Top Tips - Property Owners' insurance
Save time and money on property owners insurance. Guidance on building insurance where you let property to tenants.Skip now to tips on
Checking the terms of the lease
Insuring your building
What tenants must insure
What if the building is vacant?
Protecting your interests
Do you need Liability Insurance?
1. Checking the insurance terms of the lease
It is vital to check the terms of the lease and see who is responsible for arranging insurance. As landlord, you will usually be responsible for insuring the building, although you may be able to recoup the premium from the tenant – for example, as part of the rent or service charges.
The lease will also state what perils the building is to be insured against, such as fire, explosion, storm, etc. Even if the lease only mentions a limited number of perils, it's usually sensible to protect your investment by buying wider cover, such as either fire and all the additional perils available, or "all risks". In theory you can only ask the tenant for the premium that relates to the perils listed in the lease, but this may amout to splitting hairs where the additional cost of the extra perils is insignificant.
2. Check the terms of the mortgage - if you have one
If you have taken out a mortgage on the building, it will specify the perils that you must insure the building against. If the mortgage only mentions a limited number of perils, it's usually sensible to buy wider cover, such as either fire and all the additional perils available, or "all risks".
3. Rent Conditions
The lease will also stipulate whether, in the event of serious damage like a fire, the tenant will remain liable to pay you the rent.
- If the tenant will continue to pay rent, you need to make sure they have taken out insurance on the rent that would still be payable. Otherwise, they may not be able to continue paying you.
- If the tenant will not continue to pay rent, you need to insure the rent you receive during however many months you think it could take to:
- rebuild the premises and
- rent it out again (whether to the same or a different tenant).
- rebuild the premises and
This insurance makes up for the rent that you would otherwise have received following a fire or other serious damage. Depending on the terms of the lease, you should normally be able to recoup the cost of the rent premium from the tenant. This is often done as part of the rent or service charges.
4. Building insurance
The building needs to be insured for the full amount that would be required - as at the first day of each year of insurance - to entirely rebuild it as closely as possible to its current form. You probably need to obtain a professional valuation to establish what this figure should be. The total should make provision for site clearance and professional fees, such as architect's fees. It’s also vital to make sure that, once insurance has been taken out for this amount, the figure is regularly increased to allow for inflation.
5. "All Risks" cover
It's becoming increasingly common to insure buildings against “all risks”. This term includes fire, explosion, storm, flood and any other peril that is not specifically excluded in the policy. Some leases may only require insurance against a more limited range of named perils, but it’s generally advisable to insure for a fuller range of perils.
6. Terrorism insurance
Most insurance companies exclude terrorism from the standard cover and then charge you extra to include it.
These are the points you need to consider when deciding whether to buy terrorism cover:
- If terrorism insurance is required under the terms of the lease, you need to make sure it is included. Check if the tenant is responsible for paying for the cover.
- If you have a mortgage on the building, your mortgage lender may insist you insure the building against terrorism.
- If the premises are in an area that terrorists are likely to target, it would be unwise not to buy the cover.
- Remember terrorist damage doesn’t just occur in major cities – recent events have shown that many bomb factories are in suburban areas and even in blocks of flats.
7. Insurance surveys
Business insurers often conduct their own surveys of the premises they insure. They assess the risk of a fire, flood, etc. They may ask for certain risk improvements to be carried out after the survey, and you then need to agree with the tenant which of you will be responsible for implementing them. You might for example agree that the tenant will be responsible for any matters relating to their business activities, while you as landlord are responsible for any work on the structure of the building.
8. Multi-tenure buildings
If the building is occupied by various different businesses, this could affect the terms of your insurance. For example, an insurer may base the premium on whichever business is considered to present the most serious fire hazard – because a fire could begin there and spread to rest of the building. This may need to be explained to other tenants whose premium contribution may be higher than they would otherwise have expected.
9. What do your tenants need to insure?
You need to agree with the tenant what they are responsible for insuring – as part of their business contents – and what you are responsible for insuring as part of the building. Generally, machinery, alterations or improvements installed by a tenant will be the responsibility of the tenant until they move out – when whatever they do not take with them becomes your responsibility.
10. What if the building or part of it becomes vacant?
You need to notify the insurer every time there is a change of occupancy. The building may sometimes become unoccupied, for example after one tenant has moved out and before another moves in. Insurers are often wary of insuring unoccupied buildings in view of the increased risk of arson and vandalism, and they may wish to change the terms of the insurance during the period of unoccupancy, e.g. by increasing the premium.
11. Protecting your interests
As landlord, you are not necessarily aware of all the tenant’s activities. It is important that a condition – often called a non-invalidation clause – is included in the building insurance policy. This clarifies that your right (as the landlord) to claim under the policy will not be jeopardised by any change in the risk that you are unaware of – provided of course that you inform the broker or insurer whenever you do become aware of a change.
12. Do you need liability Insurance?
You must have Employers’ Liability insurance by law if:
- you employ someone (or control their work, eg. work experience people or sub contractors), or
- you are a limited company (even if you don’t employ anyone else – this is because the limited company is employing you).
13. Maintain an audit trail
Keep copies of all your correspondence about insurance, and make notes of any conversations and meetings. This may prove very useful if you need to make a claim, or if a dispute arises about what’s been agreed.
What next . . .
Getting new Property Owners insurance. The steps you need to take to obtain Business insurance.
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