch if it were destroyed or damaged beyond repair.
- Condition of Average – Failing to quote the full rebuild cost means that you are underinsured. Most insurers include a condition of average clause, which means that if you underquote your buildings or contents, they can reduce the claim by the percentage you underquoted. So if your property would cost £400K to rebuild, but you claimed it would cost £200K (50% less), the insurer can potentially reduce your claim by 50%, leaving you liable to pay the rest. To avoid incurring huge expenses, consider getting a professional survey and consider using an online rebuild cost calculator, such as the one offered by the Association of British Insurers.
Loss of Rent
Loss of rent tends to be set at 20% of the building sum insured. For example, a building with a £200,000 rebuild cost, would typically allow for lost rent of £40,000.
When looking for cover for loss of rent following an event which makes the premises unusable, an important thing to watch out for is the indemnity period insured: this is the length of time that you can claim for ‘loss of rent’ expenses. Typical limits are 12 or 24 months, though you can also find policies offering a 36-month indemnity period.
The longer the indemnity period, the better, as worst-case demolition or rebuilding can take years, and even longer to reconstruct many large, niche buildings used for commercial purposes.
Flat Roof Warranty
A leaky roof in a commercial property can cause significant damage. If your tenant is a company storing large amounts of stock, they may be able to make an enormous negligence claim against you. Your own contents might also be damaged, which incurs a doubly high risk for the insurer.
Flat roofs are therefore a significant concern for insurance providers, which is why many choose to include a ‘flat roof warranty’ clause in their policies. This clause stipulates that the landlord must organise regular professional servicing and state of repair for any flat portions of the roof.
Tenant’s Improvement
If your leasing out a commercial property and your tenants make any structural improvements to your property, such as installing a new kitchen, you should make sure that they add the new features to their business insurance, rather than yours.
While they are part of your building and will remain when the tenant leaves, they are technically owned by the tenant for the length of their contract. It must, therefore, be their responsibility to insure the improvements.
Final Thoughts and FAQs
Property can be one of the most lucrative investment options out there. You can see your investment returned and the profits pile up in a matter of years from rental value or property value increase. But protecting your assets is key to making money – otherwise, one setback could lose you the property and all your investment money in one fell swoop. Consider taking out commercial property insurance to help keep your investment secure.
Still have questions on commercial property insurance? Find answers to common queries below.
- What if I Have Commercial Properties and Domestic Properties in One Building? – This is often the case for property owners who rent out the bottom floor for use as a commercial shop, and the upper floor to domestic tenants. Many insurance providers can combine domestic landlord insurance together with commercial property insurance under one all-encompassing policy. To arrange this, you will have to contact the insurance provider directly and speak to one of their advisers, or use an insurance broker.
- Is Commercial Property Insurance a Legal Requirement? – Like many forms of insurance, commercial property insurance is not a legal requirement. That said, trying to defend yourself if you’re found liable for a serious incident on your property has the potential to bankrupt you, once you’ve taken compensation costs, legal fees, repair costs and loss of rent into account. In addition, while it’s not a legal obligation, many mortgage providers require you to have commercial property insurance in place before they provide you with a loan.
- How Can I Get Commercial Property Insurance in Northern Ireland? – Like in the UK, commercial property insurance isn’t a legal obligation in Northern Ireland. Many underwriters will provide cover to customers in Northern Ireland, or you can use a broker.
- What Insurance Do I Need for a Commercial Shop? – Many of the brokers and insurance providers listed here can offer tailored commercial property insurance suitable for high street shops, including additional features relevant for shop owners such as product liability insurance. A must-have for any shop is public liability insurance, as you’re in regular contact with the general public. Beyond that, it’s a good idea to consider business contents, commercial buildings insurance, employers’ liability insurance and stock insurance.
