Written by William Paull
Co-Founder & Account Director
On this page
Do I need to buy separate fire insurance for my commercial building?
No. Fire is a core insured event inside commercial building insurance. The standalone "fire policy" is largely a thing of the past. After a fire, two things decide what you are paid: what the building section covers, and whether your sum insured could rebuild the building.
What the building section responds to after a fire: the structure, permanent fixtures and fittings, and external improvements, repaired or rebuilt after the event. What it does not cover: your contents and stock, a tenant's property, and the income you lose while the building is out of action. Those are separate covers, and a serious fire tests them all at once.
On the commercial building policies we place, the building cover is accidental damage, so fire is covered unless the wording excludes it. That cover takes in your own fixtures, floor coverings, plant, plumbing and wiring. Some policies sold direct list the events they cover instead, and fire is on the list. The glossary explains the difference.
Fire cover can stop when a building sits empty. 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. On most of them, a building that is partly occupied is not treated as empty. If a tenancy is ending and the building may sit empty for a while, you need the insurer's agreement in writing before that period runs out.
A new policy can start with a gap. On most of these policies, bushfire is excluded for the first 48 to 72 hours. That gap does not apply where the policy replaces cover with no break, or starts the day you sign a contract to buy or lease the building.
What does a fire actually cost a building owner beyond the building?
The building is usually only part of the loss. A serious fire can also stop the rent or your trading income, destroy contents and stock that were never in the building sum insured, and reach the neighbours. Each is a separate cover with a separate figure.
The rent stops. If tenants cannot occupy the building, the rent stops with them. In the leases we hold, the tenant pays reduced rent, or none, while damage keeps the premises unusable. So even a lease with years left to run may not carry your income through a fire.
On the wordings we place, lost rent is paid only where a loss of rent item is on your schedule. It pays for the indemnity period you chose, the length of time the cover keeps paying. The rent claim can usually be cut back if the rent figure is set too low. The figure to insure is your tenant's annual rent excluding GST but including outgoings, because gross and net rent can be a long way apart. It needs updating at each new tenant and each rent review.
Income cover of this kind normally pays only where the damaged building is itself insured. If you decline cover for a kind of damage on the building, the income cover will usually not pay for it either.
A rebuild runs through make-safe, assessment, design and approvals, and tender. Then come 12 to 18 months of construction, and then finding a tenant. The indemnity period has to last through all of it. We recommend at least 18 months, and often 24 or even 36 depending on the client. The period is your choice, and the longer it runs, the better your position at claim time.
If you trade from the building. The equivalent is business interruption cover, which insures your profits while the business cannot trade. On the business packs we place it is optional, and it pays only after insured damage, for the period on your schedule. It can usually be cut back too if its sum insured is set too low. In our experience, business interruption arranged properly can be one of the dearer parts of a business pack, so some owners leave it off and carry the risk themselves. Whether you take it, and for how long, is your call.
Contents and stock are insured separately. Count everything on the premises when you set the figure: the fit-out, contents, plant, machinery and electronic equipment, then the stock. If you lease the building out, your tenant's contents, stock and lost profits usually sit on a policy in the tenant's own name. The lease helps establish who is responsible for insuring the fit-out; the relevant policy wording determines how the cover responds. If you occupy the building, these are yours, and they usually go on the business pack. On those packs the underinsurance test looks at the total insured at the premises, so a short contents figure can reduce a claim on the building as well.
The fire can reach the neighbours. If it spreads from your building, the claim against you is the liability section's job. That is property owners liability, cover you carry in your own name. If you are sued as the owner, your tenant's insurer generally owes you nothing.
Commercial property insurance shows how the building, rent, contents and liability covers fit together.
Why do fire claims go wrong for building owners?
Usually on the sum insured, not on whether fire was covered: a figure set years ago that cannot rebuild the building at today's costs. On a partial loss, the underinsurance clause can scale the payout down. On a total loss, most of the wordings we place pay up to 20 per cent above the sum insured, and the rest of the rebuild is yours.
A serious fire is the event most likely to produce a total loss, which makes it the event where an accurate sum insured matters most. In our experience, commercial buildings are commonly 40 to 50 per cent under-insured after 7 to 10 years without a revaluation. In the great majority we see, the owner simply did not know what a rebuild costs now.
On a partial loss, the business packs we place test a figure against 80 per cent of the building's full value: on some, your sum insured itself, and on some, a limit set 20 per cent above it. If the tested figure is short, the claim can be reduced. Small claims are exempt from this test: under 10 per cent of the policy's limit on most of the wordings we place, or of the sum insured on some. A larger fire claim may not qualify for that exception.
If the whole building is lost, most of them pay up to 20 per cent above the amount you insured it for. Anything the rebuild costs beyond that, you pay out of your own pocket. Say your building is insured for $1.2 million and would cost $2 million to rebuild. With the 20 per cent on top, the most the policy pays is $1.44 million, so you find at least the other $560,000. The co-insurance clause explained works through both cases with the numbers.
The usual basis is to rebuild new for old. The exception is a schedule that insures the building on an indemnity basis, which pays a depreciated figure allowing for the building's age and wear. If you take the money and do not rebuild, some policies pay a much lower figure. Tell us at the start what you would do, so the policy is set up for it.
Debris removal is usually paid on top of the building sum insured. On some policies it comes out of the same limit as the rebuild. Professional fees, such as an architect's or an engineer's, usually have to fit inside the sum insured or its 20 per cent headroom. So the figure needs to be the full cost to rebuild, with demolition, debris removal, fees and upgrades to current building codes included. How to work out your building sum insured goes through each one.
A tenant who pays the premium through the outgoings may ask for a lower sum insured, but the shortfall after a fire is yours. If the full figure is a stretch this year, you could raise it at your next rent review.
If you trade from your own building, the fit-out, plant and machinery added since your figures were set can leave both covers short, which our page for owner-occupiers sets out.
One way to test your building sum insured is a desktop building replacement estimate.
If my building ever has a fire, who helps with the claim?
If you are our client, a specialist claims manager on our team would run the claim with the insurer, and the broker who looks after your policy would stay involved throughout.
After a fire, the claims manager can look wider than the damage you can see. That takes in the time the building may be unusable, the lost rent, the make-safe, debris removal, professional fees and anything else the policy may respond to.
If the insurer applies an underinsurance cut, we calculate it ourselves using the policy wording and check the insurer's figure. We challenge a reduction where the wording and evidence support it.
Once it is safe, photographs and records of the damage help support the claim.
Our claims page sets out what to keep after a fire, and why major repairs and disposal wait until the insurer or loss adjuster is involved.
FAQ
Does fire cover include the rent I lose while the building is rebuilt?
No, not under the building section: lost rent is its own cover, usually called loss of rent. Consolidated Insurance Brokers arranges it priced against your real rental income, for an indemnity period you choose, long enough to rebuild and re-let.
What if the fire starts in a neighbouring property?
Your building policy responds to fire damage to your building wherever the fire started, and the insurers sort out recovery between themselves afterwards. Your part is the claim, including any excess that applies. If you are our client, we deal with the insurer on it. The reverse case matters too. A fire that starts in your building and spreads next door is a liability exposure, so property owners carry their own liability cover rather than relying on a tenant's policy.
What if my tenant starts the fire?
On the business packs we place, a fire your tenant starts by accident is fire damage to your building like any other. Malicious damage by a tenant is included too. A tenant's breach does not automatically end your cover. Some policies still protect you for a loss the policy otherwise covers, provided you did not agree to the breach and you act as required once you know about it.
Does EPS panel construction affect fire insurance for a commercial building?
Yes, both the price and whether an insurer will quote at all. EPS is polystyrene-core sandwich panel. Most of the insurers we place business packs with decline once it makes up 20 per cent or more of the floor area. The specialist insurers that take a building beyond that point are not listed publicly, which is where a broker finds them. What the building is made of has to be declared accurately. Get it wrong, and the question can become whether the policy responds at all.