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Guide to Commercial Property Insurance

Find out what commercial property or commercial landlord insurance is and how it differs from domestic landlord insurance.

What is commercial property insurance?

Commercial property or commercial landlord insurance is protection for property owners who are letting out to 3rd parties for commercial use. Your tenant is the business, organisation or group who has a rental agreement in place legally allowing them to inhabit your property. It is this agreement that defines you as a landlord and which qualifies you for such a policy.

Difference to domestic landlord insurance

The two main areas that significantly differ from a standard residential let property insurance policy are as follows:

Building types

Wooden barns, steel structures, flat roofs, asbestos etc. Commercial properties are often of a much less standardised construction to domestic properties. They could also have different types of heating systems, more complex electrical systems etc. These factors mean fixing is a more lengthy and expensive process and mean you need a specialised insurance product that can take this into account.

Tenant types

Domestic tenants are not (or at least not supposed to be) for example, using industrial equipment, housing tens or hundreds of employees, dealing in hazardous waste or using commercial chip fryers in their homes. A commercial insurance product will look at the uses of the building and adjust a cover that will match the risk your tenants pose to your building. For an insurer providing a commercial property insurance policy is about understanding the type of building you have and what it will be used for and then assessing the risks and costs involved.

What does commercial property insurance cover?

Property owners’ liability

For a commercial property this is often the most misunderstood or overlooked by commercial landlords. Liability insurance for commercial property is to compensate 3rd parties in respect to property damage and injury through negligence. You are liable, and not your tenants in these circumstances because it’s ultimately the landlord’s responsibility to oversee that their property is adequately maintained.

For example, a third-party delivery person takes a fall after tripping on a loose step in the entrance to your building. You could be held liable in a compensation case.

Property owners’ liability limits usually are offered at £1 million, £2 million, £5 million or £10 million for commercial properties. Towergate can offer some policies that don’t charge extra to include property owners’ liability.

Commercial building insurance – the rebuild cost

This is one of the most important features of commercial property insurance. It exists to cover the costs for repairing damage or rebuilding. You must be insured for the full cost of what it would be to rebuild your property should it be destroyed. Being under insured (meaning you state the full re-build cost as less than it really is) could be catastrophic should something happen which would mean you need to claim for the full amount.

Most insurers have a ‘condition of average clause’. This means if you give a sum insured for building/contents which is not enough, they can reduce the claim by the percentage that you’re underinsured. For example - insure for 100K, but should be 200k, and claim for 50k. You could end up being able to claim only for 25k (minus 50% of the difference).

There are various free rebuild calculators online that can assist you in working out your re-build cost.

Loss of rent - indemnity period

If your property should become uninhabitable from an insurable event such as a fire, the insurance will pay out for the rent you are subsequently unable to collect, meaning you aren’t losing out financially. The indemnity period is the length of time you can claim for ‘loss of rent’ expenses.

How long should my indemnity period be?

12, 24 or 36 months are also commonly available, and it should be seriously considered what is adequate for your building. This is because in the worst case demolition, debris removal, architects and finally rebuilding can take years (You might even need to find a new tenant).

Landlord’s contents

One way to understand the difference between your ‘contents’ and your ‘building’ is to hypothetically turn your property upside down. Anything that is unattached would be classed as contents. This would mean tables and chairs are contents whereas the doors, cupboards and walls come under buildings insurance. Some commercial properties may be rented already equipped for a certain type of business for example a café may have a commercial kitchen already fitted. This would make the contents insurance a vital part of your protection.

Are my tenants responsible for their own contents insurance?

As a landlord you are not responsible for accidental damage to your tenant’s belongings. Anything that the tenant owns will be covered under their own business insurance policy.

What else can be covered?

Accidental damage

Not always offered as standard. You must make it clear early on that you want to be covered for accidental damage. Accidental damage is considered damage to property not classed under another insurable peril. E.g. Bursting a pipe when nailing into a wall etc.

Legal cover

This is help with legal fees when taking someone to court for non-payment. Legal cover is not usually found as a standard policy feature, but can be requested as an optional add on to your policy. As with all optional extras they are not deemed essential or legal requirements, an adviser can discuss with you the costs and levels you might be interested in.

Malicious damage by tenants

Tenants are considered to be on your property with the landlords permission which is why this cover is not a standard requirement but if there was an incident where they expressly caused malicious damage with intent this option will keep you covered for the costs.

What do I need to be aware of?

Unoccupied properties

Unoccupied properties are much more susceptible to break-ins, petty crime, squatting etc. This being so, insurers generally exclude unoccupied properties from their policies as standard. If the property is temporarily un-occupied during a changeover of tenants or a renovation a certain amount of time (usually around 30 days) is allowed before you should convert your landlord’s insurance to an unoccupied property policy.

Accidental damage

It is always advised that you make yourself aware of the accidental damage exclusions of any policy you consider. They are generally in place to protect the insurer from claims that are ‘inevitable’ such as wear and tear. Discussing these and other exclusions will help you understand your side of the insurance agreement such as levels of maintenance (plumbing, tree surgery) and what in turn you can expect your insurer to cover.

As with many commercial policies you may not have a cooling off period which will offer a free cancelation, check this during the quotation to make sure you are fully aware of what your options are.

Flat roof warranty

In a domestic house, a roof leek is an inconvenience. In a commercial property however this can lead to loss of rent for the landlord and damage to stock and contents belonging to both the tenant and the landlord. Flat roofs are a big concern for insurers for this reason many will include a 'flat roof warranty' clause in the policy. This requires a minimum amount of servicing and state of repair for the sections that are flat. It will state that the roof must be professionally checked, serviced and repaired by the landlord.

Tips for commercial landlords

Domestic and commercial properties in one building

Many landlords call us, because they are looking to insure a commercial property that has domestic flats on the top floor. We can provide cover for both uses combined on one policy, making things convenient for you. Simply call one of our advisers who can talk you through the process.

Tenant's improvement

Landlords should make sure that structural improvements such as new kitchens installed by the tenant are added to their business insurance. While they may be part of your building, they are technically owned by the tenant, even though they won’t be taking them with them when they leave. This means while they are still there, they should be responsible for insuring the improvements and you both benefit from the cover.

Financial interest

Lenders, banks or investors want to be confident the property is properly insured so their investment remains protected. Many landlords come to us because they have been unable to find another service which allows these noted interest parties to be added to the policy, or in some cases, have a joint named policy.

This is a marketing article by Towergate Insurance.

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