Blog Question on Tenant Insuring the Building

The question posed was:

Allan, our client has for several years had a policy covering his property, liability, rent, and glass.

He has now realised that the tenant also has cover for the building, liability, rent and glass.

I have explained to the client that the sum insured on the building is under insured by $1,500,000, he is not covered as a property owner for liability and the loss of rent, which is also inadequate at 6 months, does not cover him.

Whilst he is noted as an interested party does this extend to cover him as a beneficiary?

I have tried to explain this to my client but he has received a letter from the tenant advising that they have placed cover as required under their lease and there is no need for him to pay the sort of premium he is paying to us.

He also referred this to his lawyer who had advised that “ it is not our clients prerogative to insure the premises otherwise there will be a duplication”

I feel that my client is un-adequately insured and mis-advised by third parties.

Are you able to confirm or otherwise what I am seeing as I would like to re-visit my client and his lawyer with the “facts”

Kim [surname and email provided]

My reply was:

Hi Kim

I have written many articles on this issue and I firmly believe that any owner of property should retain control of the insurance on their property and on their income stream, that is, the rent.

When a tenant arranges insurance, typically, all they are interested in is the price of the insurance and not the level or quality of the coverage, the claims service, nor the financial strength of the underwriter.

When it comes to under insurance, it is important for every building to fully appreciate the ramifications of being under insured. A common misconception is that there is no risk until such time as the loss exceeds the sum insured. This is simply not true.

Let us assume the following. The building is worth $2,000,000, but it is insured for $1,000,000. A storm causes damage to the roof, say hail and a bit of water to the interior, to the total value of $250,000.

The Insurer will allow a tolerance of typically 80%. They would then settle the claim on the following formula.

Sum Insured = $1,000,000

80% of Value at Risk of $2,000,000  x  the loss ($250,000)

= $1,000,000

$1,600,000 x $250,000

The Insurer would pay 62.5% of the claim, or $156,250, less any policy excess.

The building owner would then have to pay the balance of $93,750, plus any policy excess.

Further, if the premises are not tenantable, the tenant would stop paying rent in accordance with the Rent Abatement clause of the lease and the building owner would be out of pocket with this, as well as having to meet the ongoing outgoings of rates, etc.

As a claims professional, I also see cases where the tenant breaches a policy condition or fails to pay the premium on time and the landlord is suddenly in a position of not having any insurance at all. They are stuck with the damaged building, removal of debris and no income.

Ironically, the last one of these I had was where the landlord was, himself, a lawyer who did not understand the risk he had taken on, until the premise suffered a major fire.

In my opinion, your advice to the client is without question the correct advice to fully protect the Insured’s valuable asset and his/her income stream.

The final point I would make is that six months loss of rent is completely inadequate. It can take twelve months or longer to obtain council permission.

I hope this fully explains the situation but if not here is an article I posted a couple of years back on my blog. http://www.allanmanning.com/letting-the-tenant-insure-the-building-on-behalf-of-the-landlord-is-rarely-sensible/

Regards

Allan

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Thank you so much.

I thought I was on the right track but when My client involved his lawyer I needed to be 100% sure that what I was saying was accurate

I appreciate your valuable time.

Kim