Buildings Insurance – Who’s Responsible?

When dealing with property, the issue of building insurance invariably arises at some stage during the transaction.  Here are a few points to consider:

Who is responsible for insuring the property?

Sale and Purchase Transactions

In the case of a sale and purchase, the contract will stipulate which party will be responsible for insuring the building and from what date.  Where a building is being sold with vacant possession it is common for the buyer to be responsible for insuring the building from exchange of contracts.  However, there are some circumstances in which the seller will need to continue to insure up until completion. For example, if the property is subject to a mortgage, then it is likely to be a condition of the mortgage that the seller/borrower insures until the mortgage has been repaid in full.  Likewise, if the property is subject to an existing lease, then the lease is likely to include a covenant requiring the Landlord to insure. 

There are also situations when neither party will be obliged to insure, such as when the interest being sold is leasehold and the Landlord is obliged to insure.  In this instance the seller/tenant should provide the purchaser with a copy of the Landlord’s buildings insurance policy.

Leasehold Properties

The majority of leases will oblige the Landlord to insure the property in question.  This makes sense – the owner of the property will want to be sure that it is properly and sufficiently covered by buildings insurance.  If a property is subject to multiple interests such as being sub-divided into smaller units and/or different levels of leasehold interests such as a leasehold and sub-leasehold interest, the owner of the building can insure the whole building and then split the cost of the premium between the various tenants.

Where a tenant occupies multiple outlets such as retail chain, they may request that they insure the building under a block policy as this is more cost effective.  Whether this can be agreed is a matter for negotiation between the parties.  If agreed, the lease should include provisions requiring the tenant to provide evidence of insurance and the ability for the landlord to insure and charge back the cost to the tenant in the event that evidence is not supplied.

A landlord will only usually be required to insure the building structure.  A tenant should ensure that it obtains its own contents insurance to cover the furniture, equipment etc it keeps in its demise.

Mortgaged Properties and Legal Charges

Where a loan is secured against a property, the lender will want to be certain that in the event of damage or destruction of the property it will not lose out and will be able to recover the debt owed to it in full.  For this reason, a mortgage/legal charge will always include an obligation on the chargor/mortgagor to insure the property.

Leasehold Management

From time to time, a tenant may wish to make alterations/carry out works to the property.  Consent will be given in the form of a Licence for Alterations which will detail at what point the landlord will be obliged to insure the works being carried out.  This will usually be when they have been completed.

How much do I have to insure the property for?

The property should be insured for its full reinstatement value.  This is the amount that it would cost to completely rebuild the property from scratch if it is destroyed or so badly damaged that it needs to be demolished and rebuilt.  This includes not only the physical work of re-building but professional fees including planning professionals, surveyors and solicitors. This is very different to the market value of the property and can be considerably higher. 

It is extremely important that the property is sufficiently insured.  If it is not, and it is damaged or destroyed then any shortfall will need to be made up by the owner. 

If in doubt as to the reinstatement value of a property, a reinstatement valuation should be requested from a suitably qualified professional.

What risks do I need to insure against?

These will vary according to the type of property and its use.  Depending on the transaction, the first point of reference should be the mortgage deed, lease or any other documentation which sets out insurance provisions.  These may include a definition of “Insured Risks” and commonly includes all or any of the following:

“fire, explosion, lightning, earthquake, tempest, storm, flood, bursting and overflowing of water tanks, apparatus or pipes, damage to underground water, oil or gas pipes or electricity wires or cables, impact by aircraft and aerial devices and articles dropped from them, impact by vehicles, terrorism, subsidence, ground slip, heave, riot, civil commotion, strikes, labour or political disturbances, malicious damage”

There will usually also be a catch all along the lines of “… and any other risks that the insured decides to insure against from time to time”.

Sometimes it may not be possible to obtain cover against certain risks at a reasonable cost – flooding or terrorism, for example.  In this case it is for the parties to agree and document how this is dealt with. 

You should also consider what other liabilities need to be covered.  Business interruption (where you will be trading from the insured property), loss of rent (in the case of a landlord insuring) and third party/public liability are examples. 

What else should I consider?

• An insurance policy is a contract of good faith and requires the parties to the policy to act honestly and fully disclose all material facts.  Failure to do so could result in the insurer avoiding the policy.  You should ensure that all material facts are disclosed and if any change during the existence of the policy let the insurer know, e.g. if the use of the property changes or if it is to be left empty for a period of time because a tenant has vacated.

• Is the Property insured in the correct name or names?  The person insuring needs to have a sufficient insurable interest.

• If the property is subject to a mortgage or lease, then you should consider whether the terms of the mortgage or lease require you to note the mortgagee’s or tenant’s interest on the policy.

• If you are a tenant, your lease is likely to include a covenant that you observe and perform the requirements and recommendations of the insurer.  You cannot comply with this obligation unless you have seen a full copy of the policy, so ask to see this.  For example, if any works are being carried out that involve a heat source such as a brazing tool, the insurer may require a person to stay within the vicinity of that work for a certain time period whilst it cools down.

Summary

The above is intended to be an overview only of some of the issues to consider in relation to building insurance and to highlight the competing interests of property owner and third parties when it comes to insurance.  Each property/transaction should be considered on its own merits. 

If you require further advice in relation to this topic, please get in touch with our commercial property team by calling 0116 289 7000 or emailing us at info@bhwsolicitors.com.