Common Risks Covered By Commercial Property Insurance

A shop and a warehouse fail in different ways, and so do the policies that cover them. What they have in common is that the owner — not the tenant — usually carries the cost of the building, the liability that attaches to it, and the rent that stops when it becomes unusable.

This guide is written for landlords and property investors. It sets out what a commercial property policy covers, peril by peril, and where the gaps tend to appear.

If you trade from your own premises rather than letting them, the covers you need are different — see our guide to the eight types of insurance for business premises.

What Is Commercial Property Insurance?

Commercial property insurance protects commercial buildings and the income they produce against damage and liability.

It can be arranged for:

• Offices
• Shops
• Warehouses
• Industrial units
• Mixed-use buildings
• Property portfolios
• Investment properties

Unlike standard buildings insurance, it takes account of commercial tenants, the activities carried on in the building, and the way occupancy changes over time.

Two distinct things sit inside most policies, and they are worth keeping separate in your head: cover for damage to the building, and cover for your liability to other people. They respond to different events and they are not interchangeable.

Damage to the Building

Fire

Fire remains the most serious threat to a commercial building. It can destroy the structure, the fixtures and, in severe cases, require a complete rebuild.

A commercial buildings policy usually covers, subject to its terms and limits:

• Structural damage caused by fire
• Smoke damage
• Rebuilding costs
• Debris removal, though this is often a sub-limit rather than unlimited

For landlords, fire also stops the rent — which is why loss of rent is dealt with separately below.

Storm and Flood

Storm and flood are separately defined perils with their own excesses, and flood cover is sometimes restricted or excluded on properties in higher-risk areas where escape of water is not.

Cover typically extends to:

• Storm damage and high winds
• Flooding from external sources
• Damage caused by severe weather conditions

Rainwater ingress is usually covered only where storm damage caused it — not where poor maintenance did. That distinction accounts for a large share of declined weather claims.

Escape of Water and Burst Pipes

A burst pipe can cause extensive damage very quickly, and escape of water is the most frequent commercial property claim by number.

Policies commonly cover damage from burst pipes, leaking systems and escape of water, including damage to walls, ceilings, floors and landlord-owned fixtures.

Properties left empty are far more exposed, because a leak runs unnoticed. Insurers apply specific conditions to unoccupied premises — typically isolating and draining the water system, and inspecting at set intervals. Those conditions are enforceable, so read them.

Accidental Damage

Accidental damage cover is the one most often assumed to be included when it is not. It is usually an optional extension.

Where bought, it can respond to damage caused during maintenance work, unexpected structural damage, broken glazing and impact damage.

Malicious Damage and Vandalism

Vacant premises and retail units are the most exposed. Cover may extend to malicious damage, graffiti, deliberate destruction and damage caused by intruders.

Again, unoccupancy changes things: many policies restrict or exclude malicious damage once a building has been empty beyond a stated period.

Theft and Break-Ins

A break-in can cost more in damage than in stolen property, particularly where doors, shutters and windows are forced.

Depending on the policy, cover may extend to theft of insured contents, damage following forced entry, and damage to doors and windows. Buildings and contents are usually written as separate sections with separate sums insured, so check which of the two your landlord-owned items sit in.

Liability to Others

Liability cover does not pay to repair your own building. It pays what you become legally liable to pay someone else — and it is a different section of the policy with its own limit of indemnity.

Property Owners' Liability

As a property owner you owe a duty of care to tenants, visitors, contractors and members of the public.

Property owners' liability cover responds if someone suffers injury or damage because of the condition of your premises. It may pay:

• Damages you become legally liable for, whether settled or awarded by a court
• Legal and defence costs
• Claim investigation costs

A visitor injured on a defective staircase, or by falling masonry from a poorly maintained frontage, is the classic example. Note that this cover is the landlord's equivalent of public liability — it is not an additional product to buy alongside one.

Employers' Liability

If you directly employ anyone — caretakers, cleaners, property managers, maintenance staff or site security — employers' liability insurance is almost certainly a legal requirement under the Employers' Liability (Compulsory Insurance) Act 1969. The exemptions are narrow; check rather than assume.

It responds where an employee suffers illness or injury arising from their work. Trading without it where it is required carries a penalty for every day you do so.

Loss of Rental Income

Damage to the building is only half the loss. If tenants cannot occupy the premises after an insured event, the rent stops while the repairs run.

Loss of rent can be added to a commercial property policy, but it is a declared figure — you choose a sum insured and an indemnity period, and both need to be realistic for how long a rebuild would actually take. It does not arrive automatically with the policy, and it is not void-period or tenant-default cover: it responds to rent lost because insured damage has made the property unusable.

Two figures cause most of the trouble:

• The sum insured. It should reflect the annual rent roll for the property, not last year's actual receipts if the building is now fully let.
• The indemnity period. Twelve months is a common default and frequently too short. Demolition, planning, design, tendering and building work on a damaged commercial building routinely take longer, and the clock starts at the date of damage.

Where a mixed-use building includes flats, alternative accommodation cover for residential tenants is a related but separate extension.

Business Interruption

Business interruption is the tenant's equivalent of loss of rent, and matters to landlords mainly where they occupy part of the building themselves.

It responds to lost revenue, ongoing operating costs, temporary relocation and reduced trading following insured property damage. It normally responds only where the underlying material damage claim is accepted — the two sections work together.

Mixed-Use Properties

Mixed-use buildings combine commercial and residential occupancy in one structure — a shop with flats above, a restaurant with living space overhead, a ground-floor unit under converted accommodation.

They are harder to place because the risks differ between the two halves, and because the commercial use downstairs affects the residential risk upstairs. A takeaway under flats is a different proposition from a solicitor's office under the same flats.

Rather than arranging separate policies, most owners are better served by one policy covering the whole building. A broker who places mixed-use risks regularly will know which insurers will write the whole building on one policy, and which will decline the trade downstairs.

Underinsurance — the Gap That Shows Up at Claim

The most common cause of a shortfall is not a missing peril; it is a sum insured that is too low.

Most commercial property policies contain a condition of average. If the building is insured for less than its rebuild cost, the insurer may pay only that proportion of the claim — insured for 80% of the rebuild cost, and 80% of the claim may be paid. That applies to every claim, not just a total loss.

Rebuild costs should be reassessed periodically, and always after refurbishment or a change of use. Market value is not the right figure: it includes the land, which does not burn.

What Affects the Premium

Commercial property insurance costs vary with:

• Location, including flood and subsidence exposure
• Construction and age of the building
• Rebuild cost
• Occupancy status — let, owner-occupied, or empty
• Tenant trade
• Claims history
• Security and fire protection
• Condition and standard of maintenance

Comparing premiums alone is a poor way to buy this cover. A lower premium often reflects a narrower wording, a longer list of conditions, or an unoccupancy clause you will fall foul of. A broker can put your risk to several insurers at once and show you where the cover actually differs — not just where the premium does.

Choosing the Right Cover

Before you arrange or renew, work through:

• The type of premises and how it is occupied
• Whether any part is unoccupied, or about to be
• The rebuild cost, reassessed rather than indexed indefinitely
• The annual rent roll and a realistic reinstatement period
• Liability exposures, including any employees
• Landlord-owned contents and fixtures
• Whether residential units are included

Speak to Ellis David About Your Commercial Property

Ellis David has been arranging commercial property cover from Essex Road in Islington for around 50 years. We hold agencies with more than 100 UK insurers and MGAs, including specialists in mixed-use and unoccupied property, and our advisers bring more than 150 years of combined broking experience between them.

We will explain what each policy actually covers, tell you where it does not, and place your risk with an insurer that understands the building. You deal with a named adviser, not a call centre.

Related pages: property owners insurance, commercial landlord insurance, unoccupied commercial property insurance and block of flats insurance.

This article is general information, not a personal recommendation. All cover is subject to the terms, conditions, limits and exclusions of the policy. Ellis David Ltd is authorised and regulated by the Financial Conduct Authority, register number 442066.