Commercial Loss of Rent Insurance

What is loss of rent insurance on a commercial property?

A rented house or residential unit needs a different policy.

On the policies we place, rent must be listed separately in the business interruption section, with its own sum insured and indemnity period. Building cover alone does not include it.

We usually place rent cover with the building so one insurer handles both losses. Standalone commercial loss of rent may be arranged through a specialist agency when needed. Commercial landlord insurance explains a policy combining the building, rent and owner's liability.

What has to happen before a loss of rent claim pays anything?

On the wordings we place, the damage claim must be paid or admitted, or payable but for the excess. If flood is excluded from the building policy, the rent cover usually excludes it too. Commercial building insurance explains that cover.

The loss can be partial. If three shops in a strip of five cannot be used, the claim follows the rent lost from those three.

In the leases we hold, rent stops or reduces while the tenant cannot use the premises. If your lease keeps rent payable, there is no rent loss to claim.

If your tenant walks after the damage, does the cover carry you?

Cover can continue while insured damage causes lost rent, including during re-letting. It ends when that rental loss ends, the indemnity period ends or the insured amount runs out, whichever comes first.

Who insures what under your lease is on who pays for building insurance on a commercial property and what a commercial lease requires you to insure.

Your lease's damage and destruction clause governs what happens to rent and the lease after damage. Ask your solicitor to interpret it. We can help you compare the insurance requirements with the cover arranged.

How should the rent figure be set?

On the wordings we place, the rent item includes base rent, turnover rent and the tenant's outgoings contributions. A gross lease includes outgoings in rent; a net lease adds them separately.

We confirm the figure means annual rent excluding GST and including recoverable outgoings. Who pays for building insurance explains the gross and net lease distinction.

We generally increase the rent figure by around four per cent each year to allow for rent rises. A new tenant or market review can change it much more, so tell us when either happens.

Most of the policies we arrange also give the rent item its own underinsurance test. A figure well short of the real rent can reduce what the insurer pays on the claim.

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. 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. The $65 is what that change cost on that policy on that day, not a price list.)

How long should the cover run?

The indemnity period is the maximum number of months on your schedule. The sum insured is a separate limit. Choosing 24 months does not double that amount: it must be enough for the whole period.

What fills those months:

Making safe and assessment. Secure the site and establish the repair or rebuild work with the insurer's loss adjuster.

Design and approvals. A rebuild needs current approval and may have to meet newer building standards. Heritage or character controls can also affect what may be rebuilt.

Builders and materials. Widespread damage can delay builders. On the policies we place, a declared catastrophe adds three months to an indemnity period of at least a year, using the same sum insured.

Re-letting. A completed building earns no rent until a tenant signs. A soft market or a tenant who has moved elsewhere can add months.

Strata repairs. When the body corporate manages the rebuild, you do not control its timetable. Allow for that when choosing your period.

We explain the premium for different periods before you choose. Commercial landlord insurance costs shows whole-policy prices, usually including rent and liability. The landlord insurance guide describes a claim that exhausted its rent limit.

A worked example, with made-up numbers

Illustration: a net lease brings in $250,000 annual rent excluding GST, plus $50,000 recoverable outgoings for rates, water and insurance.

Fire makes the building unusable and the lease stops the rent. Making safe, assessment, design, approvals, tender and construction take 16 months. Finding a new tenant takes another five: 21 months without rent.

This illustration assumes constant rent and outgoings, with no savings. Even a 24-month policy needs a sufficient total limit. The actual payment depends on the wording, underinsurance calculation and other claim conditions.

What loss of rent does not cover

Tenant default is dealt with through the lease, bond or bank guarantee and property manager.

A lease ending or a tenant exercising a break right is not an insured event. Tell us before the premises become empty. On most policies we place, fire, storm, water, malicious-damage and theft cover stops after 90 consecutive empty days without written insurer agreement. Most do not treat a partly tenanted building as empty.

Some wordings apply a time excess. A shorter interruption may produce no payment, so check the excess on your schedule.

If you own a commercial strata lot, who is insuring the building?

Which plan is which, and how to find yours, is on commercial strata insurance. For your own policy alongside the scheme's rent benefit, see landlord cover for a commercial strata unit.

A strata policy commonly has a rent benefit shared across lot owners and capped in total. Rent beyond it needs your own cover, alongside any fit-out and property owners liability.

If we look after your policy, what happens when you claim?

The claims manager deals with the insurer and considers the rental loss, time out of use, make-safe costs, debris removal, fees and other available cover. We explain the records needed and keep you informed. If the policy supports a different decision, we pursue it with the insurer.

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