Why should landlords obtain Commercial Building Insurance?
Letting out a residential or commercial property can be a great investment, but as a landlord, you must ensure that you have the right Commercial Building Insurance in place. Discover how to get an accurate sum insured for your property and the potential limitations of an "Average Clause".
April 4, 2023
Property portfolio owners need to protect their assets at all costs. Commercial Building Insurance is a vital aspect of running a successful portfolio of properties.
As a landlord, your property is one of your most significant investments. You have a lot of responsibilities, and worrying about the safety and security of your property should not be one of them, especially if you hold a portfolio of properties. If not sufficiently covered you could be liable for unforeseen risks such as natural disasters, theft, vandalism, and liability claims.
As global property insurance prices recently rose by 6%, a competitive tailor-made buy-to-let policy on a rental business is essential for protecting your investments.
In this article, we examine why landlords must be protected.
Is it compulsory to cover it?
There's no legal obligation for landlords to have insurance, but most buy-to-let mortgages come with the condition that you have it. Even if it's not a legal requirement in your area, having Building Insurance is still a wise decision.
Being a commercial landlord comes with speciality risks not usually associated with personal property. For example, a tenant injuring themselves or accidental damage caused by the tenant.
Also, if a tenant cannot live in the property due to an insured event, such as fire or flood, a landlord policy can cover the re-accommodation expense and even the loss of rent.
How to get the correct sums insured?
In most instances, the sums insured for a property will be for the structure of the building plus built-in items such as kitchens, bathrooms, and boilers.
You will need to ensure the BSI is covering the property for its full rebuilding cost, including professional fees and the cost of site clearance. Commonly these professional fees and the cost of site clearance are not considered, resulting in underinsurance.
Ways you can obtain an accurate sum insured for a property:
- Firstly, you can use the Building Cost Information Services (BCIS) online calculator.
- Secondly, your mortgage offer/terms will have the reinstatement/rebuild value which is the minimum you must insure for. This is normally taken from a survey to protect the lender as they have a claim on the property.
- Thirdly, obtain a professional Reinstatement Cost Assessment. I would always recommend this option & given inflation and the increase in costs of materials/labour. Now is the ideal time to review any sums insured.
The law of average:
The majority of landlord insurance policies will include the law of average, also known as ‘The Average Clause’. If at the time of a loss, a property is underinsured, the insurance company will reduce the value of the claim per the amount of underinsurance. This does not just apply to a total loss claim but claims of all values.
For example, if a property is insured for £100k, but the actual sums insured should be £200k. This equates to it being 50% insured, in the eventuality of a £50k claim, only £25k will be paid out under the average clause.
In some cases, where a property is significantly underinsured, insurers can disregard the average clause and completely reject the claim, where a lack of care is taken from the property owner to correctly represent the sums insured of the property.
In conclusion, Commercial Building Insurance provides peace of mind, knowing that your investment is protected against any unforeseen circumstances. It's vital that your coverage is tailored to all exposures and fully protects you.
At Servca, we specialise in the placement of property portfolios & non-standard Commercial Building Insurance cases. We work closely with our partner-broker clients to build robust risk management strategies that provide your clients with the peace of mind they need.
Written by Callum Sullivan
Cert CII, New Business Account Executive