INDUSTRIAL & COMMERCIAL REAL ESTATE BRISBANE QUEENSLAND AUSTRALIA

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Insurance and your ‘hip-pocket’

Insurable risk on property is looming as a major issue for property owners.  Thanks to the media, we are continually exposed to examples of why insurance on residential property is so important. However the implications are arguably greater in the commercial property environment.

It is a landlord’s (or their nominated Managing Agent’s) responsibility to ensure that their tenant has current and adequate insurance coverage. All tenants are required to carry Public Liability Insurance and typically at a minimum level of five million dollars.

Tenants are often required to insure plate glass and in some instances, plant and machinery specific to their tenancy. Generally leases have a provision requiring tenants to provide their landlord or managing agent on an annual basis with copies of their Certificates of Currency for the various insurances. Typically tenants will also insure contents but that decision is outside the landlord’s control or responsibility.

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Unless the property is solely a one tenant property, then there are a number of insurances that need to be undertaken by landlord. These insurances seek to cover common areas for Public Liability and Machinery Breakdown Insurance for the common area equipment.

The third and more critical insurance is the Building Replacement Insurance. This seems obvious, yet this is the area where most landlords fall short. This insurance is designed to cover up to and including worst case scenarios of the building being totally destroyed. The level of the cover is meant to allow for escalating costs as if the disaster occurred on the last day of the insurance coverage period.

This insurance should cover the cost of demolition and removal of debris, cost of new plan drawings, applications and approval processes, and construction costs including all professional contractors. It should also cover the loss of rental income (or rent free incentives during lease-up) for the period up until the property is in the same position as it was prior to the disaster.

Fuel and interest rate rises combined with a labour shortage for skilled contractors has seen all costs throughout the building sector increase. Furthermore, these costs will continue to rise albeit at a slower rate. The owner must assess or, preferably, put the emphasis back on the insurer to make sure there is sufficient coverage and at a competitive premium.

On this basis, we recommend owners work through a broker to source the most cost competitive yet comprehensive cover available. At Raine & Horne Commercial, we have built alliances with brokerage firms and can recommend services that will assist in this regard.

So what is the risk to owners and managing agents if adequate insurance is not maintained?

If a person should trip and fall in tenanted premises, the costs could be hefty. This is especially so if the tenant does not have current public liability insurance, the tenant declares bankruptcy and an owner/manager has not requested copies of the policies each year. The property’s insurers are likely to claim negligence and the costs for compensation will be made directly to the owner or managing agent.

Take another scenario. The building is burnt to the ground. However the insurance cover has not been reviewed for the past two years. Construction costs have increased markedly, the tenant’s rents have moved by 20% combined with the new Brisbane City Council planning laws that have slowed the approval process. The implications are the owner will have to contribute to the construction costs just to reinstate the property. The shortfall in rental income is an additional financial burden, which could equate to $20,000/annum on an annual income of $100,000.

A building fire draws us to another very important topic, that of undertaking regular inspections and ensuring tenants comply with fire safety, insurance and maintenance provisions.

Failure by a landlord or managing agent to enforce/maintain these aspects of a property can also see landlords deemed as negligent and accordingly, insurance claims may be rejected.

For this reason, our team at Raine & Horne Commercial undertakes regular inspections and ensures tenants provide us with the necessary Insurance Certificates of Currency.  We also work with owners to ensure adequate coverage is in place.

If for any reason you are unsure of what your obligations are or you would like to know more about how you can minimise potential financial losses, please contact Daryl Gallagher-Collins on 3216 6666.