The aim of the policy is to ensure the cost to rebuild the premises is always covered, and the items and people inside it are protected. While it is not a legal requirement, it is a critical safeguard to allow a business to operate and survive through many crises.
As well as building insurance, a commercial property landlord insurance package of policies also includes contents insurance for those that require it, and property owner’s liability insurance to ensure accidents do not cause unnecessary and unforeseen costs.
While building, contents and liability insurance are usually standard in most policies, there are a number of additional extras which can provide peace of mind for some landlords and tenants.
Building insurance: This is the responsibility of the property owner, not a tenant. Although some landlords require the tenant to cover the cost of this as part of their contract. It covers the cost of repairing damage to the property itself and anything permanently attached to it. This includes roofs, car parks, doors, windows, permanent flooring and fitted furniture such as kitchens and bathrooms. Carpets and blinds are not covered by building insurance, this would fall under contents insurance. The Financial Ombudsman has more details on what items fall under contents and buildings insurance.
Contents insurance: Covers the cost to repair or replace items damaged due to a number of scenarios such as fire, flood, storm, theft or vandalism. Whoever owns the items is responsible for their insurance, so a tenant cannot claim on a landlord’s contents insurance for damage to their own items and vice versa. Landlords don’t always purchase contents insurance, but can choose to if they own expensive items inside the property.
Property owners’ liability: If a tenant, their staff or other third party is injured in the property, or has their belongings damaged, this pays for compensation and legal costs if the property owner is found culpable. This is a must for both landlords and owner-occupiers. Public liability insurance for tenants is purchased in business insurance packages to cover injury or damaged goods of third parties if members of the public visit the premises, such as a shop or pub. Injury to staff would fall under legally required employers’ liability insurance.
Tenants’ improvements insurance: Sometimes a tenant will change the commercial property to fit their requirements. For example reconfiguring a space to make areas Covid-secure. This insurance covers the cost of the work done which, had a landlord carried it out, would be covered by building or contents insurance.
Business interruption insurance: For tenants who lose income or have additional costs due to a listed incident which means they are unable to trade from the premises. For example a fire rips through a warehouse destroying stock and making the business unable to sell its goods. While the stock would be covered under contents insurance, the lost income due to the premises being unusable would be covered by business interruption. It also covers the additional costs incurred to get the business up and running again, such as higher fees to get the delivery of replacement stock expedited.
Rent guarantee insurance: For landlords who want to ensure they don’t miss income if a tenant defaults on their rent. This is usually for a set period such as six or 12 months at most.
Loss of rental income: If a listed incident such as fire or flood means a property is not useable and a tenant cannot be expected to pay rent, this covers the letting fees a landlord would have collected had the premises been occupied.
Accidental damage: For landlords or tenants for non-malicious, non-deliberate damage.
Malicious damage by tenants: Although malicious damage by third parties is usually included in building and contents insurance, malicious damage by tenants is not as it is expected they were legally allowed on the premises. This covers unlawful and intentional damage by tenants.
Legal expenses: If a landlord needs to take legal action or needs to cover defence costs.
The owner of the property is responsible for paying building insurance. However, some landlords require the tenant to cover the cost of this as part of their contract.
The landlord or owner-occupier will usually need building insurance if they have a mortgage on the property. It is also prudent to take out building insurance as it will cover the cost of completely rebuilding the property should it be destroyed. This would cost hundreds of thousands of pounds, if not millions depending on the size and requirements of the premises.
VAT is not payable on commercial property insurance, and other insurance products, the government says. It is also a tax deductible business expense, the government says. As long as the expense is “wholly and exclusively” for the purpose of the business, it can be used against taxable income.
However, insurance is subject to an Insurance Premium Tax (IPT), which is currently set at 12%.
Unoccupied commercial properties require slightly different insurance because they carry extra risks, such as squatters or a higher risk of arson or damage from a flood. If a property is left unoccupied for a set period of time (usually more than 30 days) an insurer may require a landlord to switch their policy to an unoccupied property insurance product.
Public liability insurance is available on some of these policies, but some insurers do not offer unoccupied property insurance at all. Using an insurance broker is probably the best first step in this scenario.
