What Insurance Is Required on a Commercial Building?
Quick answerNo general Australian law requires you to insure a commercial building. The requirements come from contracts instead: your lender, your lease and, in a strata scheme, the body corporate rather than you. If you own or manage a commercial building, ring us on 07 3292 1111 to check which requirements apply to you.
What does Australian law actually require?
Quick answerThere is no general Australian law requiring you to insure a commercial building. The insurances the law does compel attach to activities rather than assets: workers compensation the moment you employ someone, and injury cover bundled into vehicle registration. Some occupational licences carry their own. Owning a building triggers none of it, unless the building sits in a strata or community titles scheme.
That surprises people, so it is worth saying what the law does compel, because those obligations are real and they catch commercial building owners regularly. They just do not come from owning the building.
Workers compensation. The moment you employ someone, workers compensation is compulsory. Every state and territory runs its own scheme and the cover is arranged through that scheme rather than bought from a broker, so it is not a policy you shop for from us, and it is signposted rather than covered on our business insurance page.
Work health and safety is a duty, not an insurance requirement. As the person with management or control of a workplace, you owe duties under work health and safety law. Those are duties to make the place safe. They are not a duty to insure. Insurance answers the civil claim from the person who was hurt; it is a separate question whether a work health and safety penalty can be insured at all, and the answer depends on your state. That one is answered on If a subcontractor is hurt on your job, can you be held liable?. A prosecution can be brought against a building owner over a hazard on the property, which is covered on Property Owners Liability.
What does your lender require?
Quick answerA lender's requirements come from your loan contract rather than from any general law about insuring buildings, and they are usually stricter than anything the law would impose. Typically: the building insured for its full replacement value, the lender noted on the policy as an interested party or mortgagee, and evidence of cover produced at settlement and again at every renewal. It runs for the life of the loan, not just to settlement.
One. The building has to be insured, and usually for its full replacement value. Not for what you paid. Not for what a valuer says it is worth on the market. What it would cost to rebuild. Those three numbers are different, sometimes dramatically, and the gap between them is where most underinsurance on mortgaged buildings actually lives. A purchase price and a market valuation both include the land. A rebuild figure does not, and it has to include demolition, debris removal, professional fees and building to today's codes. How that number is actually built is set out in our guide to calculating your building sum insured.
Two. The lender has to be noted on the policy. You will see this called noting the mortgagee, or adding the lender as an interested party. It means the insurer knows the bank has a stake, and it usually means the bank is told if the policy lapses or is cancelled. It is a change to the policy record rather than a change to the cover, it is a short request to make, and in our experience it is free: on the policies we place it does not change the premium. Being noted on a policy is not the same thing as being insured by it, and a clause can ask for one while the policy does the other. That distinction is set out on what a commercial lease requires you to insure.
It is also one of the things most often missing when a policy comes to us from somewhere else. A first mortgagee that was never noted, or a lender the owner refinanced away from years ago and never took off, turns up far more often than it should on buildings that have a loan against them. A lender's interest in the building is on the public record either way, so an insurer dealing with a total loss can generally find the bank whether or not the policy names it, and a missed notation is usually something that can be corrected rather than something fatal. It is still not how the policy is supposed to read, and it is one of the first things we check.
Three. You have to prove it, repeatedly. The proof is a certificate of currency. Most lenders want one at settlement and then one every year on renewal.
Four. The obligation sits on whoever the loan documents say it sits on. If the building is owned by a trust, a company or a self managed super fund, that entity is the borrower and that entity is who has to insure. The name on the policy has to match the name on the title and on the loan. An insurer can decline a claim outright where the entity that suffered the loss is not the entity named on the contract, and a bank can call a breach of the loan on the same facts. The way this catches first time owners is covered in the commercial landlord insurance guide, and where a self managed super fund owns the building there is a further layer, set out on SMSF Commercial Property Insurance.
The bank's number and the rebuild number are not always the same number, and that catches people.
A lender will generally not settle until it holds a certificate of currency showing the sum insured it asked for. Sometimes the figure the bank has asked for is higher than what the building would actually cost to rebuild, and the owner is caught between a settlement date and a number they did not choose.
It is worth being clear about what a building policy is for at that point. It is there to meet the cost of rebuilding the building, not to repay the loan, and the sum insured is the ceiling on what it can pay rather than a promise of what it will: where the sum insured is short of the rebuild cost, a partial loss can be reduced in proportion and a total loss stops at the sum insured. Insuring above the rebuild cost buys a bigger premium, not a bigger claim.
The person at the bank asking for the figure is usually passing on a requirement set somewhere else in the bank, and is not in a position to change it on the call. Some owners take it up with their lender and get the number revisited. More often the owner decides it is quicker to insure to the bank's figure and settle, carrying a sum insured higher than the building needs.
What we do not do is tell you what to agree with your lender. That is between you and the bank. What we can do is give you the rebuild figure in writing, so that the conversation is about two numbers rather than one.
Two practical things about certificates of currency that come up constantly.
A certificate is a statement a third party relies on, so it only exists once the cover does. That is exactly why a lender asks for one rather than taking your word for it, and it is why one cannot be produced before the policy is actually arranged and in force. There is a further step people do not expect: we will not issue a certificate of currency until the policy is paid and the cover is confirmed in force, which is one reason a lender or another interested party may ask for a certificate of currency specifically. 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, and how premium funding works sets out the mechanism. If your settlement date is close, that is the sequence to work backwards from, and it starts earlier than most people plan for.
We keep a certificate of currency to cover only. It confirms the policy, the insured, the class of cover, the sum insured for that cover and the period. It does not itemise every other section a client holds, or what is inside the building. A certificate travels: to a bank, a landlord, a principal contractor, and whoever else opens their mail. We set it to what the person asking actually has to satisfy, which for a lender means the building and its sum insured, and nothing beyond that. A schedule of everything a business insures, and for how much, is not something we want circulating on a piece of paper we no longer control, and none of it is needed to prove the cover is in place.
What a certificate does and does not prove, and why there is no legal standard for what one has to contain, is set out on what a commercial lease requires you to insure. What appears on a certificate is what the issuer chooses to put there, and what the terms on it mean is in our insurance terms glossary.
What happens to the loan itself if a claim comes up short is a separate and uncomfortable question, and it is answered on For Commercial Property Owners.
What does your lease require?
Quick answerA lease is a contract, so it can require more than the law does, and it usually does. On the owner's side it commonly requires the building to be kept insured, sometimes to a stated standard, and the building reinstated after damage. On the tenant's side it commonly sets a public liability limit, glass cover and sometimes business interruption. Both sides are enforceable against you whatever the law says.
Two different sets of obligations live in a lease, and it is worth separating them.
What the lease requires of you as the owner. Most commercial leases oblige the owner to keep the building insured, and many go further: to insure against specified perils, to keep the cover current for the whole term, to produce evidence of it if the tenant asks, and, importantly, to reinstate the premises if they are damaged.
That reinstatement obligation is the one worth stopping on, and it is a different thing from the make good obligation at the end of a term. Reinstatement after damage converts your sum insured from a financial decision into a contractual one. If the lease obliges you to rebuild and the policy pays out less than the rebuild costs, the shortfall does not just come out of your pocket. It sits against an obligation you owe your tenant, while the rent has stopped.
What the lease requires of your tenant. Commercial leases commonly set a minimum public liability limit for the tenant, and often require glass cover and business interruption. A lease minimum is a floor somebody chose to protect the owner rather than a considered figure for the tenant's own exposure. That side of the clause, and what a tenant is actually being asked to arrange, is set out on For Business Owner Tenants.
Who pays for the building insurance is a different question again, and it has its own page, because it is the one that generates the most argument and the most confusion. The owner holds the policy; the lease decides who funds it, usually the tenant through outgoings, and funding a policy is not the same as being covered by it. That is answered properly at Who pays for building insurance on a commercial property?, which also covers the extra layer that applies to retail shop tenancies in several states.
The practical point for an owner is simpler than any of it. Your lease and your policy were written by different people at different times and are supposed to agree with each other. Nobody checks that unless someone is asked to.
What does a body corporate require?
Quick answerIn a strata scheme the duty to insure is the body corporate's, not yours, and it is the one place Australian law really does compel building insurance. In Queensland it turns on how the scheme was subdivided. Lots in a building format plan must be insured by the body corporate at full replacement value. Where lots sit in a standard format plan and the buildings are detached, insuring them is optional, and the building is the lot owner's.
In Queensland it depends on how the scheme was subdivided, and most owners have never been told this. The body corporate legislation does not impose the insurance duty itself. It allows the regulation module that applies to your scheme to do it, and for a scheme made up predominantly of commercial lots that is the Commercial Module. The Standard, Commercial and Small Schemes Modules all split the answer the same way:
- Where the lots sit in a building format plan, which is a scheme defined by the floors, walls and ceilings of a building and is what most multi-tenanted commercial buildings are, or in a volumetric format plan, which is an air-space parcel and is what a commercial lot in a mixed-use tower commonly is, the body corporate must insure each building for full replacement value, and must get an independent valuation at least every five years.
- Where the lots sit in a standard format plan and the buildings are detached, which is what a good many industrial estates and small commercial parks are, the body corporate may run a voluntary insurance scheme and taking part in it is optional. There is no compulsory body corporate building cover at all. The building is the lot owner's to insure, so check which plan your scheme is on.
That split is a Queensland feature rather than an Australian rule. In New South Wales an owners corporation must insure the building and keep it insured, and the duty does not turn on how the scheme was subdivided. So whether the scheme insures your building genuinely depends on the state it sits in, and Queensland is the state where the answer most often surprises an owner.
The liability minimum is a floor, and it is not the same floor in every state. Either way, whatever the plan format, a Queensland body corporate must hold public risk insurance of at least $10 million for a single event over the common property and its own assets, and the module says plainly that it is not required to insure any other property, giving a lot owned by somebody other than the body corporate as its example. In New South Wales the owners corporation minimum is also $10 million for each event. In Victoria it is $20 million. Twenty million is the limit we test as standard in any case, and a statutory ten million is a floor rather than a considered figure for a busy commercial scheme.
The five-yearly valuation is a state rule, not an Australian one, and it is widely quoted as though it applied everywhere. Queensland and Victoria both have it where the body corporate has to insure a building. New South Wales does not. What your scheme is actually required to do depends on the state it is in and the module or class it falls under, and it is worth checking rather than assuming.
Two things follow for a lot owner, and they are the two that cost money.
The scheme's duty stops at your lot. Your fitout, your contents and your own liability as the owner of the lot are yours, and none of them is in the body corporate's policy. The rent you lose if the lot cannot be used is the one it does reach, and only up to a cap: rent above that cap is yours too. The Queensland modules go further and define the insured building to exclude carpet, curtains and blinds, temporary floor, wall and ceiling coverings, air conditioning units serving a single lot, and fixtures a tenant can remove at the end of a lease. Nothing legally requires a lot owner to insure any of it, which is exactly why it gets left. What it costs to leave it is the whole subject of Commercial Strata Insurance.
A scheme can meet its statutory duty and still be short. Full replacement value is the standard the Queensland law sets, but the sum insured is a number somebody nominated at a point in time. Whether the scheme's valuation is current is a question a lot owner is entitled to ask, and almost nobody does.
What is required, and what is merely sensible?
Quick answerOnly one cover on a commercial building is ever required of the owner by anybody, and that is the building itself, required by a lender or a lease rather than by law. Everything else on a commercial building policy is optional in the strict sense and routine in practice, because the covers nobody requires are the ones that decide whether you can hold the building through a bad year rather than just rebuild it.
There is a useful exercise in separating the two, because the covers nobody insists on are the ones most often left off, and they are not the small ones.
| Cover | Is it ever required? | Who requires it, when it is required | Why owners carry it anyway |
|---|---|---|---|
| The building itself | Yes, in practice | A lender, as a loan condition. A lease, as a term. Never by statute | It is the asset. Nothing else on the list matters if this one is wrong |
| Loss of rent | Rarely required, occasionally specified in a loan facility | Some lenders specify a minimum period; most say nothing | The rent stops on the day of the fire and the loan does not. A rebuild is measured in months, not weeks |
| Property owners liability | Sometimes, where a lease or a contract names a limit for the owner rather than the tenant | A lease, a licence, a permit, a principal contractor | Somebody hurt on your property sues the owner. A tenant's liability policy is bought to protect the tenant, and it does not defend you |
| Glass | Almost never required of the owner. Commonly imposed on the tenant by the lease | The lease decides which side carries it | Shopfront glass is expensive, breaks often, and is the item leases are least clear about |
| Machinery and equipment breakdown | Not required | Nobody | Lifts, air conditioning and hot water plant fail without any insured damage having happened, and a failed lift can empty a building |
| Business interruption, for an owner-occupier | Not required of the owner. Sometimes required of a tenant by the lease | The lease, on the tenant's side | It replaces the trading income you lose while you cannot use the premises. A building policy rebuilds the building and stops there |
| Debris removal, demolition and professional fees | Not separately required, and commonly assumed to be included | Nobody asks. The policy either allows for it or it does not | These are real rebuild costs. If the sum insured does not account for them, the shortfall shows up at the worst moment |
| The right sum insured | Never required by anyone, in any document | Nobody, and that is the whole problem | It is the single number that decides whether any of the above actually works |
The pattern in that table is the argument of this whole page. The things people are required to have are the things somebody else needs in order to protect themselves. The things that decide whether you come out the other side of a fire with a business are further down the list, and nobody sends you a letter about them.
Which of these are worth carrying on your building depends on your building, your lease and your tenant. That is a conversation rather than a checklist, and it is what a phone call is for.
Why can you meet every requirement and still be underinsured?
Quick answerEvery requirement on this page can be satisfied by a policy that would not rebuild your building. A lender wants evidence of cover, not a correct rebuild figure. A lease wants the building insured, not insured accurately. The number that decides whether you are made whole after a fire is the sum insured, and no one on the list above is checking it.
On a partial loss, most commercial building policies carry an underinsurance clause, sometimes called an average or co-insurance clause. If the sum insured is materially below the true rebuild cost, the insurer can reduce the payout in proportion. You do not simply get your claim paid up to the sum insured. You get a share of it. How that calculation actually works, and what the law requires an insurer to have told you before it can rely on the clause, is set out in full on the co-insurance clause explained.
In our experience the great majority of commercial landlords we see are underinsured, and the reason is not carelessness. It is that owners simply have no current idea what a building costs to rebuild now. Sums insured get set at a purchase or a placement years ago and are then indexed by a small percentage each year while real construction costs move faster than that.
That is a solvable problem and it is not expensive to solve. When we look at a building, we commission a desktop building replacement valuation at no cost to you, commissioned for our purposes as your broker, to inform the advice we give you. It is a registered valuer's desktop assessment, not a site visit, and it is the difference between a sum insured somebody nominated and a sum insured somebody worked out. The fuller picture is in Underinsurance: the biggest risk to commercial building owners.
What does a broker need when someone has given you a deadline?
Quick answerMost people ask this question because a bank, a landlord, a body corporate or a principal contractor has asked for something and named a date. What a broker needs in order to answer that is a short list, and having it ready is what lets somebody give you a straight answer instead of coming back with questions.
The pattern is always the same. Settlement is booked, the lease is ready to sign, the job starts Monday, and the insurance question has arrived last with the least time attached to it.
These are the things that let somebody answer it properly and quickly:
Who is required to be insured, in writing. The clause itself, from the loan document, the lease or the contract. Not a summary of it. The clause decides what is actually needed, and it is usually one paragraph.
The legal entity that owns the building. The exact name on the title. A trust, a company, a super fund or an individual, and the trustee's name if there is one.
What the building is and what happens in it. Address, approximate floor area, construction, roughly what year it was built, and what the occupants do inside it. Occupancy moves a commercial building premium more than most owners expect.
Any current policy and its certificate. If there is existing cover, the schedule tells us in a minute what would otherwise take a conversation.
Who else needs to be named. The lender, an equipment financier, a head lessor, a principal. Each has to be noted properly rather than mentioned in passing, and a notation that does not do what the clause asked for is functionally the same as no notation.
When a client gives us the lease or the loan conditions, we read the insurance clause, and we set the covers to match what that clause actually says rather than what everyone assumes it says, so that the certificate we issue satisfies it. That is a half hour job that almost nobody does, and it is where the mismatches on this page get caught before a claim tests them. We are brokers and not lawyers, so what the rest of the document means is a question for your solicitor.
Most of our clients are in Queensland, New South Wales and Victoria, and we work with businesses in every state.
FAQ
Is commercial building insurance a legal requirement in Australia?
No general law requires it, but in practice you rarely get the choice: a lender, a lease or, in a strata scheme, the body corporate's own statutory duty usually requires it for you.
Do I have to insure a commercial building I own outright, with no loan and no tenant?
No. With no loan, no lease and no body corporate, there is nobody with a contractual right to require it and no statute that does. The question then is not a legal one. It is whether you could fund a rebuild out of your own resources if the building burned down tomorrow, and keep funding the rates, the loan on the next asset and the loss of income while it happened.
My bank wants the building insured for full replacement value. Is that what I paid for it?
Almost never. A purchase price and a market valuation both include the land; full replacement value is a construction figure, what it actually costs to rebuild. See our building sum insured guide.
My bank has asked for a sum insured higher than the rebuild cost. Do I have to insure for that?
It happens, and it usually comes up with a settlement date already booked. Some owners take it up with their lender and get the figure revisited, and some decide it is quicker to insure to the bank's number and settle. We do not tell you which of those to do. We give you the rebuild figure in writing so that you can have the conversation with two numbers in front of you.
Why does my lender want a certificate of currency every year and not just at settlement?
Because the loan obligation is continuous, not a settlement formality: the lender's security runs for the life of the loan, so evidence of cover is refreshed at every renewal. See our insurance terms glossary for what a certificate contains.
What happens if the insurance lapses on a mortgaged commercial building?
Two things, and they are separate. The obvious one is that a loss during the lapse is uninsured and entirely yours. The less obvious one is that lapsing is generally a breach of the loan conditions in its own right, whether or not anything goes wrong. A mortgagee also commonly has a power, under the mortgage itself and in some states under property law as well, to insure the property if you have not. That power sits in loan documents against the possibility of a borrower defaulting, and in our experience it is very rarely used: we do not think we have seen a bank exercise it in a very long time. Where it is used, the cover is arranged to protect the lender rather than you. In Queensland and in Victoria the property law then adds what the lender paid for that insurance to what you already owe on the mortgage, with the same priority and the same interest rate as the rest of the loan. Your own mortgage can say something different, so the cost outcome depends on the document as well as on the state.
The body corporate insures the building. What am I still required to insure as a lot owner?
First check that it does: in Queensland a detached building on a standard format plan may not be insured by the scheme at all. Where it does insure the building, nothing further is legally required of you, but fitout, contents, liability and rent above the scheme's cap stay yours. See Commercial Strata Insurance.
Is public liability insurance required on a commercial building?
Not by any single law that applies across the board. It becomes required in practice the moment a lease, a contract, a council permit or a licence condition asks for it, which covers most owners of buildings that other people walk into. The proper answer to the legal question is on our public liability insurance page, and why a building owner's own liability is not covered by a tenant's policy is on Property Owners Liability.
Someone has asked me for proof of insurance and I have a deadline. What do you need from me?
The clause that is asking for it, the exact legal entity that owns the building, the address and what happens inside it, any current policy schedule, and the name of anyone who needs to be noted on the policy. With those in front of us the conversation is usually short. Call us on 07 3292 1111 and an account manager will take it from there.
Related content
- Commercial Building Insurance: what the cover does, and the number it is built on.
- Commercial Landlords Insurance: the owner's three covers when there is a tenant in the building.
- How much does commercial building insurance cost in Australia?: the seven things that move a building premium.
- How much does commercial landlord insurance cost in Australia?: what changes once there is a tenant and a lease attached.