Buying a commercial investment property involves more than assessing its price and potential returns. Insurance is another important consideration – and understanding the risks associated with the building before you buy can help you identify the cover you may need and avoid unwelcome surprises later.
When should you arrange insurance when buying a commercial property?
It is worth investigating cover before you commit to the purchase, rather than leaving commercial property insurance until exchange.
The purchase price, location and expected rental yield may all influence your decision. From an insurance perspective, however, the building’s construction and condition, its occupancy, the activities carried out by tenants and the property’s claims history can also affect the risks, premium, terms, conditions and exclusions.
Start discussing insurance early and confirm with your solicitor and lender exactly when cover needs to begin. Depending on the contract and circumstances, responsibility for insuring the property typically may arise before completion (at exchange), so do not assume that completion is always the correct start date.
What insurance might a commercial property investor need?
Commercial property insurance is not always a legal requirement in itself. However, the purchase contract, lease, freehold covenants or other contractual provisions may impose insurance obligations. If the property is mortgaged, the lender may also require suitable buildings insurance to remain in place.
Commercial property policies vary between insurers. Depending on the property and policy selected, cover may include:
- buildings insurance – covering insured loss or damage to the structure and fabric of the premises;
- property owners’ liability – covering legal liability for injury to third parties or damage to their property, subject to the policy terms;
- loss of rent (often optional) – where rental income is lost because an insured event leaves the premises unusable, subject to the selected indemnity period and policy limits;
- accidental damage – where included as standard or selected as an optional extension;
- legal expenses – where included or selected;
- terrorism cover – where required or considered appropriate for the property and risk.
The precise cover, limits, excesses, conditions and exclusions will depend on the insurer and policy.
Further reading: Commercial property insurance 101 for landlords.
Check the property’s use and tenants
The type of tenant and the nature of the tenant’s business can affect the underwriting assessment and the terms, conditions and exclusions of commercial investment property insurance.
Risk profiles can vary significantly. An office, restaurant, shop, warehouse and manufacturing unit may each present different fire, escape-of-water, security, liability and business-activity risks. Mixed-use premises may combine several of these exposures.
Give the insurer accurate information about occupancy, tenant activities and the use of the premises, and tell the insurer about relevant changes in accordance with the policy terms. A material change in use or occupancy may affect cover.
Further information: Commercial landlord insurance: how insurers assess business let property risk.
Check the construction and condition
The materials used to construct the building, its design, condition and subsequent alterations can all affect insurability, premium and policy terms. Before committing to the investment, consider:
- the age, design and construction materials;
- the condition of the roof and external fabric;
- electrical and heating systems;
- fire protection, including alarms, detection and sprinkler systems where present;
- security, including doors, windows, intruder detection and CCTV where appropriate;
- flood and subsidence exposure;
- structural issues, extensions and alterations; and
- whether any element of the construction is non-standard or unusual.
Non-standard construction and other higher-risk features may affect whether an insurer will offer cover and, if so, the premium, excesses, conditions and exclusions.
Establish the correct reinstatement value
A commercial building should not normally be insured for its purchase price or market value. The building sum insured is generally based on its reinstatement cost.
Market value
Market value reflects what a buyer may pay for the property and can rise or fall with the commercial property market. It is not the same as the cost of rebuilding the premises after a total loss.
Reinstatement value
Reinstatement cost is an estimate of the amount required to rebuild the insured property following a total loss. Depending on the assessment and policy basis, this can include demolition, debris removal, construction costs, professional fees and other relevant costs.
For commercial property, consider obtaining an appropriate reinstatement cost assessment from a suitably qualified professional. The Building Cost Information Service (BCIS) provides commercial reinstatement cost data and tools for the professional market.
An inaccurate or outdated reinstatement figure can create a risk of underinsurance. Depending on the policy wording, underinsurance may reduce the amount paid following a claim.
Investigate previous claims and location risks
Insurers may consider the property’s claims history and risks associated with its location. Relevant issues can include:
- flooding;
- fire;
- escape of water;
- subsidence;
- theft and vandalism; and
- structural issues.
For properties in England, you can also check long-term flood risk using the GOV.UK flood-risk service. Equivalent flood information is available from the relevant authorities in Scotland, Wales and Northern Ireland.
Will the property be empty?
Commercial premises may be vacant during a purchase, between tenancies or while refurbishment is carried out. Empty buildings can present increased risks because leaks, damage, break-ins or other incidents may remain undiscovered for longer.
Policy definitions of ‘unoccupied’ vary. If the premises are or will become empty, tell the insurer and check the policy requirements. Unoccupied commercial property insurance may be required. Conditions may include regular documented inspections, additional security, controls over utilities and restrictions on the cover available.
Do not rely on a standard number of days before a property is treated as unoccupied: the definition and applicable conditions vary by insurer and policy.
Check the lease and insurance responsibilities
Do not assume that the landlord is always responsible for every element of insurance. Check the lease, purchase contract and any other relevant agreements to establish who must arrange cover and who bears the cost.
The landlord’s buildings or property-owner cover is also distinct from insurance a tenant may need for its own business, such as contents, stock, plant and equipment, business interruption, employers’ liability where legally required, and public or product liability as appropriate.
Consider loss of rent
Commercial property insurance may offer loss of rent cover where rental income is interrupted because insured damage makes the premises unusable. Check the sum insured, indemnity period, insured events and any policy conditions.
Loss of rent insurance does not normally cover a tenant simply failing to pay rent or falling into arrears unless the policy specifically provides a separate form of cover for that risk.
Commercial property insurance checklist before you buy
Before investing in a commercial property, check:
- the construction and current condition of the building;
- the current and proposed use;
- the current tenants and any known future tenant activities;
- the insurance claims history;
- an appropriate reinstatement value and building sum insured;
- flood, subsidence and other location-specific risks;
- fire protection and security;
- anticipated periods of unoccupancy and the insurer’s requirements;
- insurance responsibilities in the lease and purchase contract;
- the lender’s insurance requirements;
- the level and indemnity period of any loss-of-rent cover;
- the amount of property owners’ liability cover; and
- the policy terms, conditions, excesses and exclusions before you become responsible for the risk.
FAQs
What insurance do I need when buying a commercial property?
The cover required depends on the property, its use, tenants, lender and contractual obligations. A commercial property policy may include buildings, property owners’ liability and loss-of-rent cover, with other sections or extensions available where appropriate.
When should commercial property insurance start?
Arrange cover from the point at which you become responsible for insuring the property. This may be before completion (at exchange), depending on the purchase contract and circumstances. Confirm the date with your solicitor, lender and insurer.
Is commercial property insurance compulsory?
Commercial property insurance is not generally compulsory by law, but a lender, lease, purchase contract or covenant may require it. Other types of insurance may be legally required in particular circumstances; for example, employers’ liability insurance can be compulsory where a business has employees.
Does the tenant’s business affect insurance?
Yes. The tenant’s activities and the way the premises are used can affect the insurer’s assessment of risk, premium, terms, conditions and exclusions.
How much should I insure a commercial building for?
The building sum insured is generally based on an appropriate reinstatement cost rather than market value. For commercial premises, a professional reinstatement cost assessment may be appropriate.
What happens if my commercial property becomes empty?
Tell the insurer and check the policy wording. Unoccupied property definitions and conditions vary, and cover may be restricted or additional requirements may apply once the premises meet the policy’s definition of unoccupied.
Next steps
Construction, occupancy, tenant activities, location, claims history and periods of vacancy can all affect commercial property insurance. Checking these issues before purchase can help you identify potential insurance requirements, restrictions and costs before you become responsible for the property.
If you would like to discuss insurance for a commercial investment property, contact Cover4LetProperty to discuss your requirements. Cover is subject to insurer acceptance, eligibility, policy terms, conditions, limits and exclusions.
Disclaimer
This article provides general information only and does not constitute legal, financial, property-investment or insurance advice. Insurance cover, eligibility, premiums, sums insured, limits, excesses, terms, conditions and exclusions vary between insurers, policies and properties. Contractual and legal responsibilities can also vary according to the transaction, lease, location and circumstances. Check the relevant policy and legal documents and seek advice from your solicitor, lender, insurer or other suitably qualified professional where appropriate.
