Guide to Commercial Property Insurance
The simple fact is that commercial property comes in a huge range of shapes and sizes, accommodating a bewildering array of different types of business.
The most recent statistics published by the Property Industry Alliance (PIA) show that commercial property accounts for some 7.35 billion square feet in the UK and is valued at a total of more than £787 billion – some 10% of national net wealth.
A slightly higher proportion of commercial property (57% by value) is owned by landlord investors, whilst the remainder is occupied by those running their own business from the premises.
All in all, that represents a considerable amount of wealth invested by landlords and owner occupiers in commercial premises.
That huge investment is protected and safeguarded by commercial property insurance. The principle is simple and straight forward – insurance against the risks faced by owners of commercial property. Arranging commercial property insurance, however, may prove somewhat more complicated and involved.
Hence the purpose of this guide which sets out to consider the:
- risks encountered by owners of commercial property;
- types of businesses typically in occupation of commercial property;
- types of building serving as commercial property;
- special considerations relating to unoccupied commercial property insurance; and
- FAQs on the subject of commercial property insurance.
However comprehensive any guide such as this, it may still leave many questions and queries unanswered. If you want to follow up on any of these, therefore, why not consult the commercial property insurance experts here at GSI Insurance?
Risks
What are the risks faced by any commercial property owner and how does insurance aim to protect and safeguard against those risks?
The building
Bricks and mortar might sound like the most stable and secure of structures, yet the structure and fabric of your building is exposed to a very wide range of different risks. These might include:
- fire, explosions and earthquakes;
- smoke damage;
- subsidence;
- flooding;
- storm damage;
- escape of water – from burst pipes, for instance;
- impacts – from objects such as falling trees and branches or collisions involving vehicles or aircraft;
- vandalism; and
Not all commercial property insurance policies are likely to cover all of these risks – special conditions may be imposed, for instance, or cover declined if there is a past record of susceptibility to flooding or subsidence.
Nevertheless, it is clear that a number of these risks may pose threats of such dimensions that the very building of your commercial premises is totally destroyed.
For this reason, it is important that the total building sum insured is sufficient for the reconstruction of the entire property – including clearance of the site, the instruction of architects, surveyors and engineers and the rebuilding of your premises.
These costs are not what you paid for the property, nor its current market value, but the actual cost of reconstruction – which may change over time of course. To ensure that you update the estimate on a regular basis, you might want to consult a surveyor or other professional.
If the structure and fabric of the building is damaged or a total loss, commercial property insurance is designed to fund the cost of repairs or reconstruction.
The contents
If you own the building which you occupy to run your own business, the chances are that there is considerable investment tied up in its contents. This might include:
- plant, equipment and machines;
- specialist fixtures and fittings necessary for your particular business (a fully kitted kitchen, for example, if you are running a restaurant);
- stock and supplies; and
- work in progress.
Insurance is necessary to protect the contents against theft, loss or damage under similar risks to those covered in your building insurance.
Public liability
It is not only the risk of physical loss or damage. As the owner of the premises, you owe a general duty of care to ensure that no member of the public, customer, or visitor to your commercial premises suffers an injury or has their property damage as a result of any negligence on your part.
In the event of such an incident, you may face a very substantial claim for compensation. Public liability insurance, therefore, typically offers at least £1 million indemnity against such risks.
The landlord of commercial property
If you invested in commercial property to let to another business or businesses you are, of course, their landlord.
In that case, you are likely to find that the risks to property loss or damage are assessed differently by your insurer and you are likely to need specialist landlord insurance as a result. The premiums may be generally higher than if you were occupying the premises for your own business.
Employers’ liability insurance
A particular risk, whether you are employing someone to help run your business as a landlord, or indeed if you have employees working for you in running your own enterprise from the premises, is the risk of injury to one of those employees or their contracting an illness or other medical condition because of their work.
For their protection the law requires – with all but a few exceptions – that you hold employers’ liability insurance of at least £5 million.
This cover might be included in your general commercial property insurance, or may just as easily be purchased separately on a standalone basis.
Business interruption insurance
In the event of a major insured risk, your commercial property may be left temporarily unusable – with resulting disruption to your own business if it is being run from the premises or to the loss of rental income if it is let to tenants.
Business interruption insurance may therefore be incorporated into your commercial property insurance to provide a degree of financial compensation – up to limits typically expressed as a percentage of the total sum insured.
Types of business
Many different types of businesses are run from commercial premises. The business might be your own or conducted by tenants to whom you are letting the property.
To give some idea of the range of business types, it might be helpful to note that they include:
- salons – used by hairdressers, beauticians and tanning salons, for example;
- any kind of shop selling retail goods or services;
- warehouses;
- factories and workshops;
- offices;
- restaurants – including pubs, takeaways, hotels and bed and breakfasts properties;
- fitness clubs or gyms; and
- a host of what might be called miscellaneous business types.
The type of business conducted in your commercial property naturally affects the risks to which you are exposed as the owner or landlord.
There are likely to be local planning regulations governing the nature of the business conducted on your property and this also has a direct bearing on the commercial property insurance you arrange.
The type of business conducted from your property, therefore, is what your insurer is likely to regard as a “material fact” – something which influences the way in which the risk of loss or damage to the property is assessed.
As the website Practical Law advises, all insurance contracts are based on the principle of “utmost good faith” – or uberimae fidei to give it its Latin term. This means that your insurer has the right to expect your full and honest disclosure of any material fact – including, for example, the nature of the business to be conducted from the insured property.
Your failure to adhere to the principle of utmost good faith may render your commercial property insurance invalid, with the result that any claim you make may be rejected.
Types of commercial property
The types of commercial property naturally reflect the many different types of business which may be conducted from the premises.
A widely accepted classification of types may be expressed as follows:
- retail outlets – shops in other words;
- industrial – including most types of factory, workshop and warehousing;
- offices – which might range from a single room to offices spread over several floors or even the entire building;
- other commercial buildings – a catch-all classification which might include leisure facilities such as fitness clubs and gyms, or cinemas, hotels and restaurants, petrol stations and other miscellaneous types of property.
The type of property once again has a clear bearing on the type and level of commercial property insurance which may be required, depending on the risks associated with the business use.
This may be especially relevant when it comes to insurance against public liability or employers’ liability – a factory may present greater risks of injury than a retail shop, for instance, and more customers or members of public might hurt themselves in a gym than they may in an office environment.
The workplace conditions, in other words, also need to be taken into account in just the same way as the business type when arranging commercial property insurance.
Unoccupied commercial property insurance
Whatever the type of business conducted, from whatever kind of commercial property, there are occasions when the risks assume particular and heightened risks. These are the occasions when the property is left empty and unoccupied.
According to the property security and management VPS Group, approximately 20% of all factories and warehouses in the UK are currently lying empty, together with some 40,000 vacant shops.
Examples of the heightened risks to which an empty property may be exposed are:
- difficulties in monitoring the need for routine maintenance so that a failure to detect a relatively minor fault may rapidly develop into a full-blown disaster;
- all manner of unwelcome attention may be attracted to an empty building, from the likes of squatters, vandals, fly-tippers and others;
- a particular danger is raised by arson in empty buildings – citing VPS once again, each week sees a total of 2,213 arson attacks on property in the UK, with 25% of those occurring in unoccupied commercial property, where an estimated £2 billion of damage is caused.
For reasons such as this, insurers of normally occupied premises – whether used by your own business or let to tenants – typically restrict the level of cover extended during periods of vacancy or remove cover altogether.
The period after which such restrictions come into effect may be around 30 consecutive days or so – although the precise period may vary from one insurer to another.
In order to restore protection to your empty and unoccupied premises, therefore, specialist unoccupied commercial property insurance is required.
Depending on your particular needs, this may re-establish fairly basic insurance cover or comprehensive safeguards.
Mitigating the risk of loss or damage
Even though you may have unoccupied commercial building insurance, you are still responsible for mitigating the risk of loss or damage to your vacant property. For example, your insurer is likely to insist that the premises are inspected on a regular basis, preferably by a professional property security and management company, with a written record kept of each visit and untoward events duly logged and reported.
The British Security Industry Association (BSIA) has also published a brief guide to the preparation and precautions that any owner of unoccupied commercial property might need to take. These include:
- informing the fire service and police that the building is going to be empty and unoccupied;
- ensure that the police and fire services have an up to date and detailed list of all keyholders;
- advise the owners of neighbouring properties – who may be among the first to spot emergencies or criminal activity at your empty premises;
- turn off and drain down the water supply to the building – whilst leaving any sprinkler system in good working order;
- turn off gas and electricity supplies – unless it is necessary for an ambient temperature to be maintained;
- remove all hazardous and combustible materials;
- remove contents which might attract the attention of vandals and thieves; and
- in so far as possible, maintain the impression that the building is still in use and has not been abandoned.
Measures such as these may help lessen the risks and perils to which your unoccupied commercial property is vulnerable.
FAQs
Do I need commercial property insurance?
There is no legal obligation for you to hold commercial building and contents insurance, or indeed public liability insurance. Your mortgage provider, however, may make it obligatory to have buildings insurance in order to protect both your financial interests.
That aside, when considering the question of whether or not to buy such cover, however, you might want to ask yourself what you stand to lose if you do not have such cover – extensive and expensive repairs, for instance, not to mention the possible cost of rebuilding the entire property and not to mention the very substantial claims that might be made under the terms of your public liability.
If you employ others to run your business – including the letting of your premises to tenants – the law is almost certain to require that you hold employers’ liability insurance to a minimum level of £5 million.
Do I need to inform my insurer that the commercial property is let?
Most certainly. One of the principal considerations taken by insurers when assessing risks is whether the premises are occupied by the owner or let to tenants.
In order to protect yourself and your buy to let business against the particular risks you face as a landlord, you need to arrange specialist commercial property insurance for landlords.
Remember that from the moment you assume the role of landlord you have a particular duty of care towards any tenant of your property. If they suffer an injury or have their property damaged as a result of your alleged negligence as the landlord, you may face very substantial claims for compensation. Landlord liability insurance typically offers a minimum of £1 million indemnity against such claims – and often considerably more than this limit.
Do I need public liability insurance?
As the owner of the property you bear a duty of care to take all reasonable steps to ensure that visitors, customers, suppliers and members of the public suffer no personal injury or damage to their property.
Once again, any claim that you have been negligent in this regard may leave you facing a substantial claim for compensation. Indemnity against such claims is typically a minimum of £1 million and may be much more, depending on the nature of your business and the type of premises you occupy.
Do I need empty property insurance?
If your commercial property is going to be unoccupied for more than a month or so, only specially designed unoccupied property insurance is likely to offer the protection and safeguards you need.
Depending on the policy you choose, you may have the option of reasonably basic cover or more comprehensive insurance, extending for the period during which the property is likely to remain unoccupied – in other words, for less than the minimum one-year period conventionally attached to other insurance policies.
If you need to extend the period of cover – because the building is going to remain vacant for longer than you first anticipated – unoccupied commercial property insurance is generally sufficiently flexible to allow such extensions.
Summary
Despite the huge range and diversity of the many millions of commercial properties in the UK, insurance is readily available to safeguard the structure and fabric of the building or buildings, their contents and the various liabilities faced by the commercial property owner or landlord.
Nevertheless, given the importance of arranging cover to protect your investment in the property – and the importance of getting the cover your individual business needs require – you might consider it prudent to consult professional experts in the provision of commercial property insurance.
