What Is Commercial Insurance

by Josh Biggs in Finance on 25th November 2020

If you’re a commercial property owner, you are well-aware of the importance of risk mitigation. As a commercial landlord, businesses, groups, or organisations are your customer base – you rent out your property to the likes of these three interest groups.

There will be a legal agreement put in place, allowing your tenants to inhabit your property. This agreement deems you a “landlord”, qualifying you for a commercial landlord insurance policy.

But let’s dig a little deeper – in this entry, we’ll investigate the world of commercial property (landlord) insurance.

Landlord Insurance: Commercial Properties vs. Residential Properties

These two common property types have a lot of similarities and are even identical in some respects. The discrepancies, however, clearly exist. There are two areas where commercial landlord insurance policies stand apart from residential landlord insurance policies, Types of Building and Types of Tenant

Types of Building

Residential properties are built to a certain standard. Rules and regulations have to be followed carefully. This is not to say that commercial properties are built without any regard for rules and regulations. Still, commercial properties do tend to be significantly less standardised in terms of construction, size and Health & Safety feature when compared to residential properties.

As a rule of thumb, when it comes to commercial properties, repair scan is a lengthier and a more expensive process than is the case with residential properties. Commercial landlord insurance, for example, takes this into account.

Types of Tenant

When you rent out a property to residential tenants, you pretty much know what to expect. Yes, “bad” residential tenants are out there. However, you’ll never have to deal with heavy industrial equipment usage, tens and even hundreds of employees, hazardous waste, and similar issues.

This is another thing that commercial landlord insurance covers. This kind of insurance product looks at the uses of the building in question.

The Three Areas of Commercial Property Insurance Coverage

In the vast majority of commercial landlord insurance deals, there are three main coverage areas: Property Owners’ Liability, Buildings Cover and Loss of Rent.

Property Owners’ Liability

Let’s explain what property owners’ liability is exactly. Property owners’ liability, or simply “liability insurance,” deals with compensation to third parties in terms of injury through negligence and property damage. As a commercial landlord, you, not your tenants, are liable for the mentioned type of occurrence. This is because it’s your responsibility to oversee adequate maintenance of the property that you’re renting out. This responsibility doesn’t fall with your tenants here.

Let’s say a third-party, like a food delivery employee, trips on a loose step and suffers an injury. It’s you who will be responsible and held liable in terms of compensation.

Buildings Cover

The main purpose of this aspect of commercial landlord insurance is providing coverage for various costs involved with damage, repair or rebuilding of a commercial property. In the case your property ends up destroyed, you have to be insured for the entire cost of the rebuilding endeavour. If you state the rebuild cost as lower than it actually is (meaning that you are underinsured), this could end up being catastrophic.

Furthermore, the majority of insurance companies feature the “condition of the average clause”. Increasingly, insurers are enforcing these relatively unknown ‘average’ clauses in policies. Property owners are often caught out by this clause, and, incorrectly, think it only applies in the event of a total loss of the property. To see what this means in practice, let’s say an accidental fire damages a property causing repairs costing £100,000 and the building’s total declared reinstatement insurance value is £1 million, including cover for accidental fire damage.

Most building owners would assume that, with £1m cover, they have more than the adequate cover to cover this £100,000 claim, and thus would expect to pay out of £100,000 (less any policy excesses/agreed to co-insurance terms etc). However, if the insurer can establish the actual cost to rebuild the whole property is £1.25 million (even though a total rebuild is not being claimed for), the insurer can claim there is inadequate cover in place, activating the ‘condition of average’ clause. Any claim will then be reduced by the same proportion as the amount of ‘under’ insurance. In this case, the building has been insured for 80% of its’ true value/rebuild cost (£1.00m/£1.25m = 80%), i.e. it was under-insured by 20%, thus 20% will be deducted from any claim payment, i.e. payout of £80,000 (less any policy excesses/agreed to co-insurance terms etc).

Loss of Rent In case of an insurable event, like a fire, flood, etc, a good commercial landlord insurance policy will cover you in terms of rent that you aren’t able to collect (owing to the catastrophic or non-catastrophic event that has made your property non-viable for tenant usage). When requesting your policy, you’ll get to choose your “indemnity period”, which is the time during which you’ll be able to claim for the mentioned “loss of rent”.

Commercial Landlord Insurance – Back to Basics

Hopefully, this entry has painted a clearer picture for you regarding commercial landlord insurance, in general. Keep the three focus areas of commercial property insurance in mind and make sure that you’ve fully understood all the liabilities and responsibilities that you have as a commercial landlord.

However, the key basic concept that most insurance buyers gloss over is that large claims are rare. Thus low policy excesses (the ‘norm’ requested by most insurance buyers) for every financial period can be a waste of money for scenarios that are so unlikely that they can be financed without a low excess, typically from accumulated premium and IPT savings. 

It is this “back to basics” thinking which is at the heart of buying insurance holistically, educating buyers about how they can make better buying insurance decisions safely. Insurance is designed to protect you from short-term volatility, so if you are in the commercial property business for the long-term and/or have a large portfolio, insuring every possible outcome is usually the most expensive option in the long-term. By re-evaluating your risk appetite and risk-financing time-frame, you can reduce premiums Substantially, Safely and Strategically.

Categories: Finance