Properties need to be insured, just like any other 'asset' like your car or personal contents and furniture. If you're a home owner you'll be used to arranging your annual renewal of your building insurance, and for business properties and larger residential developments often through landlords, managing agents, and possibly tenants directly or indirectly by paying the premium.
Things are generally easier for your own home insurance, as it's often just a matter of shopping around for the best deal. There are lots of online comparison websites to help, and advice to help make sure you provide the right information and use the right negotiation tactics.
The mistake seen time and time again though, is people assuming that it's that simple with larger and more complex properties. This is where property management comes into play, and helps shape the right cover and cost to suit the exact property and client in question.
An Example Mixed-Use Property
So let's take an example of a few flats above a shop on a high street, owned by a landlord who lets out each area to a different tenant.
A residential tenant with a long leasehold ownership will probably end up paying part of the annual renewal premium for their share of the building insurance of the property, and let’s say they’re not happy that they are paying twice what they have had quoted themselves from an online insurance comparison site just for their own flat.
The bad news is that it may well need to be this way through the landlord at a higher rate. The building will be classed as one shared block needing one cover that only the landlord as the overall owner can arrange, and with having a retail shop below which has say cooking facilities, carries a higher risk of potential fire damage than just flats on their own. Also, the leases may say it has to be done this way, and in actual fact the tenant has to make sure they don't misuse the property and cause potential threats to loss of cover.
The good news though is that the landlord will have a duty to make sure the best market rates are established, that the correct figures are being used, and is fairly splitting the cost between each tenant in the building. Residential tenants also have right to receive transparent and timely information upon request.
Of course the premium cost is always important, but as you progress up the property ladder you need to make sure all your property insurance ducks are lined-up nicely in order to make sure there is actually sufficient clover in the event of any damage and claim, and that everyone has been fairly charged and treated.
The Basic Building Insurance Guide
So let's take a step back, and look at seven different aspects to having the best insurance cover for your property. These aren't going into endless detail at this stage, which they really deserve as you look further into it, but rather give an overall picture in order to help you head in the right direction.
Whether you're a landlord or investor owner looking to arrange the right and cheapest cover, or a tenant needing to consider and challenge any cover and premiums, this will help guide you through from a property management perspective:
1. What it Does and Doesn't Cover
So building insurance is literally covering the actual property itself and the cost to repair or even rebuild if there was any damage to it.
If a fire therefore breaks out in the kitchen, then this will look at literally what is damaged at the property, so maybe a new ceiling is needed from fire damage, and the mains electrical circuits need re-wiring. What it won’t cover though is, say, damage to the contents of the kitchen which should be under a separate policy by the occupier, for example the pots and pans and even some of the final fittings like blinds over the window or their own shelving. It also won’t include any harm to people and other interests involved, as this boils down to the literal bricks and mortar property repairs.
You can have these additional policies still with the same insurer and person, or they can be separate. They include public liability for harm to others, business interruption for the loss of use by the occupier, employer’s liability, and directors and officers plus professional indemnity for individual interests involved.
You then have ancillary property covers such as restrictive covenant indemnity for other land interests, latent defects insurance for defects in the construction, and engineering insurance for serious pieces of plant like lift machinery and heating systems.
2. What the Policy Covers
Even though you know it's just the bare-bone property itself, there's still certain information and aspects needed to make sure everything is correctly covered.
Begin with getting the actual property right, including the exact address and any additional ancillary land, and what the property is actually used for. So taking the earlier example of flats above shops, this may include a rear car park as part of the title and the insurers will probably need to know the nature of the shop use, as cover for a takeaway will be more than a newsagent because of the higher perceived risk.
Actual risks being covered then need establishing, and if any are specifically excluded, for example those that were caused intentionally by the insured. There may also be those that can't be covered which may take separate stand-alone policies, for example the risk of flooding and subsidence.
Then establish information needs establishing like the Reinstatement Value and Loss of Rent. The former is the basic cost of having to literally rebuild the property brick by brick if it did burn down, and is different to the market value of the property. So you might have purchased the property for £200,000 because that's what it is worth, but the construction cost of building it all back may only be £150,000.
The later loss of rent looks at what rents are being paid and what the insurers may need to pay if the occupiers can't use the property for a long period of time, and may need to include other costs like service charges.
Also, check if the policy is just for this property or part of the insurer’s general block policy for other properties held by them. This can be acceptable, particularly with premium savings being achieved by combined business from the insurers, but make sure details and cover are clear for each individual property.
After all this is established, the insurers will issue a Certificate which summarises what is finally being covered, and can be issued to interested parties like tenants, mortgage lenders, and third party interests.
3. What the Legal Interests Say
There are three main scenarios with different property interests that will involve legal documents shaping how building insurance should be covered. These are when property is mortgaged, sold and let; however before we look at these it's important to see the reason why these do change things.
If you own your property then in actual fact you can do what you want to in one respect. If you didn't arrange any building insurance, or had it on a different basis, then you're the only one who will win or loose. With property being such a valuable asset though, it's in your best interests to make sure that you have cover otherwise you risk losing everything.
However, when you bring in other legal interests, there will be documentation that now states that the building insurance must be taken out in a certain way. Because they have a stake in the property, they quite rightly want to make sure that the property owner takes out the correct cover as they will now be affected if things go wrong.
In addition, there can be ways in which these other interests do have a more direct contact with the insurers themselves. They may have the policy in their joint name, or an officially noted interest on the cover in order to keep informed of things.
There's also a legal principle of Subrogation where the insurers can recoup any losses direct from another party like a tenant if they were at fault, even though it's only the landlord who has a direct lease contract with the tenant. From a tenant's perspective this can be a daunting prospect, therefore under typical leases of the landlord arranging tenant paying the premium they can insist on wording which excludes this Subrogation right and the insurers being able to pursue the tenant directly.
So firstly check what any mortgage or lending criteria states, as they will understandably want to make sure that their asset does not literally go up in smoke with no way of recouping the property value.
Secondly, when you sell or buy your property interest, a whole new policy will need to be taken out, just like with a selling a car and the new owner having their own cover.
The important factor will be the timing, particularly between exchange and completion which may need to involve double cover with both buyer and seller still covering their own interests during this interim stage, and then clarifying any return premium to the seller once their policy does end.
Thirdly, an agreement with any occupier will need to clarify what the owner is obliged to arrange and cover, and if the occupier is obliged to pay the premium and behave at the property. These are common in full-blown leases, with whole sections actually needing more detail than what you might think.
If a building was severely damaged so that it was unusable for a few months, you suddenly have two different interests to clarify. The tenant will want the works done quickly and their loss of costs like rent being covered while they can't use the property, and the landlord will want to make sure that this loss of rent is covered by the insurance and that any claim is not invalidated by the tenant misbehaving.
Also, when it comes to leases, the extent of a tenant's general repairing liability can differ from the definition of 'building' for insurance purposes. There are helpful posts here on this.
4. What the Middle Man Can Do
Once you have the right basic cover clarified, when it comes to actually liaising with different insurance companies, you can have middle-man brokers to help arrange this for you.
To some degree, when you search online through a comparison website for, say. your own home insurance, these websites are a form of middle-man intermediary broker that check the market for the best deal and take their money from the insurers direct.
With larger and more complicated properties this principle becomes even more important, and not so much online but actually using an appointed real-life insurance broker to act on your behalf in this matter. Not only will they be seeking to get the best rates, but as above go through the process of the right cover, and helping with any renewals and claims in the future.
A classic mistake you can make at renewal is being tempted to change insurance company in order to save a few pounds on the renewal premium. In most cases this makes sense, but if you have a difficult property or client situation where you have built up some good faith with the current insurers, any change may cause a new insurers to review things after a new inspection of the property and issue action points of actual works to the property in order to improve cover.
So although you may save £500 on your renewal premium by moving, if the new insurer re-inspect and insists upon good-practice advice from a risk assessor to upgrade the fire alarm, then an installation cost of £1,000 suddenly outweighs the premium saving of £500, not to mention any further reductions your current insurer may issue in future years.
Whatever broker you use, carefully select them for their expertise and accreditation, and pay particular attention to their fees in this which often filter through to a higher overall insurance premium. They should be regulated, and even further middle-men like property managers needing to carefully clarify with clients if they are involved themselves in this process and declaring any fees being received.
5. What Claims Will be Paid Out
Although this is probably the last thing you look at when you take out insurance, it's the reason why insurance exists, really. If you need to make a claim, then they need to pay out for the repairs and works, therefore it's worth making sure the basis of this is just how you expect it to be.
So clarify their own procedures for this in terms of dealing with claims timely, and how far they go investigating claims through say Loss Adjusters.
Check what the excess is on the policy, i.e. the initial part of the claim that they don't pay of often a few hundred pounds, and place this in context of your own situation. So check any recourse to tenants for covering back these excess shortfalls to tenants and the service charge, and make sure VAT is paid if you can't recover through your own or the property's VAT status (check out a post here on this)
6. What Requirements Will the Insurers Have
So the insurance is arranged, and the premium is paid. Hopefully you never need to make a claim, however the insurers may still want to inspect the property themselves and require action points for the owner in order to help reduce the risk of any claims happening.
This is common for larger and more complicated properties, particularly at the start of a new cover or any change in events, and maybe every few years going forward.
Some of these are straight forward housekeeping points that you need to make sure are communicated to actual occupiers, for example keeping fire doors closed and escape routes clear, and updating any compliance reports like the electrical testing or fire detection system.
These items will of course be due anyway, however an insurer may insist upon proof of this, and then action points that may not be a necessarily under general obligations but for the insurers sake they want that extra-mile protection of the property. Worst case scenario is that they go even further and insist upon features like a security or a fire alarm that is remotely connected, which may have not even been mentioned in your regular assessments.
There will also be certain situations that may require additional action points, for example if the property is vacant after a period of time and measures such as weekly inspections, utilities being turned off, and letterboxes being sealed closed.
Whatever these requirements are, firstly understand what they are at the outset, and secondly make sure they are not only completed in the prescribed timescales going forward, but that they are documented and if needs be communicated back to the insurers.
7. What Changes Are Happening in the Insurance World
As a final point, it's worth keeping tabs on any changes in the insurance world that you need to be aware of. Over time these should make the whole process fairer and transparent, although at different times it may seem more bias than others.
Various intermediaries like insurance brokers and managing agents will have regulations and good-practice that they need to adhere to anyway, and individual landlords as part of any accreditation scheme they are part of. In terms of some general insurance legislation changes, here’s some to be aware of:
The Insurance Act 2015
Commercial insurance contracts now have further responsibilities for the policy holder to provide relevant information through senior management, plus new remedies for non-disclosure, in addition to the insurers dealing with breaches of warranty more fairly.
This was a big shake up for the insurance industry, aiming to bring greater transparency, and although affects all relevant policies by default, it can be excluded upon agreement for individual policies.
So owners must provide all the right information for the insurers to provide a fair cover, which may sound obvious but during the course of busy day-to-day management can be missed. All facts must be substantially correct, made in good faith, and are issued if circumstances change in the future, and examples include history of claims, financial and conviction, status of key personnel and directors, and details such as health and safety and fire compliance changes. Worst case, claims can be voided and any historic claims reimbursed.
On the plus side for owners, warranties should be treated more fairly. These are where the insurers oblige the owner to do something at the property, which historically enables the insurers to resist any claims on the basis of the insured breaching these warranties. Breaches must now be connected to any loss, and any suspension only for the period of breach.
The Enterprise Act 2016
For building insurance, this obliges the insurers, their agents, and loss adjusters, to now handle all claims in a reasonable time frame. This is a great help to policy holders, in order to make sure that any pay-out or agreed works are progressed as soon as possible, as delays can mean time, use, and money being wasted. A lot of time there are genuine reasons for this, maybe waiting for contractor quotes or consents, but in others it may be down to just poor administration.
This takes effect from 4 May 2017, and enables a policy holder to claim for any subsequent losses from these delays, and although this will be implied to all insurance policies by law, individual insurers can contract out of this obligation with their own policy.
The Building Insurance Bottom Line
Therefore before you panic about the current building insurance being sufficient, or trying to take out new cover on the cheapest basis, go through the above six aspects to building insurance cover to make sure you're on the right track.
It's so important for larger and more complex properties that you've actually got the correct basis and cove first clarified, as there are more factors to consider than just a simple home insurance renewal online. However once you have this confirmed, you should of course be seeking the best and cheapest cover in the market, and understanding the different roles of people arranging and then paying for this.
So whether you're a landlord investor having to arrange this, or a tenant picking up the annual premium cost, don't get bogged down and confused - begin clarifying, and you'll soon spot what's needed and be able to ensure the best possible cover at the lowest possible premium.