Commercial property owners insurance is built around three things the owner of a single building or unit stands to lose: the building itself, the rent it produces, and the owner’s liability for what happens on the property. Get those right and the rest is detail. Get them wrong and a fire, a storm or a fall in the car park can cost more than the policy was ever set up to pay. Our commercial property owners insurance page sets out the cover options. This guide is about setting them.
Standalone Building or Strata Lot?
This guide is for owners of a standalone commercial building, or a unit or complex held on a title that is not part of a strata scheme. If your unit sits within a strata or community titles scheme, the building is normally insured by the owners corporation or body corporate, and your own policy is about fit-out, rent and liability inside the lot. See commercial strata insurance for how that works.
The Building Sum Insured
The building should be insured for what it would cost to rebuild today, not its market value or what you paid for it. A commercial rebuild includes:
- Demolition and removal of debris.
- Professional fees for architects, engineers and certifiers.
- Compliance with current building codes, which can differ sharply from those that applied when the building went up.
- Cost increases during what can be a long design, approval and construction period.
A professional valuation is worth having for any significant building, and it should be refreshed when building costs move or the property is altered. Our guide to underinsurance and co-insurance explains what happens when the figure is short.
Construction, Fire Protection and Location
Underwriters look closely at what the building is made of and how it is protected. Wall and roof construction, the type of insulated panels used, sprinklers, alarms and monitored detection all affect the offer. Location matters too: flood and storm exposure, bushfire proximity, and the neighbouring properties. If you have upgraded fire protection, replaced old panels or improved drainage, give your broker the details and the dates. It is information the underwriter can use in your favour.
Loss of Rent
If insured damage makes the premises untenantable, the rent usually stops while the loan repayments, rates and other outgoings continue. Loss of rent cover can respond to that shortfall for the indemnity period you choose.
- Choose an indemnity period that reflects the full time to rebuild and re-lease, not just the construction time.
- Insure the rent the property would actually earn, including outgoings recovered from tenants where the lease allows.
- Remember that loss of rent generally responds only to insured damage. A tenant who stops paying, or leaves, is a different risk.
Landlord’s Liability
As owner, you can be liable for injury or damage arising from the condition of the property: a broken step, a loose awning, a pothole in the car park, a falling branch. A commercial property owner’s policy usually includes a public liability section for that exposure, and the limit should reflect the kind of property and the number of people who use it.
Your lease should also require tenants to hold their own public liability, note the landlord as an interested party where appropriate, and provide a certificate of currency each year. Collect those certificates and diarise them. A lapsed tenant policy often comes to light only after a claim.
Tenant Fit-Outs
Who insures the fit-out depends on who owns it and what the lease says. Base building items, such as original ceilings, lighting and amenities, are usually the owner’s to insure. Tenant improvements, such as partitions, joinery, specialist services and signage, are often the tenant’s. Grey areas appear when a tenant leaves improvements behind, when a landlord funds part of a fit-out, or when make-good clauses change who owns what at the end of the lease.
Record the fit-out responsibilities in writing for each tenancy, and make sure the building sum insured includes the landlord-owned elements.
Setting Up Commercial Property Owners Insurance Around the Lease
The lease and the policy need to agree. Check:
- Whether the lease requires the landlord to insure the building and recover the premium as an outgoing.
- What use each tenant is permitted, and whether the insurer knows about it. A change from office use to a spray booth, workshop or commercial kitchen can change the fire risk and needs to be disclosed.
- Whether the lease requires the landlord to hold a specified liability limit or to note the tenant on the policy.
- Whether the lease asks the landlord’s insurer to give up rights of recovery against the tenant, and whether your policy permits that.
Vacancy Clauses
Many commercial property policies restrict cover when a building is unoccupied for longer than a set number of consecutive days. The period and the effect vary: some policies exclude malicious damage, theft, glass breakage or escape of liquid during extended vacancy, and some apply a higher excess. If a tenant leaves and the building sits empty between leases, tell your insurer, secure the premises, keep alarms monitored and inspect regularly.
Glass
Shopfronts, glazed entries and illuminated signs are expensive to replace and often need boarding up after hours. Glass may be included with a sub-limit or offered as a separate section. Check whether the lease makes you or the tenant responsible for glass, and insure to match.
Machinery Breakdown for Building Plant
Lifts, air-conditioning chillers, boilers, hot water plant, fire pumps and automatic doors are part of the building, but they fail in a way building insurance is not designed for. Mechanical and electrical breakdown is generally excluded from the material damage section. Machinery breakdown insurance can respond to sudden breakdown of that plant and, depending on the policy, to resulting loss of rent where the breakdown makes the premises unusable.
What Drives the Premium
There is no list price. Underwriters look at construction and age, fire protection, each tenant’s occupation, location, sums insured, claims history and the excess you choose. Practical ways to improve the offer include:
- Keeping maintenance records for roofs, gutters, electrical switchboards and fire systems.
- Disclosing every tenant’s use accurately, so the underwriter is not pricing for uncertainty.
- Fixing known defects before renewal rather than explaining them.
- Choosing a higher excess if small claims are rare for the property.
If you also run a business from the property, see our commercial business insurance page for how the covers fit together.
Common Questions
Will my building policy respond to damage caused by a tenant?
Accidental damage by a tenant may respond, subject to the wording and excess. Deliberate damage, wear and tear and gradual deterioration are generally excluded.
Do I need to tell the insurer when a tenant changes?
Yes, if the new tenant’s use is different. Occupancy is one of the main things the premium and the cover are based on.
Is loss of rent the same as rent default insurance?
No. Loss of rent responds to insured damage. It is generally not designed for a tenant who stops paying.
Talk It Through
Request a quote or call 1300 983 940 and we will set up your commercial property owners insurance around the building and the leases you actually have.
General advice only. This article does not take your objectives, financial situation or needs into account. Consider the relevant PDS and Target Market Determination before deciding on a policy.