Landlords and tenants are commonly incorrectly insured, underinsured, or think they are covered when they aren’t.
Common pitfalls are landlords and tenants thinking each other’s insurance will provide cover; insurance being rendered void because of a change of use by an existing tenant or a new tenant; and people not opting in for certain options such as flood cover.
Issues can arise because business insurance is more complex and tailored, whereas insurance packaged for consumers such as car or home insurance is generally simpler and offers broader coverage with more automatic inclusions.
Business owners and commercial property landlords have greater expectations on them. They are expected to understand a lot more about their responsibilities.
What does your landlords insurance cover?
The level of cover varies between policies and insurers, however typical landlord insurance is limited to hard assets, loss of rent and liability. However, do not expect anything to be insured by default. Always double check.
Importantly, when insuring a building (for commercial, industrial or retail use), attention needs to be given to whose responsibility it is to cover which fixtures and fittings.
If a tenant moves in and makes amendments: whether a renovation, upgrades or improvements, the landlord must understand who is covering these improvements and when the responsibility transfers from tenant to landlord.
As a basic rule of thumb, whoever pays for it insures it. It would be the tenant’s internal contents insurance that would provide cover for what they own and operate within the confines of the landlord’s premises: from a kitchen fit-out, to upgrades to 3-phase power, to carpets, desks and computers.
There should also be different layers of protection afforded the landlord in the tenant’s insurance which can provide the landlord more security. This means landlords should require their tenants to show proof of insurance prior to their lease commencement and each year upon renewal.
Which insurances should landlords require of tenants?
Public Liability (Non-negotiable requirement)
In almost in all cases the tenant’s public liability insurance will include cover for the property they are tenanting (if they damage it). Additionally, if someone is injured as a consequence of the tenant’s activities, the right public liability policy will also protect the landlord should they be caught up in an action for the injury.
Internal Contents Insurance (Highly recommended requirement)
Covers the tenant’s property and improvements, including those items they might leave behind after expiry of their lease.
Cash Flow Cover / Business Interruption Insurance (Optional requirement)
Assists the tenants to meet their rental obligations following a loss or business interruption. This is often not insisted upon however should be looked upon favourably by landlords.
Practically and commercially, the more you insist from a tenant, the more difficult it becomes to lease your property, however public liability insurance should be non-negotiable. Most standard leases automatically require tenants to have public liability and glass insurance.
Insurance is subject to the tenant and their activities
Business insurance is based on the stated activities of the business. An accountant’s office carries a different level of risk to a mechanic’s workshop, to a hazardous materials storage facility.
If you as the landlord bring in a new tenant, or your tenant changes their operations and your insurer is not notified, you as the landlord may be denied a claim. Landlords should have “change of tenant and activities clauses” in their lease to add a layer of protection.
This not only provides the landlord an avenue for recovery should the tenant void the landlord’s insurances, however it also serves as a mechanism to recover increased costs in insurances for these changes.
Landlords are expected to have a higher threshold of understanding these things and have checks in place such as a commercial property manager conducting routine inspections.
Furthermore, the insurer must be notified of any form of construction works and renovations. They will decide if that has any impact on policy coverage and pricing. Failure to notify them may result in a denied claim.
The landlord also has an obligation to keep the insurer informed of changes in insured values. This goes for rental income figures and building replacement values. All commercial property owners should consider obtaining a Quantity Surveyor’s report to ascertain correct replacement values of the building insured. Consider also that build costs have increased dramatically in recent years.
With the recent floods, many businesses faced damage to stock and fixtures and fittings without insurance cover.
Flood cover is something that’s really important to consider adding to your commercial property insurance if your property is located in an area subject to flooding. It is generally an optional extra for commercial properties.
Net leases are often preferred by landlords
A net lease that charges outgoings (such as insurance) in addition to rent is the preferred option among landlords, rather than a gross lease that includes outgoings.
One reason is that if a tenant changes activities and attracts a higher insurance premium, that increase will be paid for by the tenant. However, if a gross lease is in place, then the landlord will face these increased premiums, unless there is an appropriate recovery clause in your lease.
If you as a a landlord don’t have a lease, or a tenant’s lease has expired and you roll onto a month-to-month lease, you’re asking for trouble.
While there is no condition or requirement for a lease, the absence of a lease creates risk. For example, you have no control over change of activities.
Insurance Brokers: Given the complexities of business insurance, landlords and tenants are encouraged to engage a business insurance specialist like a Qualified Professional Insurance Broker who can assist businesses in selecting insurance. Request a Quote here.
Commercial Property Manager: Using a specialist commercial property manager with an understanding of the various risks and insurances for both landlord and tenant, and with processes in place to minimise the chance of an oversight is also highly recommended.