Thursday, July 25

How Much Commercial Property Insurance Do I Need?

The type and amount of commercial property insurance a business needs depends on whether they are a tenant, owner-occupier or landlord. The amount of commercial building insurance depends primarily on the rebuild value of the structure.

The amount of commercial contents insurance needed depends on the value of the furniture, furnishings, and other items within the property. Commercial tenants typically take out contents insurance, but do not need to take out building insurance and may have other types of business insurance like a public liability. Landlords can choose not to have contents insurance if they are happy to replace the few items they have in a property.

Some other extras some commercial property owners choose to take out, such as rent guarantee or income protection.

A brief outline of these are set out below:

Buildings insurance: Covering the cost to repair or replace any damage to the structure of the building or things attached to it. Not only does this include walls, doors, windows and pipes as one would expect, but it also includes fitted furniture or goods such as wooden flooring and kitchens. The property owner only requires this, so tenants do not need to worry about this. However, if they’ve added their own fixtures and fittings to the building, they may wish to take out tenant’s improvements insurance, explained below.

Contents insurance: Covering all moveable items within the property, such as computers, stock and machinery, as well as sofas, desks and carpets. Only the contents owned by the policy holder is covered. So a landlord cannot claim for the costs of a destroyed carpet on the tenant’s contents insurance. It is largely taken out by the business that operates from the premises rather than landlords. The majority of a landlord’s responsibility will come from the upkeep of the building. However, sometimes a landlord has added some expensive items to the building and may wish to protect them. Landlords wondering whether the items they have paid for in the property are covered by contents or building insurance can read this guidance from the Financial Ombudsman.

Property owner’s liability insurance: This is wise for landlords as it funds compensation and legal costs if someone in the building is injured or has property damaged. The policy holder is held liable. The very nature of commercial property insurance means there will be people working in the building, all with personal belongings and all carrying a risk of injury. Of course, a landlord may believe they are diligent and fix issues as soon as they arise, but accidents can always happen. Sometimes a property owner will have to pay legal fees to defend themselves even when they have done nothing wrong. Due to the work they do, staff injured on site are covered under the legally-required employers’ liability insurance. While third parties entering the premises which are injured or have items damaged where the tenant is at fault are covered under public liability insurance.

Rent guarantee: Covering the cost of the rent a landlord would receive should their tenant default on a payment. Landlords often look to take out a rent guarantee for peace of mind, particularly if they have their own costs that need meeting every month.

Loss of rental income: Another one for landlords, but instead of a tenant not paying their bills, loss of rental income insurance applies when a disaster means a landlord cannot charge rent. For example, if a fire ripped through an office, making it unusable, and the tenant had to move out, loss of rental insurance would meet the cost of the rent the landlord would have received if the tenant was still occupying the property. If a tenant is worried about the financial implication of not being able to operate from their workplace due to a disaster, they should look at business interruption insurance.

Business interruption insurance: This is for businesses that operate from the premises and covers the money it has lost due to a qualifying disaster, such as a flood, making it impossible to trade. This insurance also covers the extra costs associated with the incident, such as buying staff new laptops so they can work from home while repairs are made.

Accidental damage: This is not necessarily covered as standard on cheaper contents or building insurance policies. It covers the cost to repair or replace any damage that occurred by mistake, such as drilling a hole in the wall and hitting a pipe. Malicious damage is usually covered on building and contents insurance, but usually not malicious damage by tenants.

Malicious damage by tenants: This protection for landlords funds damage deliberately and unlawfully carried out by the tenant. While malicious damage by third parties such as burglars or rioters is covered in most policies, if a tenant carries it out, this would usually only be covered by specific malicious damage by tenants insurance because they were lawfully allowed on the property.

Tenant’s improvements insurance: If a tenant has upgraded parts of the building and wants their work protected, tenant’s improvements insurance would cover the costs to these works. For example, if it fitted a new kitchen, fitted furniture would normally be covered by building insurance. But because a tenant is not responsible for building insurance, they would not have protection for their expensive upgrades without this cover.

Legal expenses cover: Funding legal bills for a number of different scenarios, such as chasing a debt or eviction.

How much does commercial property insurance cost?

Commercial property costs depend on a number of factors: The size of the building, the type of work carried out there, the value of the goods inside, the rebuild costs, and the amount of exposure to the public there is. The main cost factor when getting quotes for commercial property insurance is the rebuild cost. This is the biggest cost an insurer would have to foot if a building was destroyed; therefore, the more expensive it is to rebuild, the higher a premium will be.

However, add ons to the premium will also send the policy cost considerably higher than a basic package. Loss of rental income and rent guarantee can be expensive, as can contents insurance if there are a lot of high-value goods at risk.

Research by insurance experts NimbleFins into commercial building insurance (with £2 million public liability included) found premiums start at about £218 for a small business site with a £200,000 rebuild cost. This increases to about £416 for a £500,000 rebuild cost and £758 for a £1,000,000 rebuild cost. NimbleFins looked at the average price of the cheapest three quotes available at the time.

But this research does not take into account the occupier’s trade, which can massively reduce or increase the premium. Looking at small businesses as an example, an organisation offering office services came out at £169, but a coffee shop (with members of the public coming in and out) costing £268.

How to value commercial property for insurance

The cost of commercial property insurance is largely based on the cost to rebuild the property, with premiums varying wildly for a small office to a large warehouse.

While there is a free calculator with the BCIS (part of the Royal Institute of Chartered Surveyors) to assess the rebuild cost for residential homes and some buildings, there are limitations to what it can provide estimates for. Alternatively, businesses can hire a chartered surveyor to get an accurate estimate. It is advised to use a surveyor registered with the RICS.

Is commercial property insurance compulsory?

There is no legal requirement for a business to take out commercial property insurance; however, some mortgage providers insist a policy is in place as part of the terms of the loan.

While there is no legal obligation to hold commercial property insurance, it is wise to cover the building as a basic. If the worse happens and the property is destroyed, commercial property building insurance would cover the rebuild cost.

Meanwhile, tenants or owner-occupiers with a lot of stock run the risk of losing thousands of pounds, maybe even hundreds of thousands of pounds in lost revenue if all goods were destroyed and they were without their own contents insurance.

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