Reviewed by William Paull
Co-Founder & Account Director
On this page
- What is loss of rent insurance on a commercial property?
- What has to happen before a loss of rent claim pays anything?
- Why your lease decides whether you have a loss at all
- If you own a commercial strata lot, who is insuring the building?
- How the rent figure is set, and the number most owners get wrong
- How long should the cover run?
- What loss of rent does not cover
- Where the cover sits, and whether it can be bought on its own
- A worked example, with made-up numbers
- If the building has just been damaged, the call is a different one
- FAQ
Your commercial building burns on a Tuesday. Under most commercial leases the rent stops that week, and the loan repayment does not.
If you rent out a house or residential unit, this isn't your cover.
What is loss of rent insurance on a commercial property?
Loss of rent insurance is the commercial property owner's version of business interruption cover. It responds to insured damage, not a tenant who stops paying, for a set number of months called the indemnity period.
What has to happen before a loss of rent claim pays anything?
Three things, in order: damage the policy covers, damage that makes the premises unusable or partly unusable, and a lease that lets the tenant stop or reduce the rent while that's true. If any one is missing there's usually no claim, even where the lost income is real.
First, the damage has to be insured. The rent section is normally available only where the property damage claim responds. Where you declined a peril on the building, the income wording will usually exclude that same peril. The building section is on commercial building insurance.
Second, the damage has to stop the building being used. Partial interruption is the common real-world case: three tenancies in a strip of five are unusable, so part of the income stops and part of it doesn't. The claim follows the part that stopped.
Third, the rent has to legally stop.
Why your lease decides whether you have a loss at all
Most commercial leases let the tenant stop paying while damage makes the premises unusable, which is what turns damaged bricks into lost income. The clause commonly carves out two situations where the rent doesn't abate, and usually gives one or both sides a right to end the lease if the repair drags on.
The clause is called rent abatement, and your tenant's conduct can switch it off. In the leases we hold, the abatement doesn't apply where the tenant's negligence, default or wilful act caused or contributed to the damage, or where your own insurer refuses or cuts the claim because of something the tenant did. So a decision your insurer makes about your policy can decide whether your tenant owes you rent. The clause in full is on what a commercial lease requires you to insure.
A tenant who can walk is a longer claim, not a shorter one. A bad rebuild costs you months of rent, and it can cost you the tenant. Your cover then has to carry you through the rebuild and through finding somebody new, which is the single most common reason a loss of rent limit runs out. Who insures what under a lease is on who pays for building insurance on a commercial property.
Give us the lease with the schedule, and we read the two together as insurance brokers. We tell you what the lease obliges you to insure, what it obliges your tenant to insure, whose interest has to be noted where, and whether your policy actually matches. We do not give you a legal opinion on the damage and destruction clause. Whether your abatement wording bites in your situation is a question for your solicitor. That's where we'll send you, rather than guess at it.
If you own a commercial strata lot, who is insuring the building?
The answer depends on the plan your scheme was created under, so a lot owner cannot assume the body corporate has it covered. On some plans, nobody has to insure the building at all.
Which plan is which, and how to find yours, is on commercial strata insurance.
The body corporate policy caps what it pays for your rent. On the wordings we place, a strata scheme's policy carries a capped loss of rent benefit for lot owners: a set limit, usually a percentage of the building sum insured, commonly paid until the lot is re-let after an insured loss. If your rent is worth more than that cap, the gap is yours to insure under your own landlord cover. The cap is there for all of the lot owners together, not for you and your tenant.
How the rent figure is set, and the number most owners get wrong
The figure to insure is your annual rent excluding GST, plus the outgoings your lease lets you recover from the tenant. Rates, water, land tax, and the insurance premium itself stop arriving when the rent stops, but they keep falling due regardless. A policy carrying rent alone replaces the rent and leaves you funding every one of those out of your own pocket.
Gross leases and net leases treat outgoings completely differently, so "the rent" means two different amounts depending on which one you're on. The number in your head is usually the one that arrives in your account rather than the one the lease entitles you to.
So we never take the first figure. When you give us a number, we read it back as a question: is that your annual rent excluding GST but including outgoings? Our who pays for building insurance guide explains the difference.
Review the figure when the rent reviews, and tell us when the tenant changes. Unlike the building sum insured, there's no annual index nudging it along, so we ask for an updated rent figure every year.
What that costs, from a real claim of ours. A commercial owner insured for $36,000 a year of loss of rent, excluding GST. That figure belonged to a tenant who had moved out two years earlier. The tenant then in the building was paying $60,000 a year, and the policy had never been told. Storm damage closed the building. Because the sum insured was well under the real annual rent, the underinsurance provision applied and the insurer reduced what it paid on the claim. Bringing the cover from $36,000 excluding GST up to $60,000 would have cost about $65 more for the year, because the policy was already close to the insurer's minimum premium. (One real claim on one building, owner's details removed. The $65 is what that change cost on that policy on that day, not a price list. On your building it will be a different number, and the only way to know your number is to get a quote against your actual risk.)
How long should the cover run?
Long enough to cover the rebuild and the re-letting that follows it, not the rebuild alone. That length is called the indemnity period. Consolidated Insurance Brokers strongly recommends 24 or 36 months, depending on the owner. The minimum is 18 months, and the longer the period, the better your position at claim time.
Design and approvals. A building that has to be rebuilt rather than patched needs a current approval. A current approval means current building standards, which isn't always what is standing there today. Where the building sits under a heritage or character overlay, what may be rebuilt is constrained by the approval rather than chosen by you.
Tender and contractor availability. After a widespread event, the builders in your area are quoting on hundreds of jobs at once.
Then the re-letting. The building is finished, but the rent is still zero until somebody signs. In a soft market, or where the previous tenant has settled somewhere else, the re-letting can run for months.
In a strata scheme, the rebuild can run on someone else's timetable. If the body corporate is running it, the pace of the repair isn't in your hands. Your indemnity period has to survive it.
On a commercial building, we push owners to step up from the 18-month minimum to 24 or 36 months, because every stage above runs before the rent starts again. What the section costs and what moves it is on what commercial landlord insurance costs.
On our own files, one commercial landlord's cover paid exactly as designed, until the limit was exhausted about a week before a tenant was finally found. That file, with its figures, and a rent claim we fought and got paid, are in the commercial landlord's insurance guide.
What loss of rent does not cover
Loss of rent doesn't cover a tenant who stops paying while the building is undamaged, a tenancy that simply ends, or damage your policy doesn't cover in the first place. None of these is fixed by buying more of this cover.
A tenant who stops paying while the building stands. That's a lease-enforcement problem rather than an insurance one, and what protects you there is your lease, your bond or bank guarantee, and your property manager.
A lease that ends. A tenant who reaches the end of the term, or exercises a break right, hasn't caused an insured event. Vacancy is a policy issue in its own right, because most commercial wordings change once a building sits substantially empty. Tell us as a tenancy is ending, not after.
An interruption shorter than the excess. On some wordings, the excess on this section is a period of time, not a dollar amount, so a very short interruption can fall inside the excess and produce nothing. Your excess is written on your own schedule.
More time than you bought. There's no retrospective extension after an event.
Where the cover sits, and whether it can be bought on its own
Most commercial owners hold loss of rent as a section of the policy that already insures the building, with its own sum insured and its own indemnity period. That's how we place it in almost every case. Where a situation calls for it we can also approach an underwriting agency, underwritten at Lloyd's, that will write loss of rent on a commercial property on its own.
Keeping the cover with the building means one insurer answers for the damage and for the income that stopped because of it. Standalone cover is the exception. It is not where we start. We go there when the building policy's own section won't stretch far enough, or when the building is insured somewhere we cannot change and the income cover needs fixing on its own.
If you want the building, the rent, and your own liability on one landlord policy, that is commercial landlord insurance.
A worked example, with made-up numbers
Take $300,000 a year of income, a rent-only sum insured of $250,000, and the 18 month minimum indemnity period. Together they open two gaps: the wrong figure while the cover pays, and no cover from month 19.
An illustration only: not your building, not a quote, and not a statement about how long a rebuild takes.
An owner leases a small commercial building to one tenant. The rent is $250,000 a year excluding GST. The lease is a net lease and lets the owner recover $50,000 a year of outgoings: rates, water, and the insurance premium. So the income that actually stops if the building stops is $300,000 a year, not $250,000.
A fire makes the building unusable, and under the lease the rent abates from that day.
- The owner insured rent only, $250,000, and took the 18 month minimum indemnity period.
- Make safe, assessment, design, approvals, tender, and construction take 16 months.
- The building is finished, and a new tenant signs 5 months later. Total: 21 months.
What the policy does: it pays the insured figure for 18 months and then stops.
- The wrong figure. Even in the 18 months it paid, the cover replaced only $250,000 a year of a $300,000 a year loss, because the recoverable outgoings were left out of the sum insured. So the owner paid the rates, the water, and the premium out of their own pocket the whole time.
- The wrong period. From month 19 to month 21 there is no cover at all: three months of a $300,000 a year income gone, while the loan still has to be serviced.
The same owner insuring $300,000 for 24 months is covered for the whole 21 months at the right rate. Two decisions made at the desk, years before the fire, decided the outcome.
If the building has just been damaged, the call is a different one
What we're claiming for, all of it. The building damage itself, the time the property may be unusable, the loss of rent, make-safe costs, debris removal, professional fees, and anything else your policy may respond to. Owners commonly ring about the building damage alone and leave the rest of that list unclaimed.
Where it actually stands. Has the insurer or the loss adjuster inspected the property yet, and what have they said the next step is. If nobody can answer that, that's the first thing we chase.
What matters right now. Keep every invoice, every piece of correspondence, the photos and the reports. And don't agree to major repair work, or let damaged property be thrown out, without the insurer or the loss adjuster being part of that decision.
Then we read the policy against the claim with you, so the claim is handled properly and we are pursuing everything you are entitled to under the policy.
The biggest issue is making sure the claim does not sit still. We want a clear plan early: assessment, make-safe works, the repair or rebuild scope, and the loss of rent position. Ring 07 3292 1100.
FAQ
What actually triggers a loss of rent claim?
A loss of rent claim is triggered by insured damage that stops the building being used, plus a lease that lets your tenant stop paying while that's true. Consolidated Insurance Brokers tells you what your lease obliges you to insure and whether your policy matches it. The damage and that lease term both have to be present, or there's nothing to claim.
Can I buy loss of rent cover on its own, separately from my building policy?
Yes, but it's the exception: almost always, your loss of rent sits inside the policy that already insures your building. Where a situation calls for it, Consolidated Insurance Brokers can place loss of rent cover separately. Standalone cover exists, but it's the uncommon arrangement, not the normal one.
My lease says the rent abates if the building is damaged. Does that mean I am covered?
No, it means you have a loss worth insuring. Consolidated Insurance Brokers reads your lease and your schedule side by side, so you see where the clause and the cover line up. The abatement clause turns damaged bricks into lost income, and the policy is what replaces it. Carve-outs apply in the leases we hold.
Does the cover keep paying while I look for a new tenant, or does it stop when the builders finish?
The cover pays for the number of months you chose, not the number the building took to fix. Consolidated Insurance Brokers looks at the rebuild and the re-letting together when you choose those months. A re-let running past the rebuild is still covered until the period ends.
Can my tenant end the lease after the building is damaged?
Often, yes. Consolidated Insurance Brokers helps you size the cover to carry both the rebuild and the re-letting if your tenant walks. In the three commercial leases we hold, either side may end the lease where repair is impractical. The tenant may also end it where the landlord hasn't repaired in time.
What happens to the cover if the rebuild finishes early?
Nothing to claim and nothing to get back, because the indemnity period is a maximum, not a budget: it pays the loss you actually suffer, up to the months you bought. Consolidated Insurance Brokers weighs that trade-off with you when the period is chosen. Buying more months than you need costs a little premium; buying fewer costs you the shortfall.
Is loss of rent the same as business interruption insurance?
They're close cousins, not the same cover: business interruption protects a trading business's lost profit, and loss of rent protects a commercial landlord's rental income. Consolidated Insurance Brokers works out with you which one you need: if you own a building and trade from it, you may need both, sometimes through two entities. The full comparison is on business interruption insurance, explained properly.