Industrial building insurance for factories, sheds and workshops

Many sheds were put up by the owner years ago, sometimes with discounted or unpaid labour. The slab is the first thing left out, because owners think concrete cannot be damaged. Then they insure at the kit price paid 20 years ago. They leave out labour at trade rates, the fees to get the building approved again and the cost of meeting today's building code. On an older building, site clearance and asbestos removal add to it, and asbestos removal is a specialised, regulated job. Clearing a metal shed costs money too, because it has to be cut up to be taken away and recycled.

The sum insured has to be the full cost for third-party trades to put the whole building back, not what it would cost you to do it yourself.

What does a short figure do to a claim?

Every business pack policy we place carries an underinsurance clause, often called the average clause. It tests your sum insured against 80 per cent of what the building would really cost to replace, and the percentage on your own policy is the one that counts. The calculation, and any exception for smaller claims, depends on your policy.

• A serious partial loss. If your sum insured falls below that 80 per cent mark, the insurer can pay only part of the claim, using the calculation in your policy.
• A total loss. The payout stops at the building limit for the event. On most of the policies we place, that limit is up to a fifth above your sum insured, and the rest of the rebuild is yours to fund.

You do not need to wait until renewal to raise a shortfall. Tell us when you find it. We can ask the insurer what needs to change and how that would affect future claims. We ask the insurer to confirm how any agreed change affects the underinsurance calculation. We review the figure again at renewal.

The workings, with figures, are in our guide to the co-insurance clause.

Is a builder's estimate enough?

Not always. A builder's rough construction estimate may leave out demolition, debris removal, fees and the cost of meeting current building rules. Check that it prices a complete rebuild after a total loss, not just the new structure. Our desktop building replacement estimate page shows how far a builder's figure can fall short, item by item.

When you ring, we start with what you need and talk through the building. Then we get the rebuild figure, a desktop building replacement estimate worked out from aerial and street imagery rather than a site visit. We commission it for our purposes as your broker, to inform the advice we give you. Where the figure shows little or no gap, we move on to finding suitable options. Where it shows a real gap, we ring you back to go through it and give you prices at more than one sum insured. We can arrange an on-site valuation instead of a desktop building replacement estimate, but that's a service you pay for.

What the building is made of, what happens inside it and where it stands set the premium, as well as the sum insured. When a renewal goes up and nobody has said why, we compare policies for you and explain the price and the cover together, even where the better answer costs more. What owners pay, and why two buildings worth the same can pay very different amounts, is in our guide to what commercial building insurance costs.

Before it settles a shed purchase, a lender will usually want a certificate of currency, the insurer's confirmation that cover is in place, showing the sum insured it asked for. Ring us once the contract is signed. We give you the rebuild figure in writing, place the cover when you instruct us, and send you the certificate for the bank once we have received your premium. The sum insured you agree with your lender is a matter for you and the bank.

What the building is made of has to be declared accurately: the sandwich panel content, the roof material and its age, and the cladding. Get it wrong and the question can become whether the policy responds at all.

Most of the insurers we place business packs with decline once EPS (polystyrene-core) sandwich panel passes about 20 per cent of the floor area. Some will consider more. Specialist markets exist beyond them for panel-heavy and asbestos-roofed buildings. An asbestos roof is harder to place on every type of policy.

In our experience, insurers use aerial imagery to decline buildings with visible rust or ponding on the roof, and at claim time to cut payments for gradual deterioration. Damage that was already there is the biggest reason we see roof claims reduced.

That look at your roof is our roof condition check. Nobody attends the site, so it cannot certify the roof or find every defect.

Your insurer prices the trade in your building, so it needs to know who is in there now. Recycling and waste, chemical storage, spray painting, and timber and plastics processing are all harder to place. Industrial tenancies change fast. Storage becomes welding, and welding becomes spray painting. Each is a different risk that the insurer either priced differently or would have refused. A change nobody meant to hide can still cost you the claim. That is why we ask at every renewal who is in the building and what they do in it.

If a tenant in your shed breaks a condition of your policy, your cover does not automatically end. On some policies you stay protected for a loss the policy otherwise covers, as long as you did not agree to the breach and you act as required once you know about it. Depending on the policy, that can mean making the tenant comply, telling the insurer and agreeing to an extra premium.

The insurer may also read your tenant's website, and look at a satellite image of the yard, before it renews. Businesses often describe themselves as more complex than they are, and the insurer reads what is written. One building owner was refused renewal over a bin hire tenant's website. The insurer read the website, and a satellite image of skip bins in the yard, as a waste recycling or processing facility. The tenant ran a skip bin depot and an office. We put the tenant's process guide and current photos to the insurer, showing that no waste was stored or processed on site. The decline was overturned and terms were issued.

The core of a commercial property policy is the building at full replacement cost, with contents and stock where you hold them, and theft and glass cover added as sections where you need them. The building cover and its rebuild figure work as they do for any commercial building.

Each business pack we place puts the owner's fixtures and fittings, floor coverings, fixed plant, plumbing and wiring inside the building cover. A few limits matter more on an industrial site:

• Fences, gates, signs, retaining walls, awnings and shade structures. Storm damage to them is capped at $25,000 an event, or a higher amount on some schedules.
• Water. Sudden water damage from a burst pipe can be covered, even where repairing the pipe itself is not. A slow leak, seepage, rust or damp is usually excluded. We can explain whether your policy helps pay to find and reach the leak.
• Clearing the site. On most of the policies we place, removing debris has its own allowance on top of the building figure. On some it comes out of the same limit as the rebuild.
• Rebuilding to today's code. Rebuilding after insured damage may mean meeting newer building requirements, which matters most on an older building. Your policy may help pay the extra cost. The allowance and conditions matter, including whether that money is additional to your rebuilding limit or comes out of it. We check how your schedule handles it.

Machinery breakdown is not in it. The property cover excludes a motor that burns out or a compressor that seizes from the inside. Breakdown is a separate, optional section you add, and the breakdown sections inside a pack commonly exclude the switchboards and wiring that fail. On an industrial site that gap is expensive: a fault in the power run under the car park can mean digging the car park up. That is often the job of a standalone equipment breakdown policy.

Lost rent. Under the leases we hold, the damage and destruction clause can suspend or reduce the tenant's rent while the premises cannot be used. A landlord's policy pays that rent only where a rent item is on your schedule. The rent figure on your schedule should be the annual rent excluding GST plus the outgoings you are entitled to recover, because gross and net rent are a long way apart.

The indemnity period is how long the policy keeps paying after the damage. For the rent, we recommend at least 18 months, and often 24 or 36 depending on the owner. For business interruption if you run your business from the shed, we recommend 18 months. Which period you take is your call.

Your own liability. Your tenant's liability policy is written for your tenant's business. A claim can name you as the property owner, and any cover your tenant's policy gives you may be limited. We check what already protects you as owner before recommending property owners liability of your own.

The lease. Your lease says who should insure the glass, the air conditioning and the fit-out. Check both the lease and the policies, because the lease putting the fit-out on the tenant does not show the tenant has insured it. We help you see what you and the tenant have each covered in the shed, and what is still missing. What your tenant insures for itself, its stock included, is on our page for business owner tenants.

On most of the policies we place, cover for fire, storm, water damage, malicious damage and theft stops once a building has been empty for 90 days in a row, unless the insurer agrees in writing. If a shed will sit between tenants, tell us well before that and we raise it with your insurer.

The same policies require the insurer to be told before alterations or building work begin. Tell us before the builder starts.

After a fire or storm, the claims manager deals with the insurer and the loss adjuster, the person the insurer sends to assess the damage. We work through the building damage, make-safe costs, debris removal, professional fees and, where the building is let, the lost rent. The insurer decides the claim. We pursue what the policy entitles you to and tell you how it is moving.