Landlords and tenants are commonly incorrectly insured, underinsured, or think they are covered when they are not, according to a northern beaches insurance expert.

Common pitfalls are landlords and tenants thinking the other’s insurance will provide cover; insurance being rendered void because of a change of use by an existing tenant or a new tenant; and people not opting in for certain options such as flood cover, according to managing director of business insurance specialists, BIA Group, Andrew Herrett.

“Issues often arise because business insurance is more complex and tailored, whereas insurance packaged for consumers such as car or home insurance is generally simpler and offers broader coverage with more automatic inclusions,” he said.

“There are greater expectations on business owners and commercial property landlords. They are expected to understand a lot more about their responsibilities”.

What does your business insurance cover?

Landlord Insurance:

The level of cover varies between policies and insurers, however typical landlord insurance is limited to hard assets, loss of rent and liability. However, do not expect anything to be insured by default. Always double check.

Importantly, when insuring a building (for commercial, industrial or retail use), attention needs to be given to whose responsibility it is to cover which fixtures and fittings.

“If a tenant moves in and makes amendments: whether a renovation, upgrades or improvements, the landlord must understand who is covering these improvements and when the responsibility transfers from tenant to landlord.” Andrew said.

As a basic rule of thumb, whoever pays for it insures it. It would be the tenant’s internal contents insurance that would provide cover for what they own and operate within the confines of the landlord’s premises: from a kitchen fit-out, to upgrades to 3-phase power, to carpets, desks and computers.

“There should also be different layers of protection afforded the landlord in the tenant’s insurance which can provide the landlord more security,” Andrew said, adding that this means landlords should require their tenants show proof of insurance prior to their lease commencement and each year upon renewal.

Which insurances should landlords require of tenants?

Public Liability (Non-negotiable requirement):

In almost in all cases the tenant’s public liability insurance will include cover for the property they are tenanting (if they damage it). Additionally, if someone is injured as a consequence of the tenant’s activities, the right public liability policy will also protect the landlord should they be caught up in an action for the injury.

Internal Contents Insurance (Highly recommended requirement)

Covers the tenant’s property and improvements, including those items they might leave behind after expiry of their lease.

Cash Flow Cover / Business Interruption Insurance (Optional requirement)

Assists the tenants to meet their rental obligations following a loss or business interruption. This is often not insisted upon however should be looked upon favourably by landlords.

“Practically and commercially, the more you insist from a tenant, the more difficult it becomes to lease your property, however public liability insurance should be non-negotiable. Most standard leases automatically require tenants to have public liability and glass insurance,” Andrew said.

Insurance is subject to the tenant and their activities

Business insurance is based on the stated activities of the business. An accountant’s office carries a different level of risk to a mechanic’s workshop, to a hazardous materials storage facility.

“If you bring in a new tenant, or your tenant changes their operations and the landlord’s insurer is not notified, the landlord may be denied a claim”, Andrew said, adding that landlords should have “change of tenant and activities clauses” in their lease.

This not only provides the landlord an avenue for recovery should the tenant void the landlord’s insurances, however it also serves as a mechanism to recover increased costs in insurances for these changes.

Not having this clause or not knowing the tenant activities have changed is no excuse, according to Andrew.

“Landlords are expected to have a higher threshold of understanding these things and have checks in place such as a commercial property manager conducting routine inspections,” he said.

Furthermore, the insurer must be notified of any form of construction works and renovations. They will decide if that has any impact on policy coverage and pricing. Failure to notify them may result in a denied claim.

The landlord also has an obligation to keep the insurer informed of changes in insured values.  This goes for rental income figures and building replacement values.  Andrew warns all property owners to consider obtaining a Quantity Surveyor (QS) report to ascertain correct replacement values of the building insured.  Consider also that build costs have increased dramatically in recent years.

Floods Insurance

With the recent 2022 northern beaches floods, many businesses faced damage to stock and fixtures and fittings without insurance cover.

“Flood cover is something you must elect in. It is generally an optional extra and should be taken by the people who operate in a geographic position that lends itself to flood exposure,” Andrew said.

Net leases are preferred by landlords:

A net lease that charges outgoings (such as insurance) in addition to rent is the preferred option among landlords, rather than a gross lease that includes outgoings.

One reason is that if a tenant changes activities and attracts a higher insurance premium, that increase will be paid for by the tenant. However, if a gross lease is in place, then the landlord will face these increased premiums, unless there is an appropriate recovery clause in your lease.

Andrew also warns that if a landlord does not have a lease, or a tenant’s lease has expired and they roll onto a month-to-month lease, they are asking for trouble.

“There is no condition or requirement for a lease, but the absence of a lease creates risk. For example, you have no control over change of activities”.

Professional Assistance

Brokers: Given the complexities of business insurance, landlords and tenants are encouraged to engage a business insurance specialist such as BIA Group who will assist businesses in selecting insurance, and in doing so is an act of mitigating risk in and of itself. Several business packages can also be selected that offer wider cover across multiple risks.

Commercial Property Agents: Using a specialist commercial property agent with an understanding of the various risks and insurances for both landlord and tenant, and with processes in place to minimise the chance of an oversight is also highly recommended. Pine Property has numerous guides and checklists to help you consider your options.