Commercial Property Owners Insurance

Owning commercial property is about more than insuring a building.

The way the property is occupied can change the risk considerably. A warehouse used for straightforward storage presents a very different insurance picture from the same building occupied by a manufacturer. A suburban office has different considerations again from premises containing a commercial kitchen.

Then there is the rental income the property produces. If an insured event leaves a building unusable, rebuilding it may only be part of the financial impact. Rental income may stop while expenses continue.

A good insurance program starts with the property you own today, how it is used and what would happen financially if something went wrong.

Commercial Properties We Advise

Insuring the Building for the Right Amount

The sale value of a commercial property and its insurance replacement value are not the same thing.

Your property policy is concerned with the cost of reinstating the building after an insured loss. That can involve demolition before reconstruction begins. Professional fees and changes in building costs may also affect the amount required.

If the sum insured has simply been carried forward for years with an annual percentage increase, it may be worth asking when the property was last professionally valued for insurance purposes.

Some commercial property policies contain average or co-insurance clauses. If the building is insured for less than the amount required, it may reduce the amount paid when you make a claim, depending on the policy wording.

The effect depends on your policy wording. For more background, see ‘Is Your Business Underinsured?’.

Protecting Your Rental Income

For many commercial property owners, the rent is almost as important as the building itself. If insured damage leaves the premises unusable, rental income can be interrupted while repairs take place. Commercial property insurance can include cover for loss of rent following insured property damage.

It’s worth looking beyond the amount of cover and considering the period for which the policy could respond. A major property loss can take time to resolve. Demolition may be required before rebuilding begins, and planning approvals can extend the process.

For a larger or unusual building, the recovery period may be considerably longer than expected. If the building couldn’t be occupied for an extended period, would the indemnity period on your policy be long enough?

Loss of Rent Is Not the Same as Rent Default

The terms sound similar, but they deal with two different problems.

• Loss of rent following insured property damage generally applies when an insured event makes the premises untenantable.
• Rent default involves a tenant failing to pay rent even though the property itself may still be usable.

Having loss-of-rent cover does not automatically mean tenant default is insured. If rent default is a significant concern for you, check whether appropriate cover is available and the conditions that apply.

Tenant Fitouts & Lease Responsibilities

One of the most useful things you can establish before a claim is who is responsible for insuring what. 

The lease is the starting point, and the answer is not identical for every lease. A tenant will commonly insure its own business property while the owner insures the building, but improvements and fitouts aren’t always as simple.

Fitouts can sit somewhere between the two. Ownership may depend on the lease, the nature of the work and how the work was funded. If a valuable fitout forms part of your property, establish who owns it and who is responsible for insuring it.

Your solicitor should advise you on the lease. Your insurance adviser can then help to ensure the insurance reflects that responsibility.

Liability as a Property Owner

Commercial property ownership can create liability exposure. Someone may allege that the condition of the premises caused an injury or damaged their property. Shared areas can make responsibility less obvious, particularly where tenants and a property manager are also involved.

Appointing a property manager doesn’t necessarily remove the owner’s potential exposure. The insurance should reflect how the property is occupied and managed.

Commercial Strata Property

If you own a commercial strata lot, start by understanding what is already insured through the body corporate or owners corporation. The scheme’s policy may cover the building and common property, but an individual owner can still have separate exposures. Rental income is one example.

There may also be property associated specifically with your lot that isn’t dealt with in the way you expect. Strata insurance requirements vary between Australian jurisdictions, so obtain a copy of the current strata insurance schedule before arranging additional cover.

If the boundary of responsibility isn’t clear from the documents, legal advice may be appropriate.

Lifts, Air-Conditioning & Building Services

Building services can represent a significant part of the value of a commercial property. If an air-conditioning system is damaged by fire, the property policy may be relevant. If that same system suffers a mechanical failure, the position can be different.

Machinery breakdown insurance can provide cover for certain sudden mechanical or electrical failures, depending on the policy.

Where tenants rely heavily on lifts or climate control, the financial consequences of a breakdown can extend beyond the repair bill itself. A risk and insurance review can help you understand how your current insurance program may respond and whether the cover still reflects the property.

When Your Property Becomes Vacant

If a tenant leaves and the property will be empty for a while, tell your insurer or adviser.

Vacant buildings can present a different risk. Damage may go unnoticed for longer, and unauthorised access can become more of a concern. Insurers handle vacancy differently.

Your policy may impose additional conditions or change the cover after the property has been unoccupied for a period. There isn’t a universal 30-, 60- or 90-day rule that applies to every policy, so check the wording you actually hold.

Renovations & Building Works

Renovating a commercial property can change the insurance exposure while the work is underway. Parts of the building may be opened up or temporarily less protected than they would be in normal use.

Your insurer may need to know about significant works before they begin. For larger projects, contract works insurance may also need to be considered. The owner and contractor should be clear about who is arranging the relevant insurance before the work starts.

Finance & Lender Requirements

If the property is financed, your loan agreement may contain insurance requirements. A lender might ask for evidence of cover or require its interest to be noted on the policy.

The requirements aren’t identical from one lender to another. Check the finance documents rather than assuming your current commercial property policy automatically meets every condition.

Your insurance adviser can help with the insurance side. Questions about the legal effect of the finance agreement belong with your lender or legal adviser.

Natural Hazards & Location

Location can have a significant influence on commercial property insurance. Flood may be an important consideration for one property, while another is more exposed to bushfire. The risk can vary considerably even between buildings in the same general area.

If your property is in a bushfire-prone location, you may find our ‘Five Ways to Prepare for Bushfire Season’ useful.

Cyber Risk in Commercial Property

Commercial buildings increasingly rely on connected technology. Access-control systems are one example. Larger properties may also use networked building-management systems.

For many property owners, cyber insurance will sit behind the building and rental income exposures in terms of priority. For businesses managing substantial portfolios or relying heavily on connected systems, it may deserve a closer look.

Our cyber insurance guide explains how cyber cover works and where its limitations can arise.

Does a Property Owner Need Professional Indemnity Insurance?

Simply owning a commercial property doesn’t automatically create a professional indemnity exposure. It may become more relevant if your business provides professional services to other parties.

A property group that manages assets for third-party clients, for example, may have a different risk exposure from a company that simply owns and manages its own property portfolio.

If professional services form part of your business, our professional indemnity insurance guide explains the cover in more detail.

When Your Property Portfolio Changes

Insurance arranged several years ago may no longer reflect the properties you own today. A building may have been renovated. A different tenant may now occupy it. Perhaps you’ve acquired another property with a completely different use.

The replacement value may also have changed significantly while the policy has simply rolled forward each year.

You don’t need to wait until renewal to tell your insurance adviser about a substantial change.