Insurance a bank needs for a commercial loan

Key points

• Insure for what a rebuild costs today, whatever the purchase price.
• Make sure the policy names the owner it is meant to protect, with the bank noted.
• A bank figure above the rebuild cost adds premium, not payout.
• Keep the cover running for as long as the loan does.
• A claim that comes up short can put the loan itself under review.

What does a bank make you insure on a commercial property loan?

The bank wants three things from the policy: a sum insured that would rebuild the building, its own interest noted, and a certificate of currency. A certificate of currency records the cover in force on the day it is issued, and it is what the bank asks to see. The schedule, the wording and any endorsements, the changes added to the policy, carry the full terms. Your bank lends against the building, and the insurance is part of its security.

The bank's terms last for the life of the loan. Some facilities add a minimum sum insured or ask for loss of rent cover.

These terms sit on top of your commercial building insurance and do not change what the policy covers. A lease or a body corporate can ask for more again, and what insurance is required on a commercial building goes through those.

Full replacement value is what it would cost to rebuild the building today. What you paid and what a valuer says the building would sell for both include the land. Neither is the figure to insure for. Our guide to calculating your building sum insured shows how that figure is worked out, and construction cost increases in Australia shows why it changes from year to year.

Whose name goes on the policy, and how is the bank noted?

The policy needs to name the people or entities it is intended to protect, whether that is a person, a company, a trust or a self-managed super fund. For a building held in a trust or super fund, that includes checking the trustee's role. We use the ownership and lender details to get those names right. If you hold buildings in more than one entity, our page for commercial property owners shows how each is insured. A super fund that borrows to buy has its own guide, SMSF commercial property insurance.

The bank is noted on the policy as mortgagee or interested party, the terms for a lender with a stake in the building. The notation tells the insurer about that stake. Being noted is not the same as being insured, and the insured is still you. Our guide to what a commercial lease requires you to insure shows how a certificate sets out the difference.

On a policy that comes to us from elsewhere, a missing notation turns up far more often than it should. Sometimes a first mortgagee, the bank with the first loan over the building, was never noted. Sometimes a lender refinanced away from years ago was never taken off. Because the bank's interest is on the public record, a missed notation can usually be put right. It is still not how a policy should read. When you refinance, tell us and we have the new lender noted and the old one taken off.

When can you get a building insurance certificate of currency for settlement?

The time to talk to us is when you sign the contract to buy, so we can check when your cover needs to start. Your certificate of currency follows your premium. If you fund the premium, it follows the funder's payment, and our guide to how premium funding works covers the interest and the instalments.

On most of the business packs we place, a new policy does not cover named cyclone or bushfire damage in its first 72 hours. On some, flood is left out for those 72 hours too. The policy may make an exception if you are replacing existing cover without a gap, or have a contract to buy or lease the property. Tell us the dates while you are arranging the purchase or lease, so we can confirm which exception applies before cover starts.

The bank asks for a fresh certificate at every renewal, for as long as the loan runs. A loss while the policy has lapsed is yours to fund.

What do we do before settlement?

A broker goes through the bank's insurance terms with you. We check the sum insured the bank asked for against the cost of rebuilding the building. We set the policy up with the bank noted and the cover starting on the right day. The certificate of currency then goes to the bank.

What if the bank asks for a sum insured above the rebuild cost?

A building policy pays to rebuild, not to repay the loan. A higher sum insured does not entitle you to more than the costs your policy covers. Before treating the bank's figure as excessive, allow for demolition, professional fees and rising costs during the rebuild. The bank will generally not settle until it holds a certificate showing the sum insured it asked for. When that figure is above the rebuild cost, you are caught between a settlement date and a number you did not choose. The person who sends the email is usually passing on a requirement set elsewhere in the bank, and cannot change it on the call.

We can give you the rebuild figure in writing. What you agree with your lender is between you and the bank. Some owners take the figure back to the bank and get it revisited. More often they insure to it and settle.

Can an underinsured claim put your bank loan at risk?

It can. A major claim that comes up short leaves the security behind the loan worth less than everyone assumed, and the bank can review the loan.

An underinsurance clause can cut a partial claim when the building is insured for less than 80 per cent of what a rebuild would cost. The policy you settle with fixes how that cut is calculated, and which smaller claims, if any, are exempt from it. The figure tested is the one on the policy at the start of the year, and raising it after a loss does not change that claim. The co-insurance clause explained runs the arithmetic for a partial claim and a total loss.

Found a shortfall partway through the year? Raise it with us then, rather than waiting for renewal. We put it to the insurer, asking what the fix would be and how future claims would be treated. If a change is agreed, we check with the insurer where it leaves the underinsurance test, and we look at the figure again when the policy renews.

Frequently asked questions