27 February 2018

It is quite common in the commercial property space for the tenant to be responsible for placing the insurance cover on the building they are leasing. This responsibility is passed to the tenant via a clause in the lease agreement. This common practice is fraught with danger for the owner of the building. In the event of a claim it can result in significant prejudice to the interests of the owner.

For Example:

  • The tenant does not insure the building for the correct replacement value. This leads to an underinsurance issue in the event of a claim which means the insurer will pay out a lower amount.
    • Full replacement value of the building is $800,000. Tenant insures it for $600,000. As the insured amount is only 75% of the true replacement value the insurer will only pay 75% of any claim.
  • Non-disclosure or incorrect disclosure by the tenant allows the insurer to cancel the policy from inception.
    • Tenant provides incorrect information about the construction or maintenance of a building. Following a claim it is determined that if the correct information was provided the insurer would not have insured the building. The insurer can rely on the duty of disclosure to cancel the policy from inception and deny the claim.
  • The tenant selects a very high excess to reduce the premium cost. Any losses under the excess will not be covered and in the event of a large loss the owner is self-insuring a large portion of the loss.
    • The policy excess is set at $50,000. Any loss under that amount is not covered and any loss over that amount is subject to the owner paying the first $50,000.
  • The tenant does not insure for loss of rent.
    • Loss of rent cover is a very important benefit to the building owner. As it is an optional extra cover it increases the cost of the insurance. This cover is often not requested by the tenant leaving the owner uninsured for this type of loss.
  • The tenant insures the building in both the name of the tenant and the owner. Any breach of the insurance contract by the tenant could potentially allow the insurer to deny a claim.
    • Any deliberate damage caused by a tenant could render the policy void as deliberate damage by an insured is likely to be excluded.
  • The tenant chooses to insure the property for indemnity value rather than replacement value. Again this is usually a cost saving measure.
    • Land value aside it will almost always cost significantly more to rebuild a building than what the building is actually worth.

It is a much more prudent option for the owner of the building to arrange the insurance themselves and pass on the cost on to the tenant. This way the owner can make sure they are covered for the risks they wish to insure and avoid the types of pitfalls mentioned above.