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Commercial Property Insurance - part 1

Amongst the thorny issues in the relationship between landlord and tenant is the building insurance premium. Unlike residential property where the landlord has a vested interest in making sure the premium is competitive, because more than likely the premium would not be recoverable from the tenant, leases generally for commercial property require business tenants to either reimburse the premium or insure the property themselves.Arguments for and against allowing tenants to insure themselves are many, the most common that the tenant might underinsure. Generally, landlords prefer to control the insurance arrangements, either by insuring direct and recovering the premium from the tenant, or including an obligation in the lease for the tenant to produce evidence of cover at least once a year and to update the cover to the landlord's requirements.When you grant a new lease from scratch you may include whatever wording you like, with the tenant's approval. When you buy an existing lease (as successor to the previous landlord) you would be bound by whatever the parties agreed when the lease was granted (unless the insurance provisions have been subsequently varied by agreement).Generally, the list of insured risks is not contentious. For example, the risks of loss or damage by fire, storm, tempest, earthquake, lightning, explosion, riot, civil commotion, malicious damage, impact by vehicles and by aircraft and articles dropped from aircraft (other than war risks), flood damage, bursting and overflowing of water pipes and tanks and such other risks as the Landlord from time to time shall decide to insure against. What a landlord cannot so, unless expressly allowed in the lease, is to insure for anything that is not mentioned in the lease; hence the "such other risks" etc.Insured risks will also include cover for loss of rent. In older leases, the period of cover might be one or two years, but nowadays it is usually three years, or for more flexibility however long the landlords decides: three years is generally considered ample.Where part or the whole of property is damaged or destroyed by an insured risk rendering the premises unusable by the tenant for the duration of the works of repair, etc, the loss of rent cover entitles the landlord to claim from the insurance company, not the tenant, the amount of rent for the duration up to the maximum period of cover. It is essential, therefore, that whenever the rent is changed the amount for loss of rent is also adjusted. Even if the cost/time of informing the insurer or broker seems disproportionate, it is important to ensure the loss of rent cover is correct: it is not advisable to leave notifying the insurer until the next renewal date. Where a rent review date falls within the policy renewal year, some leases entitle the landlord to increase the loss of rent cover to the estimated rent for the review even before the review rent is agreed or ascertained. Some landlords make the adjustment as a matter of course, regardless of what the lease says; and may not even bother to reduce the cover should the actual rent agreed or ascertained be less than their estimate. Whether their tenants are any the wiser would depend upon the tenant and its advisers.Valuation for building insurance differs from other types of property valuation. An insurance valuation is not a valuation of what the property might sell for, but how much it would cost to rebuild/restore in the event of total destruction. Restoration, as distinct from rebuilding, might be a requirement of the planning authorities, particularly if the property were in a Conservation area or is a Listed building.The whole of the built structure is valued by reference to building costs for the type of property. Generally, the on-line free calculators for building costs tend to be residential-property oriented, which is no good for commercial property. An inexperienced approach to an insurance valuation or leaving it to your broker or insurance company to suggest a figure is not recommended. It is advisable to commission an insurance valuation from an experienced surveyor. The surveyor will inspect and measure the property, including any outbuildings, etc. The surveyor will calculate the gross external area and using industry sources estimate the rebuilding cost, to which would be added professional fees and VAT. Whether to include VAT in the calculation can be tricky because it depends upon whether VAT would be recoverable and by whom.Estimating building costs is often just an informed guess: generally it is prudent to be over-insured than under-insured. With buildings in Conservation Areas and Listed buildings, frankly it is anyone's guess just how draconian about restoration the planners and heritage organisations would be.In a well-drafted lease, the insurance premium will fall within the meaning of 'rent' as defined by the lease. By that I don't mean that the premium would automatically mean rent regardless. If it's not expressly included in the definition of rent then it would be a debt, in which case the procedure for recovery in the event of non-payment would be more expensive.With insurance there are two separate relationships: 1) the relationship between the policyholder (the insured) and the insurance company; and 2) the relationship between the insured (landlord) and the tenant. Where the insured and the tenant are one and the same then problems are less likely to arise, unless the insured is a different person/company to the legal tenant.Within the context of the tenancy (lease), the relationship between landlord and the tenant is contractual, subject to any overriding legislation. Where the tenant covenants to pay the insurance premium (assuming the lease does not entitle the tenant to insure), it is usual for the landlord to insure and then recover the premium from the tenant. The renewal date for the insurance policy will often differ from any other rent payment dates, so it will be necessary for the landlord to renew the policy before the tenant has to reimburse. When the tenant has to reimburse depends on the wording in the lease. I have encountered leases that require the insurance premium to be paid on the next payment date (as defined in the lease) following the renewal date. When, as is common, the payment date is a quarter day, the tenant is not obliged to reimburse the premium beforehand, in which case depending upon the insurance policy renewal date the landlord would be out of pocket during the intervening period. A landlord that threatens legal action in the event of non-payment before the tenant's contractual payment date due would have no grounds.Where the premium is payable by the tenant for example on demand or within 14 days of the policy renewal date, in an ideal world tenants would honour the covenant. Often that is not the case. Unless the lease so provides, a tenant is not entitled to see the receipt for payment by the insured before reimbursing, but will nevertheless request proof. From experience, I find that by providing the tenant with full details, for example copy policy schedule, confirmation of renewal, and how the premium has been calculated where apportioned, the less cause for complaint and delay the tenant has. Many tenants have designed their accounting systems around their needs rather than the payees. The fact that the payment is for example due on demand is unlikely to cut any ice with a tenant whose accounts department only pays monthly and your demand has arrived too late for the current month so will be paid next month or maybe the following month if the person that authorises payment is next available!Generally, tenants fall into two types for insurance premium. The first understands that, per business tenancy law, it is not necessary for a landlord to shop around for the most competitive premium provided cover is with a reputable insurer. The second is convinced they can get the premium much cheaper and has shopped around to prove it. The first type is, of course, easier to deal with: it's simply a matter of claiming the correct amount for payment to then be authorised. The second type needs to be educated, not only in the difference between the value of the property for insurance and the value for sale, not to mention the difference between commercial property and residential, but also in commercial reality: a task that can be made all the harder by the insurance companies themselves offering special deals to new customers into which category the tenant would fall when the tenant is making enquiries.A premium is the amount of money that the insurer charges for carrying the risk. A premium will vary with the type of property, its location, and so on; also the nature of the tenant's use of the property, and the landlord's and tenant's respective reputations. Insurance companies are in the business of making a profit out of risky situations. Where the proposal would be considered a low risk, based on the information on the application form, and insurer's experience, the premium would be commensurate. As businesses, insurance companies have to be competitive which, to them (insurance companies) means either offering special deals to new customers, or if there is no enough profit to be had then withdrawing from the particular sector of the market. Anyone who has tried to get insurance on empty property will know how few insurers are interested and how much higher the premium than if the property were let.Speaking of which, a difference exists between the landlord and tenant relationship concerning a property that is let but unoccupied and the insurer and policyholder relationship in the same situation. Between landlord and tenant, a let but unoccupied property is the tenant's problem. Between insurer and policyholder, an unoccupied property is the policyholder's problem. The insurer will require the policyholder to agree to conditions for the cover, which would be passed on to the tenant but which, in practice, the tenant might ignore. In modern leases, there is often a provision obliging the tenant to comply with the reasonable requirements of the insurer, failing which the tenant would be in breach of covenant.Where the landlord insures and then recovers, in effect the landlord is acting as a go between for any claims even when the landlord simply forwards any claims to the insurance broker or the insurer. Strictly, as I understand, the tenant should carry out the works at its own expense then recover the cost from the landlord who, as the policyholder, recovers the cost from the insurer per the claim. Whether the landlord has to pass on the whole of the cost, or indeed whether the works have to be done at all depends upon another standard condition in leases namely that in the event of damage or destruction not being remedied within a specified period of time the tenant would be able to terminate the lease. The insurance monies are nowadays kept by the landlord.A minority of tenants have a habit of claiming for damage caused by the tenant's failure to repair, rather than an insured risk. Generally, the insurers will process such claims by inspection and quick to reject it. Spurious claims made by tenants can damage the landlord's reputation with the insurer.


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