What Is in the Insurance Clause of a Commercial Lease?

Written by William Paull, Co-Founder & Account Director · 48 min read

The short version

• An insurance clause is a promise you made to the other party, not a policy. Your insurer was not in the room when it was drafted and is not bound by a word of it. Nothing in a lease creates cover.
• There are six questions to ask of any insurance clause, and most people ask only the first. What a lease leaves out changes the bargain as much as what it puts in: in three Queensland commercial leases we hold, three of the six have no clause answering them at all.
• "Note the landlord's interest" and "name the landlord as an insured" are different instructions with different effects, and a policy can do one while the lease asked for the other. In our experience a notation is free.
• A certificate of currency and a certificate of insurance are treated across the market as the same document, and we do not treat them that way. We will not issue a certificate of currency until the policy is paid and the cover is confirmed in force, which is why an interested party asking for one is asking a second question as well as the first.
• Two clauses cost money and almost nobody reads them: the one making the tenant reimburse the landlord's excess, which in the leases we hold bites whatever caused the loss, and the one letting the landlord take out the insurance and bill it as rent, which the leases we hold do not have at all.
• Complying with the lease is not the same as being properly insured. A lease minimum is a floor written by the other side's lawyer, and it can sit below what the business actually needs.
• A clause you cannot comply with is a live breach, not a technicality. It is cheap to fix before signing and expensive to find at claim time.

What is in the insurance clause of a commercial lease?

Quick answerSix questions. What the landlord must insure, what the tenant must insure and to what limits, whose name has to be noted on whose policy, what each side gives up against the other after a loss, who pays the excess when the landlord claims, and what happens if the tenant does not take the cover out. Each one can be complied with or breached on its own, and not every lease answers all six: in three Queensland commercial leases we hold, three of those questions have no clause at all.

Two things this page is not, so you can go straight to the right one.

It is not about who ultimately pays for the building policy. That question, landlord or tenant, outgoings, gross lease or net lease, is answered in full on Who Pays for Building Insurance on a Commercial Property?, including the case where the lease says nothing about insurance at all.

It is not a list of what a tenant has to hold. That list, and what it means for a business renting premises, is on For Business Owner Tenants.

This page is about the clause itself: how it is built, what each part does, and how to tell whether the policy you already hold actually answers it.

Here is the thing worth understanding before any of the detail. An insurance clause in a lease is a contract between a landlord and a tenant, not a contract with an insurer. Nothing in it creates cover, changes a policy wording or obliges an insurer to do anything. What it creates is a promise: I will hold this cover, at this limit, on these terms, and I will prove it to you.

That gap is where the trouble lives. A tenant can sign a lease promising something no policy in the market provides, a landlord can accept a certificate that does not evidence what the clause asked for, and both can be entirely satisfied with the paperwork until somebody claims. So the useful exercise is not reading the lease. It is reading the lease and the policy schedule next to each other, part by part, and asking whether the second one does what the first one promised.

The six questions to ask of a lease insurance clause, and the ones a lease leaves out

Quick answerA commercial lease insurance clause is best read as six questions rather than as six parts every lease contains: the landlord's insurance, the tenant's insurance, the notation requirement, the release and waiver, the tenant's liability for the landlord's excess, and what happens if the tenant fails to insure. Asking all six is what turns a page of dense drafting into a short checklist, and the questions a lease does not answer matter as much as the ones it does.

Use the table below as a set of questions rather than as an anatomy. We read three Queensland commercial leases we hold against it, all drafted from one law firm's precedent, and three of the six were not there: no covenant by the landlord to insure the building, no mutual release and no promise to make either insurer give up its right to chase the other party, and no right for the landlord to take out the cover and bill it. None of those absences is neutral. A missing landlord covenant means nobody has promised the tenant the building will be insured at all; a one-way release means only one side has given something up.

One observation about that structure, and it survives every variation above.

Parts one and two get read, and parts three to six decide the outcome. Almost everybody reads what they have to insure. Very few people read who has to be noted on what, who gives up which rights, who pays the excess, and what happens if the cover is not there. Those are the four parts that actually move money, and every one of them can be amended before the lease is signed and none of them afterwards.

What limits does the clause set, and are they the right ones for you?

Quick answerA lease sets minimums, and a minimum is a floor written by the other side's lawyer to protect their position. Ten million and twenty million dollars are the public liability figures you will see, and twenty million is the one we usually find written into a commercial lease. Whether the right figure for a particular business is one of those, or something else again, depends on what that business is exposed to, not on what the lease happens to say.

Two figures in a lease are worth pausing on, and the interesting thing about both is that complying with the lease and being properly insured are not the same test.

The public liability limit. The lease number is a floor. Carrying less than it is a breach from the day the cover drops, whatever anyone thinks about whether the figure is sensible. Carrying exactly it is compliance, and compliance is not the same as adequacy: if a claim exceeds the limit, the excess is the business's to fund, and the landlord's lawyer was not thinking about that when they picked the number. Twenty million dollars is the figure we usually see written in, and ten million turns up as well. It is also the figure in all three of the Queensland commercial leases we hold, in each case as a limit of not less than that amount arising out of a single incident. In our experience the right limit is the one the business's own exposure calls for, which can be either of the two common figures depending on what that business does, so what the lease asks for is the start of that question rather than the end of it. Why the numbers are what they are, and what sits behind them, is on Public Liability Insurance, and what the cover costs is on what public liability insurance costs.

One technical point in the same clause is easy to miss: a lease usually says "for any one occurrence", but public liability limits are commonly written per occurrence while product liability limits are commonly an aggregate for the whole policy year, so a combined public and products figure in a lease and the same figure on a policy do not always mean the same thing. That distinction is explained on Product Liability Insurance.

The loss of rent minimum. Where part one of the clause does put a building insurance covenant on the landlord, it often names a minimum period for the loss of rent cover, and where a period is named, twelve months is a common one. Plenty of leases name no period at all, and none of the three Queensland commercial leases we hold does, because none of them obliges the landlord to insure in the first place. Our default is eighteen months, we recommend twenty-four wherever we can, and twelve is the floor we place only on a client's express instruction, for the simple reason that a substantial commercial building is rarely designed, approved, demolished, rebuilt and re-tenanted inside a year. So a landlord who insures to a lease minimum has complied with the lease and may still be short, and a landlord whose lease sets no minimum has nothing to comply with and exactly the same exposure. It is the clearest example on this page of a lease requirement being a floor rather than an answer. How to size the period properly is in the commercial landlord's insurance guide.

What does "note the landlord's interest" actually do?

Quick answerIt records on your policy that the landlord has a stake in the insured risk. It is an administrative change rather than a change to the cover, in our experience it is free, it is normally the only way the landlord's name appears on your certificate of currency, and it is not the same as making the landlord an insured. Leases use "noted", "named" and "insured" as though they were interchangeable. They are not, and a policy can comply with one while the clause asked for another.

Other pages on this site tell you what a notation is not: being noted on somebody else's policy is a long way short of being covered by it, and a landlord relying on a tenant's policy is relying on cover they do not control. Both are true and both matter, and they are on Property Owners Liability and in the commercial landlord's insurance guide.

This page is about the other half: what a notation positively does, and how to get it right.

It is an administrative change, and in our experience it is free. A notation records who has an interest in the insured risk. It does not alter what the policy insures, what it excludes or what it pays, and on the policies we place it does not change the premium. So a landlord asking to be noted is generally asking for something that costs nothing to give, which is worth knowing before the request is treated as a negotiation.

It is how the landlord's name reaches the certificate. This is the practical reason the clause exists. A landlord asking to be noted is usually asking for a document with their name on it, and the notation is what puts it there. If the interest is not noted, the certificate cannot show it, and the tenant is technically in breach of a clause they thought they had satisfied.

The name has to be exactly right, including the capacity. This is where notations fail, and it fails quietly. Where a landlord holds the property through a trust, the entity has to be noted as trustee, not simply by its own company name. A trading name is never a substitute for the registered entity. A notation in the wrong name evidences nothing, and it is the single most common defect we find when we check one.

A policy can carry more than one, on different sections. A tenant can have a financier noted on the plant section and a landlord noted on the liability section at the same time. They do not compete and one does not imply the other.

Being noted is not the same as being an insured. This is the part the lease drafting blurs. Under Australian insurance law, a person who is specified or referred to in the policy, by name or otherwise, as somebody the benefit of the cover extends to has a direct right to recover from the insurer, even though they never signed the contract. That is a real, substantive right, and it is what a landlord asking to be "named on the policy" is generally after. A bare notation is a different thing: the legislation does not use the word "noted" at all, so whether a notation carries any right to recover turns on the words the policy actually uses, not on the fact of the notation. Australian courts have looked at clauses of that kind and the answer has turned on the wording in each case. If the clause asks for one and the policy does the other, somebody has to notice.

And even the real right comes with the tenant's baggage attached. A landlord who does have a right to recover under a tenant's policy takes it subject to the same defences the insurer would have against the tenant, including defences about the tenant's own conduct. So a landlord relying on a tenant's policy is relying on the tenant having disclosed properly, paid the premium and complied with the conditions. That is the reason the landlord's own property owners liability cover exists, rather than a landlord simply riding on the tenant's.

And part four of the clause, sitting right beside all this, costs the tenant something. Some leases include a mutual release: each party gives up the right to sue the other for damage its own insurance covers, and each promises to try to get its insurer to give up the same right (a lease may call this a waiver of subrogation). Subrogation is simply the insurer's right, after paying a claim, to go after whoever caused it. Giving that right away is a promise only the insurer can make, so a tenant who signs the clause has promised to obtain something they do not control, and it needs confirming with the insurer rather than assuming.

The other shape is a one-way release, and it is easy to read past. In all three of the Queensland commercial leases we hold there is no mutual release and no waiver of subrogation anywhere. What sits in their place runs in one direction only: the tenant releases the landlord, and the tenant separately indemnifies the landlord, carved out only for the landlord's own negligence or default. Nothing runs the other way. A tenant reading "release" and assuming it is mutual has read the opposite of what the clause does, and the check is a short one: read which party is releasing which.

The four questions worth putting to whoever arranges the cover:

• Does the clause ask for the landlord to be noted, named as an insured, or both?
• Does the schedule show the landlord the way the clause asked, in the correct legal entity name and the correct capacity?
• If the landlord has been made an insured on a liability policy, can each of you still claim against the other, or has that been excluded?
• Does the clause ask for a waiver against the landlord, and has the insurer actually agreed to give one?

None of that costs anything to ask, and it takes a phone call. What it avoids is the version where a certificate has been produced every year for six years, everybody has been satisfied, and the wording never did what the clause asked.

Who pays the excess on the landlord's insurance claim?

Quick answerOften the tenant, and it is written into the lease rather than the policy. A common clause makes the tenant reimburse the landlord's excess where the claim arises from the tenant's act, default or negligence. That fault trigger is not universal: the three Queensland commercial leases we hold carry none, so any claim the landlord makes on a policy covering the premises during the term brings the excess back to the tenant, whatever caused it. It is a real cost, and it belongs to a policy the tenant has never read.

This is the clause that surprises people, because it moves a cost the tenant cannot see and cannot control. The shape of it is simple. The landlord holds the building policy, and that policy carries an excess, which on a commercial building is not a small figure and can be much larger where the building has a claims history or sits in a flood or cyclone area. Something happens, the insurer pays the claim less the excess, and the lease then makes the tenant hand the excess back to the landlord. Many leases characterise that payment as additional rent so the landlord can enforce it the same way as rent.

Whether the tenant's fault is part of the test is the first thing to read, and it is easy to assume it is there. In the three leases we hold it is not. What triggers the clause is the landlord making a claim, not the tenant causing one, and the clause says expressly that it applies whether or not the tenant contributes to outgoings. On that drafting a storm claim on the premises, a burst pipe in the ceiling above them, or an impact by a passing vehicle all end with the landlord's excess on the tenant's invoice.

Three more things follow, and none of them is obvious from the tenant's side of the desk.

The tenant is exposed to a number they have never seen. The excess is set on the landlord's policy at the landlord's renewal, and it can move without the tenant being told.

A rising excess is a rising tenant liability. Where a landlord accepts a higher excess to bring a premium down, the saving is the landlord's and the additional exposure lands on the tenant under this clause. That is worth knowing, and it is worth asking about, before it happens rather than after.

The tenant's own liability policy may respond, and may not. A liability policy generally answers legal liability the insured would have had anyway. A liability the insured picked up by signing a contract can be treated differently, and many wordings limit cover for liability assumed under contract. Whether a particular policy answers this particular clause is a wording question, and it is the sort of thing worth having read before the lease is signed. How excesses work generally, and the trade-off in choosing one, is on insurance excess explained.

Want to know whether your own liability policy answers a clause like that? It takes one call to find out.

What happens if the tenant does not take the insurance out?

Quick answerMany commercial leases let the landlord fix it and send the bill. If the tenant fails to effect or maintain any insurance the lease requires, the landlord may take out that insurance and recover the premium as additional rent, and doing so does not waive any other remedy for the breach. So the cover appears, the cost lands on the tenant, and the breach stays on the record. Not every lease has that clause: the three Queensland commercial leases we hold give the landlord no step-in right at all, and instead name insuring as an essential term, which makes a lapsed policy a breach the landlord may treat as repudiation.

Where the step-in clause is there, it is a sensible clause from the landlord's side and an expensive one from the tenant's, for three reasons.

The policy is bought to protect the landlord. A landlord stepping in buys what satisfies the clause, not what suits the tenant's business. It is unlikely to carry the sections the tenant actually needs, and the tenant is paying for it.

The price was never negotiated. The landlord has no reason to shop it and every reason to arrange it quickly.

The breach is not cured by the landlord fixing it. These clauses are almost always expressed as being without prejudice to the landlord's other rights, so the default still happened, and on a serious or repeated default that can matter at renewal or on an assignment.

And a lease with no step-in clause is not the softer version. In the three Queensland commercial leases we hold the landlord cannot take the cover out and bill it, and what those leases carry instead is an essential terms clause: a short list of the covenants whose breach the landlord may treat as repudiation of the whole lease. Insuring is on that list, alongside paying the rent, the permitted use, maintenance and repair, and assigning without consent. So the question worth asking is not only whether the landlord can step in, but whether insuring is named as an essential term, because that is the difference between a lapsed policy costing money and a lapsed policy giving the landlord a reason to end the lease. Three of the eleven essential terms in the leases we hold bear directly on insurance: insuring itself, the use of the premises, which is what a change of use trips and what triggers the premium-increase recovery in the conduct clause, and maintenance and repair, which is what a lapsed six-monthly service contract trips. An unserviced air conditioner sits on the same list as an unpaid insurance policy.

The same shape turns up in the two situations that lapse cover without anybody deciding to: a policy not renewed because an invoice went unpaid, and a limit reduced at renewal to save money. Reducing a limit below what the clause requires breaches it just as effectively as cancelling, and it happens far more often, because it does not feel like a decision about the lease at all.

What can you not do under the lease without affecting the insurance?

Quick answerAlmost every commercial lease says the tenant must not do anything at the premises that voids the landlord's policy, increases the premium, or breaches the insurer's requirements, and must pay any increase their use causes. It is rarely read, largely because the tenant has never been shown the policy they are being asked not to prejudice. In our experience the two obligations most often broken are not the ones people expect, and neither of them is a decision anybody made.

The maintenance obligation, and air conditioning above all. A lease puts the servicing of plant on somebody, and where it sits with the tenant, the tenant frequently does not realise it is theirs. Air conditioning is the one that goes wrong most: the servicing is not kept up, and the landlord does not follow it up either, so nobody notices until the unit fails or a claim raises the question. It matters on the insurance side too, because the maintenance conditions can sit in the lease itself. In the three Queensland commercial leases we hold they do: unless the landlord says otherwise, the tenant must service the fire prevention, extinguishing, safety and detection equipment at least every six months, must hold a service contract with an approved contractor attending any air conditioning at least every six months, and must produce the service contractor's written report on request. All three name a failure to take out or maintain those service contracts as one of the express triggers of the tenant's indemnity of the landlord, and a failure that traces back to servicing that was never done is a harder conversation than one that does not. The short fix is to read what the lease puts on you and diarise it.

Damage the tenant causes to the building through its own operations. The second one is a tenant damaging the landlord's building by running its business normally, without realising that is what is happening. A common example is a cafe fitting a commercial exhaust: the exhaust discharges against a wall or over the roof it vents through, and over time the discharge damages the wall or the roof surface. The lease makes that the tenant's to repair, the tenant did not know it was being caused, and it is gradual rather than sudden, which is exactly the kind of damage property policies are least likely to answer. Anything that vents, drains, heats or vibrates is worth a look on that basis before it becomes a repair bill.

The clause itself has other triggers, and they are rarely dramatic either.

A change of use. The most consequential of them. A policy is rated on what the building is used for. A tenancy described to the insurer as light storage that becomes a workshop, a commercial kitchen or a spray booth is a different risk, and the insurer was not told. That is a disclosure problem for the landlord and a breach of the lease by the tenant. The right sequence is to tell the landlord first and let them tell their insurer, before the change happens rather than after.

Storing something the wording excludes. Flammable liquids, certain chemicals, expanded polystyrene, batteries in volume. Many building wordings carry conditions about what may be stored and how, and a tenant who has never seen the wording cannot know them.

Contractors doing hot work. Welding, grinding and torch work on a roof are classic causes of fire loss, and many wordings carry a hot work permit condition requiring the area to be cleared, a watch kept and the site checked afterwards. A tenant arranging the contractor is the party who has to make that happen.

Protections that stop working. A fire door propped open, an alarm not set, a sprinkler head blocked by stock, a security condition nobody passed on to the staff who lock up.

Leaving the premises empty. Most property wordings restrict cover once a building is unoccupied beyond a set period, commonly measured in weeks. A tenant moving out early, or a landlord between tenancies, needs to tell the insurer rather than find out afterwards.

And the biggest cost of conduct is not in the insurance clause at all. There are three doors, one cause, and no seat at the table. In each of the three Queensland commercial leases we hold, the tenant's own conduct reaches the tenant's wallet through the landlord's insurer in three separate places, and they sit in three different parts of the lease, so they are almost never read together. The excess: where the landlord claims on a policy covering the premises, the tenant reimburses it. The rent abatement: all three abate the rent while damage makes the premises unusable and reduce it in proportion while the premises are only partly usable, with an exit for either side where the landlord notifies that repair is impractical and an exit for the tenant if the landlord has not repaired within three months, or within such further time as the landlord reasonably requires given the extent of the damage, the difficulty of repair and what materials and labour can be got. That relief falls away entirely where the tenant's negligence, default or wilful act caused or contributed to the damage, and equally where the landlord's insurer refuses indemnity or reduces what it pays because of an act or default of the tenant or the tenant's people. And the repair itself: where insurance money that would normally have paid to repair damage is not paid because of some act, omission, neglect, default or misconduct of the tenant, the tenant's employees or invitees, the tenant is responsible for that repair, and that one sits in the maintenance clause rather than the insurance clause, which is precisely why nobody reads it. The tenant is not a party to any of the three decisions and never sees the policy they turn on. It is also why a six-monthly service contract is not housekeeping: a lapsed one is exactly the sort of act, omission or neglect all three doors are hinged on.

The practical problem is that a tenant usually cannot comply with this clause without knowing what the landlord's insurer required, and the tenant is almost never shown it. Asking the landlord what conditions their insurer has imposed is a short, fair question, and it is the sort of thing an account manager will ask on a client's behalf.

What does a certificate of currency prove, and what does it not?

Quick answerIt is a one page document confirming a named policy was in force on the day it was issued, for a stated period, with stated limits. It is evidence that cover exists, not evidence that the cover matches the clause. There is no legal standard for what it has to contain, so what appears on it is what the issuer chooses to put there: we will not issue one until the policy is paid and the cover is confirmed in force, and not every issuer draws that line in the same place. It does not show the exclusions, the endorsements or the excesses, and it stops being true the moment the policy changes.

Almost every commercial lease has an evidence clause, and this is the document that satisfies it. It is genuinely useful and it is routinely over-relied on, so it is worth being exact about what it is.

Start with something most people assume the other way round: for a commercial lease there is no legal standard for what a certificate of currency has to contain. It is a market document, and what appears on it is what the insurer or broker chooses to put there. So two certificates for two identical policies can look quite different, and neither is wrong. The two names, certificate of currency and certificate of insurance, are used across the market as though they were interchangeable, and nothing anywhere makes one of them mean something the other cannot.

What a certificate normally shows. The insured's legal name, the insurer, the policy number, the class of cover, the period of insurance, and the limit or sum insured. Often the interested parties noted on the policy. Whether it says anything about the premium having been paid depends entirely on who issued it, which is the subject of the next two paragraphs.

What it does not show. The exclusions. The endorsements, which are the changes the insurer wrote onto the policy. The excesses. The conditions the insurer imposed. Whether the sum insured on the fit-out is adequate. Whether the limit is per occurrence or in the aggregate. Whether what the business actually does is covered by the wording. Everything that decides a claim sits in the schedule and the wording, and a certificate summarises neither.

The line we draw, and why an interested party cares about it. We will not issue a certificate of currency until the policy is paid and the cover is confirmed in force. That is deliberate rather than administrative: an unpaid policy is a policy that can be cancelled out from under whoever is relying on it, so a document that says nothing about payment leaves the party relying on it with a risk it cannot see. That is one reason a landlord, a financier or a head contractor may ask for a certificate of currency specifically rather than for evidence of insurance. Because the contents of the document are not standardised, not every issuer draws the line where we do, so where the distinction matters it is worth asking what the certificate in front of you actually evidences.

The one case our line does not touch is premium funding. 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. What waits on a payment is a premium that has not been paid and is not funded. How premium funding works sets out the mechanism.

And it is a snapshot. A certificate issued in July says the policy existed in July. If the limit is reduced in September, a section cancelled, or the policy allowed to lapse, the certificate is still sitting in the landlord's file saying everything is fine. That is not dishonesty, it is what a snapshot is. It is a second reason the notation matters: a noted party is generally told when a policy is cancelled or materially altered, and the certificate cannot tell anybody anything.

How often a fresh one has to be produced is a drafting question, and it is worth reading. Some leases require a certificate at each renewal, which puts the obligation on a calendar. In the three Queensland commercial leases we hold the obligation bites on request only, with no renewal trigger at all, which puts the obligation on the landlord remembering to ask. That is how a tenancy can run for years with everybody satisfied and the notation never once checked, and it is why the lease's own evidence clause is a better guide to what is really happening than the file of certificates.

There is a side of this that tenants raise with us and landlords rarely think about. A certificate of currency is a document handed to a third party, and it can disclose more than the fact of cover. Depending on how it is produced it can show what sections a business carries, what its tools or stock are insured for, and sometimes what it paid. A business handing one to a landlord, a principal or a head contractor is entitled to have it show what the clause actually requires and no more, and that is a fair thing to ask the broker who issues it. That is how we produce ours: a certificate is set to what the person asking has to satisfy and nothing beyond it, because a schedule of everything a business insures, and for how much, should not be circulating on paper we no longer control.

Four things worth checking on a certificate, whether you are producing one or receiving one. The legal entity, which has to be the entity that holds the lease, because trustee structures and related companies are the usual source of a mismatch. The period, which on a renewal request means the coming year rather than the one just finished. The limit against the clause, read against the lease rather than against memory. And every cover the clause required: a clause asking for liability, glass and the tenant's own property needs a certificate evidencing all three, and one for the liability policy alone answers a third of it.

The plain definition of the document, alongside the rest of the vocabulary a lease uses, is in our insurance terms glossary.

How do you tell whether the policy you hold answers the clause?

Quick answerBy reading the schedule, not the certificate. Four checks do most of the work: the insured entity against the lease, the situation and occupancy description against what actually happens at the premises, each required section against each part of the clause, and the sums insured against what they are supposed to cover. It is a half hour job and it is where nearly every mismatch turns up.

Check the insured entity. The name on the policy has to be the entity named as tenant, or as landlord, in the lease. Where a business trades through one company and holds the lease through another, or where a building is held by a trust or a self managed super fund, this is the check that finds it.

Check the situation and occupancy description. Every commercial policy schedule describes the risk it is insuring, and that description is what the insurer priced. This is also the fastest way to tell what kind of policy you are actually holding. A schedule describing a property owner risk with a tenant underneath it is a landlord's policy: it answers claims by people coming onto the property, and it covers nothing at all about the business operating inside. A schedule describing the business is a different policy answering a different clause. Where one entity owns the building and another runs the business from it, that is often two policies rather than one, and where the building sits in a self managed super fund it is always two. The landlord's side of that is on Property Owners Liability.

Check each required section against each part of the clause. Liability at the required limit and on the required basis. Glass, if the clause names it. The tenant's own property and fit-out. Workers compensation and business interruption, where the clause requires them. A missing section is a breach even where the policy is otherwise excellent.

Check the sums insured against what they have to cover. This is where the fit-out gap actually comes from, and it is arithmetic rather than an argument. A building replacement valuation values the building. Its own assumptions expressly exclude the lessee's fixtures, fittings, plant and equipment, along with contents, loss of rent and liability. So the building figure never contained the fit-out in the first place, whoever the lease says should insure it. If nobody puts a separate sum insured against the fit-out, there is no cover for it anywhere, and no amount of reading the lease will produce one. Who insures it is dealt with in the commercial landlord's insurance guide and, for shops, on Retail Insurance.

What we do with a lease. We do not insist on seeing it. When a client gives us a copy we read it, and we set the covers to match what it actually says rather than assuming ownership decides. For commercial landlords that means matching the building policy to what the lease keeps with the owner. For business tenants it means checking that the limit, the glass, the fit-out and the notation line up with what was promised. For owner-occupiers who hold the building in one entity and trade from another, it means checking the lease between the two entities exists and is current, because that is what makes loss of rent respond at all, and we raise it as a matter of course rather than waiting to be asked.

And if the check finds a gap, fixing it is usually a short job rather than a project. This is the part people brace for and it is rarely the hard part. Almost every gap a lease clause exposes is one of a short list: property, glass, business interruption, air conditioning breakdown, or property owners liability. Those are the great majority of what a lease sends us, and arranging or amending them is generally same day or next business day work. So a tenant sitting on a request from a landlord, with a deadline on it, is usually a much smaller problem than it feels like at the point of reading the clause. The thing that costs time is not the fix. It is not knowing there is a gap.

A note on what we will and will not do with a lease. We read the insurance clause to work out which sections of insurance you need to hold, so that the certificate of currency you hand your landlord actually answers what they asked for. That is the job, and it is deliberately a narrow one. We do not give a verdict on what your lease means, we do not advise on the consequences of a breach, and we are not the people to tell you whether a clause is reasonable. That is your solicitor's work, and there is no overlap between the two jobs.

What happens when the clause is impossible to comply with?

Quick answerIt happens, and usually because a lease template is older than the insurance market it describes. A clause can require a cover the market does not write in that form, a limit that is hard to place for that trade, insurance over property the tenant does not own, or a promise only an insurer can give. An impossible clause is still a breach, so the fix is to change the words before signing.

Two of those shapes are worth spelling out, and the last of them turns up in the FAQ below.

The cover does not exist in that form. "Plate glass insurance" is the everyday example and it is harmless: plate glass is an older term for a way of making glass, and modern glazing is generally float, toughened or laminated rather than plate, so a clause asking for plate glass insurance is in practice asking for the glass cover the market writes today. It is worth confirming rather than assuming that the policy answers it, and what glass cover actually reaches is dealt with in the glass question in the FAQ below. A harder version of the same problem is a clause requiring insurance against a peril that standard wordings exclude.

The limit is difficult to place for that trade. A template written for a shopping centre can demand a liability limit that is genuinely hard to obtain for a small operator in a hazardous occupation, or demand products cover in a form that occupation cannot get.

What to do about it, in order:

1. Find it before signing. This is the whole ball game. Insurance clauses are more negotiable than most people assume, and an amendment agreed at heads of agreement stage costs nothing.
2. Ask for the words to be changed to what is actually available, and where they cannot change, get the position recorded. Landlords are generally reasonable about this, because the point of the clause is protection rather than phrasing. Where the wording has to stay as it is, a short exchange of emails confirming what has been agreed, kept with the lease, is better than a clause nobody can satisfy.

A clause that is merely silent is a different problem with a different answer, and it is dealt with on who pays for building insurance on a commercial property.

Can the lease help fix an underinsured building?

Quick answerYes, and which part of the lease does it depends on the kind of lease: on a gross lease the rent review is the recovery, and on a net lease the tenant is already funding the correction through outgoings.

If you are the landlord rather than the tenant, this next part is yours. Most commercial buildings we see are insured for less than they would cost to rebuild today, correcting the sum insured moves the premium, and the lease decides who feels it: on a gross lease the landlord carries the outgoings and the rent review is where the correction is recovered, while on a net lease the pass-through already is, so the useful step there is telling the tenant what changed and why. Your lease decides what is actually recoverable and when, and rent reviews have their own rules and timing, which are a matter for you and your property adviser rather than your broker. The figure itself is not something to guess at: a desktop building replacement valuation settles it, and we commission one at no cost to you, for our purposes as your broker, to inform the advice we give you.

The fuller version of this conversation, including what to do when the review is not due yet, is on why your commercial insurance went up, and why the gap is so common in the first place is on Underinsurance: The Biggest Risk to Commercial Building Owners.

Want the rebuild figure in front of you before the next review comes around? One phone call starts it.

Does it change if the premises are a strata unit?

Quick answerYes, and mostly by what the lease does not say. In a strata scheme the building is commonly the body corporate's to insure, funded by the levies the lot owner pays, so a lease of a strata unit may carry no building insurance in it at all. Whether the body corporate must insure the building is decided in Queensland by how the scheme was subdivided: where the lots sit in a building format or volumetric format plan the body corporate must insure the building, and where they sit in a standard format plan and the buildings are detached it may not insure the building at all, so check which plan your scheme is on. Either way the body corporate's policy is not the tenant's: it does not reach the tenant's fit-out, stock or liability, and the boundary of the lot is what decides where the tenant's public liability stops and the body corporate's starts.

The three commercial leases we hold make the contrast plainly, because one of them is a strata unit and the other two are standalone commercial buildings.

In the two standalone leases, the building policy is the landlord's and the lease says how it gets paid for. Outgoings is defined at length and it expressly includes the provision of insurance cover for the land and the building, including fire and the other usual risks, public risk, glass and loss of rent. That does not oblige the landlord to insure, as part one above explains, but it does put the machinery to recover the premium from the tenant into the lease, whether or not the landlord switches it on.

In the strata lease, outgoings is one line and there is no insurance in it. It is defined as the charges, levies, premiums, rates or taxes payable by the landlord as owner of the lot, and the lease simply says the landlord must pay them. There is no insurance limb, because in that scheme the building is the body corporate's to insure and is funded by the levy, and the levy is the lot owner's cost rather than the tenant's. That is not automatic in every strata scheme: where the lots sit in a standard format plan and the buildings are detached the body corporate may not insure the building at all, so check which plan your scheme is on before you read a silent lease as proof the building is covered. The body corporate's policy is never mentioned in the lease at all. So a tenant of a strata unit can read the whole lease and never meet a building insurance cost, and that is the drafting working correctly rather than an oversight.

What the body corporate's policy does not do is cover the tenant. It answers the common property, and the building where the scheme has to insure it. It does not reach the tenant's fit-out, stock or liability, and none of those becomes the body corporate's problem because the building is insured. The tenant's own public liability in the strata lease we hold covers the tenant's occupation of the lot, so common property sits outside it and the body corporate's own public liability is what answers there. Where the lot boundary runs is therefore an insurance question and not only a title one.

And the by-laws are a separate compliance stream from the insurance clause. In the strata lease we hold the tenant must comply with the by-laws and indemnify the landlord if it does not, and the body corporate turns up again in the consents the tenant needs for its works and signage and in the signage fees it pays, and that sits outside the insurance clause entirely, so a tenant who has checked the insurance clause has not checked it. What a lot owner is left holding, and where the body corporate policy stops, is on Commercial Strata Insurance, and who pays for what in a strata scheme is on who pays for building insurance on a commercial property.

Does a retail lease change any of this?

Quick answerYes, in ways set state by state rather than nationally, because retail tenancies carry their own legislation on top of the lease, whether a particular tenancy counts as a retail shop lease at all is a legal question rather than an insurance one, and the drafting itself can be aimed at that answer: one of the commercial leases we hold limits the permitted use so that the use cannot make the lease a retail shop lease, which is a reminder that knowing which regime a lease sits under comes before reading its insurance clause.

In Queensland, under the Retail Shop Leases Act 1994 (Qld), a tenant on a retail shop lease is not liable to pay outgoings, and building insurance premiums are outgoings, unless the lease specifies what they are, how they are apportioned and how the landlord may recover them, so whether your tenancy is a retail shop lease in the first place is worth putting to a property solicitor.

FAQ

My lease says the landlord has to be noted as an interested party on my policy. Does that cost anything?

In our experience, no. Noting an interest is a routine administrative change to the policy record rather than a change to the cover, so on the policies we place it is free and it does not change the premium. It is also the only way the landlord's name reaches your certificate of currency, which is usually what they are actually asking for. What matters most is the accuracy: the landlord's registered legal entity, in the right capacity, spelled exactly as the lease has it.

The landlord is a company acting as trustee of a trust. Does the policy have to say that?

Yes, and it is the detail that most often goes wrong. Where a landlord holds the property as trustee, the notation has to record the entity in that capacity rather than just the company name or the ACN. A notation in the wrong name evidences nothing, and a trading name is never a substitute for the registered entity. It is a short thing to correct, and it is worth checking the day the notation is arranged rather than the day the landlord asks for the certificate.

Our lease makes me reimburse the landlord's excess if the damage was my fault. Is that normal?

It is a common clause, and many leases characterise the reimbursement as additional rent so the landlord can pursue it the same way as rent. The part most people miss is that the fault condition is not always there: in the three Queensland commercial leases we hold the trigger is the landlord making a claim, not the tenant causing one. Who pays the excess on the landlord's insurance claim sets out what that means and what to ask before you sign.

What happens if my landlord takes out insurance because I did not?

Many leases allow it, and allow the landlord to recover the premium from you as additional rent, and doing so usually does not cure the breach. Some leases give no such right at all, which is not the softer option: in the three Queensland commercial leases we hold, insuring is an essential term, so a lapsed policy is a breach the landlord may treat as repudiation. What happens if the tenant does not take the insurance out has both cases in full.

My lease requires glass cover. Is it actually worth having, or is it just a box to tick?

Where a lease requires glass cover, not holding it is a breach of the lease, and a breach of an insurance clause is not a technicality. Glass is generally an inexpensive section to add, so cost is rarely the deciding factor. What is worth checking is not whether to hold it but what it reaches, because there is no fixed definition of glass cover and it is set by the policy wording: internal glazing, mirrors and signage are the three worth confirming rather than assuming. And the lease can ask for glass twice without announcing it. In the three Queensland commercial leases we hold it does: the tenant must insure the glass and, separately, must replace or repair all broken glass in the premises as a maintenance obligation. The second obligation does not go away because the first one is satisfied, so a breakage that falls outside the glass section still leaves the replacement with the tenant.

My lease says the loss of rent cover must run for twelve months. Is that enough?

It satisfies the lease, and for a substantial commercial building it is often not enough: designing, approving, demolishing, rebuilding and re-tenanting rarely fits inside a year. What limits does the clause set sets out the period we work to and why, and sizing it is covered in the commercial landlord's insurance guide.

I want to drop my limit at renewal to save money. Does the lease stop me?

If the lease specifies a minimum, reducing below it puts you in breach from the day the cover changes, and it does so just as effectively as letting the policy lapse. Where the premium is the real problem there are usually other levers worth testing first, and insurance excess explained covers the most common one. The same point in context is in what happens if the tenant does not take the insurance out.

The lease asks for something my insurer will not agree to. What now?

Get the wording changed rather than signing and hoping. The usual candidates are a waiver the insurer declines to give, a landlord added as a named insured where the insurer will only note an interest, and a promise about cancellation notice that only the insurer can make. What to do about it, in order, is in what happens when the clause is impossible to comply with.

My lease says I must insure "for the full replacement value". How do I know what that is?

Not by using last year's figure with a bit added. Full replacement value means what it would cost to build or buy the thing again today, including professional fees, demolition and removal, and the compliance upgrades a rebuild now has to meet. It matters because the co-insurance clause in most policies works two different ways depending on the size of the loss. On a partial loss it reduces the payout in proportion to how far short the sum insured was. On a total loss it reduces nothing: you receive the full sum insured, and if that figure is below the real cost, the shortfall is yours to fund. The arithmetic is on the co-insurance clause explained, and how to arrive at the right figure for a building is in the building sum insured guide.

Related content

Product pages: Public Liability Insurance, Property Owners Liability, Commercial Building Insurance, Commercial Landlords Insurance, Retail Insurance, Office Insurance, Commercial Strata Insurance, Business Interruption Insurance.

Who you are: For Business Owner Tenants, For Commercial Building Owners, For Business Owner Occupiers.

Guides: Who Pays for Building Insurance on a Commercial Property?, What Insurance Is Required on a Commercial Building?, The Commercial Landlord's Insurance Guide, How Much Does Commercial Landlord Insurance Cost?, What Public Liability Insurance Costs, Why Did My Commercial Insurance Go Up?, Insurance Excess Explained, The Co-Insurance Clause, How to Calculate Your Building Sum Insured, Insurance Terms Glossary.

Tool: Underinsurance Risk Checker.