Written by William Paull
Co-Founder & Account Director
On this page
- Key points
- What does a bank make you insure on a commercial property loan?
- Whose name goes on the policy, and how is the bank noted?
- When can you get a building insurance certificate of currency for settlement?
- What if the bank asks for a sum insured above the rebuild cost?
- What happens if the insurance lapses on a mortgaged building?
- Can an underinsured claim put your bank loan at risk?
- Want the policy set up the way your bank needs it?
- Frequently asked questions
Key points
- Insure for the rebuild, not the price or the valuation.
- Insure in the title holder's name.
- A bank figure beyond the rebuild adds premium, not payout.
- Keep the cover running for as long as the loan does.
- A short claim can put the loan itself under review.
What does a bank make you insure on a commercial property loan?
Your bank lends against the building, and the insurance is part of its security. What it asks for is usually stricter than the law, and it lasts for the life of the loan. Some facilities also set a minimum sum insured or ask for loss of rent cover.
The bank's terms sit on top of your commercial building insurance and do not change what it covers. What a lease or a body corporate can require is on what insurance is required on a commercial building.
Full replacement value is the rebuild cost, not what you paid or what a valuer says the building would sell for. Both of those include the land. The gap between the three numbers is where most underinsurance on mortgaged buildings lives. How to work out a rebuild figure is in our guide to calculating your building sum insured, and why a bank valuation does not tell you what to insure for is on construction cost increases in Australia.
If you own a lot in a strata scheme and the body corporate insures the building, the bank will usually want the scheme's certificate of currency. We can help you get it, and the scheme's valuation date (commercial strata insurance). If the loan funds a building under construction, the cover until it is finished is contract works insurance.
Whose name goes on the policy, and how is the bank noted?
The insured is whoever the loan documents name: a person, a trust, a company or a self managed super fund. The name on the policy has to match the title and the loan. How each ownership structure is insured is on For Commercial Property Owners, and a fund that borrows to buy has its own layer, on SMSF commercial property insurance.
The bank has to be noted as mortgagee or interested party, so the insurer knows it has a stake. Being noted is not the same as being insured. Why, and what a certificate of currency proves, is on what a commercial lease requires you to insure.
A missing notation is one of the things most often wrong on a policy that comes to us from elsewhere: a first mortgagee never noted, or a lender refinanced away from years ago and never taken off. The lender's interest is on the public record, so an insurer facing a total loss can generally find the bank, and a missed notation can usually be corrected rather than being fatal. It is still not how a policy should read.
When can you get a building insurance certificate of currency for settlement?
We will not issue a certificate of currency until the policy is paid and the cover is confirmed in force. If settlement is close, work backwards from the date. A funded premium is paid to the insurer in full on day one and the client repays the funder over the year, so a funded policy is a paid policy and its certificate issues in the ordinary way (how premium funding works).
The bank asks again at every renewal, because the loan obligation is continuous. Each certificate shows what the bank has to see, and nothing beyond.
What if the bank asks for a sum insured above the rebuild cost?
A bank will generally not settle until it holds a certificate showing the sum insured it asked for. Sometimes that figure is more than the building would cost to rebuild, and you are caught between a settlement date and a number you did not choose.
A building policy pays to rebuild, not to repay the loan. Insuring beyond what the rebuild needs buys a bigger premium, not a bigger claim.
Some owners get the bank's number revisited. More often they insure to it and settle. We do not tell you what to agree with your lender, but we can give you the rebuild figure in writing.
What we check: The bank's figure against the rebuild cost, before you reply.
What happens if the insurance lapses on a mortgaged building?
A loss during the lapse is uninsured and entirely yours, and the lapse itself generally breaches the loan.
A mortgagee commonly has power to insure if you have not, though in our experience it is very rarely used, and that cover protects the lender. In Queensland and Victoria its cost is added to your mortgage debt, unless your mortgage says otherwise.
Can an underinsured claim put your bank loan at risk?
Yes. A major claim that comes up short leaves the security behind the loan worth less than everyone assumed. The conversation that follows can include a covenant review, a fresh valuation, a demand to restore the loan-to-value ratio or, at the ugly end, selling another asset to do it.
Every one of the twelve business packs we place has an underinsurance clause that can cut a partial claim. How that arithmetic works is in the co-insurance clause explained.
Want the policy set up the way your bank needs it?
Tell us when you settle, the sum insured the bank has asked for and the entity on the title.
Frequently asked questions
When will Consolidated Insurance Brokers issue a building insurance certificate of currency for settlement?
At Consolidated Insurance Brokers, we issue it once the policy is paid and the cover is in force, not before. A funded premium counts as paid, because the funder pays the insurer the whole premium at the start. The policy also has to be in the right name with the bank noted. Then the certificate goes to your bank.
My bank wants a sum insured above the rebuild cost. Can Consolidated Insurance Brokers change the bank's figure?
No. The figure is the bank's, and Consolidated Insurance Brokers does not advise on it: what you agree with your lender is between you and the bank. What we can do is put the cost to rebuild in writing for you, so you have a second number to take into that conversation.
Does Consolidated Insurance Brokers charge to note my bank on the building policy?
In the experience of Consolidated Insurance Brokers, noting a lender is free, and on the policies it places it does not change the premium. It changes the policy record, not the cover: the building is insured on the same terms, with the bank recorded as having an interest in it.
Can Consolidated Insurance Brokers check whether my lender is noted on a policy I already have?
Yes. Consolidated Insurance Brokers checks it as one of the first things on any existing building policy you bring us. We put the schedule beside your title and loan documents and confirm two things: the insured matches the owner on the title, and the bank noted is the one that holds your loan now.