Insurance for Commercial Landlords
It is absolutely vital that let property is properly covered for certain risks. These are usually specified in the lease:
- Buildings insurance
- Public Liability Insurance
- Loss of Rent in the event of damage or destruction
These are the usual types of risks covered and these may be extended to include additional risks such as vandalism and wilful damage.
With shops and offices it is often a requirement that tenants cover plate glass, a risk which is often included in their shop owners or business risks policies.
It is usual practise for the landlord to arrange the insurance and collect the premiums from the tenant annually as service charges. This will be specified in the lease.
Where several tenants occupy one building, which is covered by one insurance policy, the lease will specify the apportionment of insurance costs amongst the tenants. This is often calculated on the basis of floor area or rateable values etc.
There may be a provision in the lease to cover suspension of the rent payments or even the ending of the tenancy in the event of damage or total destruction. Landlords and tenants need to be clear about what these provisions are.
In the event of disruption to trading and an insurance claim there may be important questions as to how and when repairs are to be carried out and how the insurance money is to be spent – the lease should be clear on these aspects.
To ensure that the building is fully covered in terms of its replacement value (remember insurance companies will average in the case of underinsured claims) a surveyor’s insurance valuation will be required from time to time. The lease may provide for the cost of valuations to be recovered from the tenant.
Where there has been underinsurance who makes up the difference in replacement cost – the landlord or the tenant? This is a difficult one and ideally should be thought about very carefully at the outset. It is in the tenant’s interest just as much as the landlord’s that the building is insured for its full replacement cost.
Problems often arise where tenants feel that landlord is not going for the best value (cheapest?) insurance cover. In practice the landlord may be using one company for several properties by way of a block policy, which usually works out cheaper overall.
Landlords will often use insurance companies which they have found to be best in terms of overall service not necessarily the cheapest – it’s only when you process a claim when you find out the merits or not of a company.
In any event, legal precedent has established that landlord’s do not have to prove reasonableness regarding the criteria they use when selecting an insurance company.