Who Pays for Building Insurance on a Commercial Property?

Written by William Paull, Co-Founder & Account Director · 24 min read

The short version

• The owner holds the policy. The lease decides who funds it. Those are two different questions, and mixing them up is what leaves someone holding a loss they thought was covered.
• Paying the premium does not make you the insured. A tenant who pays building insurance through outgoings generally cannot claim on that policy, because the building is not their asset.
• Most Australian commercial leases pass building insurance to the tenant as an outgoing, alongside council rates, water and land tax. Yours might not. The outgoings clause settles it, not the industry norm.
• The fitout is the gap. The building policy covers the building. What the tenant installed is usually the tenant's to insure, and it is the asset most often left uninsured because each side assumed the other had it.
• In a multi-tenant building the premium is driven by the riskiest tenant, so an even split is rarely a fair split.
• A lease that says nothing about insurance does not create cover. Silence just means somebody owns an uninsured asset and does not know it yet.

Who pays for building insurance on a commercial property?

Quick answerThe property owner takes out the building insurance, because the owner is the one who suffers the loss and the one the insurer pays. The lease then decides who funds it. Most Australian commercial leases pass the premium to the tenant as an outgoing, along with council rates and water. So the owner is insured, and the tenant often pays.

That one sentence settles most of the argument, but it is worth slowing down on, because the two halves get confused constantly and the confusion is expensive.

Holding the policy means being the party the insurer contracts with. That is the owner, on almost every commercial building in the country, for a reason set out in the next section.

Funding the premium means being the party whose money ends up paying for it. That is a lease question, and in Australian commercial leasing the answer is usually the tenant, through outgoings.

Those two things travelling in opposite directions is normal, and it is legitimate. It only becomes a problem when somebody assumes that funding a policy is the same as being covered by it. It is not, and a claim is a bad moment to find out.

Why is the policy usually in the owner's name?

Quick answerBecause the owner has the insurable interest in the building. Insurable interest means you would be financially worse off if the thing was damaged. The owner loses the asset, the owner has to rebuild it, and the owner is the one a claim payment restores. A tenant who does not own the building generally has no insurable interest in the structure itself, however much of the premium they fund.

Insurable interest is the plain-English test underneath a lot of insurance law: can you actually lose something here? Burn a leased warehouse to the ground and the owner is left with a slab, a mortgage and no rent. The tenant loses their fitout, their stock and their trading, which are real losses and are insurable, but they are the tenant's own losses on the tenant's own policy. They are not the building.

This is why an insurer will not usually move a building policy into a tenant's name because the tenant is the one paying for it. The contract has to sit with the party who bears the loss.

There is a second, sharper version of the same rule that catches owners rather than tenants: the policy has to name the exact legal entity that owns the building. If the title is in a trust, a company or a self managed super fund, that is the name that belongs on the policy, not the name of the person who signed the enquiry form. An insurer can decline a claim outright where the entity that suffered the loss is not the entity on the contract. The mechanics of that are on our commercial building insurance page, and the way it catches first time landlords is covered in the commercial landlord insurance guide.

What does it mean when your lease says the tenant pays outgoings?

Quick answerOutgoings are the running costs of owning the property, which the lease can pass to the tenant on top of rent. They commonly include council rates, water rates, land tax, body corporate levies and building insurance. Paying an outgoing means reimbursing the owner for a cost the owner has incurred. It does not transfer the asset, the policy or the right to claim.

Think of an outgoing as a cost pass-through, not a transfer of ownership. The owner pays the council, pays the insurer and pays the body corporate. The lease then says how much of that the tenant reimburses, and when.

This is the single most useful thing for a tenant to understand about the insurance line on their outgoings statement. You are not buying insurance. You are contributing to the cost of the owner's insurance, on a policy that exists to put the owner's building back.

Three consequences follow from that, and they are the three that generate the phone calls.

One. You cannot claim on it. If the roof blows off, the owner claims, the insurer pays the owner, and the owner rebuilds. The tenant's own losses, the ruined stock, the fitout, the weeks not trading, come back only from the tenant's own policy, if the tenant has one.

Two. You are exposed to a number you did not set. The sum insured on that policy is the owner's decision. If it is too low, the owner is the one short at claim time, but the tenant is the one trading out of a building that takes longer to come back.

Three. You are entitled to ask what you are paying for. A tenant reimbursing an insurance premium can reasonably ask to see the certificate of currency, what the sum insured is, and what the policy actually covers. Most reasonable owners will provide it. Whether they are obliged to, and in what form, is a lease question, and in some tenancies a statutory one, which is covered further down.

For the tax side of an outgoings recovery, generally speaking premiums on an income producing commercial property are deductible and landlords commonly recover them through outgoings under the lease. Tax positions turn on your structure, so confirm yours with your accountant before you rely on it. The longer answer is in Is Commercial Property Insurance Tax Deductible?.

Gross lease or net lease: which one are you on?

Quick answerOn a gross lease the rent is a single figure that already includes the property's running costs, so the owner funds the building insurance out of the rent collected. On a net lease the tenant pays outgoings on top of the rent, and building insurance is commonly one of them. Either way the policy stays in the owner's name. The difference is only who writes the cheque and how visibly.

Gross lease. One number, predictable for the tenant, and the owner absorbs movements in rates, water and insurance for the term. The insurance cost is still being paid by the tenant, just invisibly, inside the rent. If the premium jumps at renewal, that is the owner's problem until the next rent review.

Net lease. Rent plus outgoings, so the tenant sees each cost line and each movement in it. Budgeting is harder for the tenant, but so is the argument that they are being overcharged, because the numbers are itemised.

You will also hear semi gross, modified gross, single net, double net and triple net used, sometimes loosely, and sometimes to mean different things in different states or even different agencies. The label is not what governs. The outgoings clause in your own lease is what governs, and it is worth reading rather than assuming, because two leases described in the same words on a listing can apportion insurance completely differently.

A practical note for owners on a gross lease: because the premium comes out of a fixed rent, a jump in the building premium lands straight on the owner's margin, and the only lever is the next rent review. That is one reason gross lease owners feel premium increases more sharply than net lease owners do. Why premiums move at all is covered in Why Did My Commercial Insurance Go Up?.

Who insures what: the landlord and tenant split

Quick answerAs a general pattern the owner insures the building, the loss of rent and their own liability, and the tenant insures their fitout, their stock and contents, their glass in many leases, and their own liability. But the pattern is only a starting point. The lease overrides it, and the items in the middle of the table below are the ones the lease is most often quiet or ambiguous about.

Two things to take from that table.

The first is that only the top row follows ownership rather than agreement, and even that can be varied by a lease that makes a single tenant insure the building in joint names. Everything below it is a drafting decision somebody made, sometimes carefully and sometimes by copying an old template.

The second is that the ambiguity clusters in the middle. Nobody wonders who insures the slab. The air conditioner, the glass and the fitout are the items where a plausible case can be made either way and the lease is often quiet or ambiguous, and they are the ones worth settling in writing before anyone needs to claim on them.

If you are the owner, the fuller version of your side is in the commercial landlord insurance guide and on Commercial Landlords Insurance. If you are the tenant, start at For Business Owner Tenants.

What happens if the lease says nothing about insurance?

Quick answerSilence does not create cover and it does not create an obligation. If the lease is quiet on insurance, then nobody has agreed to insure anything, and the only cover in existence is whatever each party happened to buy. The loss falls on whoever owned the damaged asset and had no policy on it. That is usually the tenant, and usually the fitout.

Older leases, short form leases, handshake arrangements between people who know each other, and leases that were renewed by letter for a decade are all common sources of this. So are leases where the insurance clause exists but only says "the tenant shall pay the landlord's insurance", which answers the funding question and says nothing at all about who insures what.

The practical position when the lease is silent:

• The building is the owner's asset, so a fire loss lands on the owner. If the owner has no policy, or an inadequate one, that is the owner's loss.
• The fitout is generally the tenant's asset during the term, so it lands on the tenant. If the tenant assumed it was covered by "the building insurance the landlord takes out", it is not.
• Neither party has agreed to reimburse the other, so there is no contractual route to make good the gap after the event.
• Liability sits where the law puts it, not where the lease is silent, so an owner can still be drawn into an injury claim at a property they have not visited in years. That mechanism is on Property Owners Liability.

The fix is boring and cheap, which is why it so rarely happens: put it in writing before anything goes wrong. A short exchange of emails confirming who is insuring the fitout, who is insuring the glass and what the building sum insured is, costs nothing and settles the whole question. It is also the sort of thing a broker will do for you if you hand over the lease.

Can a landlord recover the whole premium, or only part of it?

Quick answerThe lease decides. Some leases pass on the whole building premium, some pass on a defined share, some cap what can be recovered in a year, and some exclude particular items altogether. What a landlord can actually recover is a question for the lease, and retail tenancies carry rules of their own on top of it.

The starting point is always the outgoings clause, and it is worth reading closely for four things:

What is on the list. An outgoings clause usually enumerates what can be recovered. If building insurance is not on the list, it is generally not recoverable, even if everyone assumed it was.

Which insurance is on the list. "Insurance" can mean the building policy only, or it can sweep in loss of rent cover and the owner's liability policy as well. Those are three different premiums.

How the share is worked out. In a single tenancy building it is usually the whole premium. In a multi-tenancy building it is a share, and the method of working out that share is the subject of the next section.

Whether there is a cap or an estimate obligation. Some leases require the owner to give the tenant an estimate of outgoings before the year starts and reconcile it afterwards. Some cap increases. Some do neither.

And if it is a retail tenancy, there is a layer above the lease. In Queensland, under the Retail Shop Leases Act 1994 (Qld), a tenant on a retail shop lease is not liable for outgoings, and building insurance premiums are outgoings, unless the lease specifies what they are, how they are apportioned and how the owner may recover them. Whether your tenancy is a retail shop lease at all is a legal question rather than an insurance one, and the rules differ between states, so that is the one to put to a property solicitor.

Who pays when there are several tenants in one building?

Quick answerThe owner still holds one policy over the whole building, and the lease decides how the premium is shared. The complication is that the premium is not driven evenly by the tenants. It is driven up by the riskiest occupation in the building, so an even split usually means the low risk tenants subsidise the high risk one.

Here is the example that makes it obvious, and it is a real shape rather than a hypothetical curiosity: an industrial duplex, a mechanic on one side and an office on the other.

The building is one structure with one policy. The premium is set by the risk the insurer is taking on, and the mechanic's side drives it, because a workshop with hot work, oils, solvents and vehicles is a materially different fire risk from a room full of desks. The same building with two office tenants would cost less to insure.

So when the outgoings statement lands and the office tenant is asked for half the insurance, the question they ask is a fair one. Why am I paying half of a premium I am not causing?

There is no single legally correct answer to that. Common approaches are:

• By floor area. Simple, transparent, easy to administer, and blind to risk. The office tenant subsidises the mechanic.
• By risk. Fairer in principle, harder to calculate, and it needs somebody who can actually show what each occupancy is doing to the price.
• A hybrid. Floor area as the base, with an adjustment for a tenancy that clearly drives the premium.
• Whatever the lease already says. Which, when a lease is well drafted, is the answer, and is why the drafting matters more than the arithmetic.

Two things make this manageable in practice.

Set the expectation before the tenant signs, not when the invoice arrives. A tenant who was told at the outset that they are in a building with a higher risk neighbour and that insurance is apportioned by risk will accept the number. A tenant who finds out through an unexplained charge will dispute it.

Tell tenants when the mix changes. If a low risk tenancy is replaced by a high risk one, everybody's share moves. That is a phone call, not a surprise on a statement.

What we can do about it: the split invoice. Where an owner wants it, we can split invoice a multi-tenant building, which means an individual premium invoice per tenant rather than one bill for the owner to apportion and explain, and we can work out the rate for each occupation by hand rather than dividing by floor area. In our experience it is a very rare request, because most owners are content to pass on the share their lease already specifies. When it is asked for, each tenant gets their own invoice for their own share, which is an easier document to defend than "you owe 50 per cent of this", and it takes the awkward conversation off the owner. It is not a legal ruling on apportionment: the lease still decides what each tenant actually owes, and the policy still belongs in the owner's name.

Who pays in a strata or mixed use building?

Quick answerIn a strata scheme the body corporate insures the common property and, in most schemes, the building structure, and it funds that through the levies every lot owner pays. So a lot owner pays building insurance through levies rather than by holding the policy. If that lot is leased to a business, the lease decides whether the tenant reimburses the owner's levy share as an outgoing.

Strata puts a third party in the middle, and it changes the shape of the question rather than the principle.

The body corporate holds the policy over the common property and the structure and pays the premium. It recovers that from lot owners through levies, split by lot entitlement.

The lot owner pays the levy, which is where their share of the building insurance sits. What the lot owner insures themselves is everything the scheme's policy does not reach: the fitout inside the lot, their own contents, their own liability as a lot owner, and loss of rent on their own tenancy.

The tenant in the lot insures their own business: fitout if they installed it, stock, contents and their own liability. Whether they also reimburse the owner's levy or the insurance component of it is, again, a lease question.

There is a specific exposure for commercial and mixed use lot owners worth knowing about. If the body corporate's sum insured is short after a major claim, the shortfall does not vanish. It is raised as a special levy on every lot owner, split by entitlement, whether or not you were the one asking for a proper valuation. In Queensland a body corporate must insure common property at full replacement value and have that value independently reassessed at least once every five years under the Body Corporate and Community Management Act 1997, and with building costs rising as fast as they have, a valuation even two or three years old can already be short.

Commercial strata and mixed use schemes are the ones this page is written for, and the full treatment is on Commercial Strata Insurance. We also arrange cover for residential strata schemes, but that is not the focus here.

What happens at claim time when nobody sorted this out?

Quick answerThree things go wrong, and they all surface at the same moment. The policy is in the wrong name and the insurer declines. An asset turns out to be nobody's, because each side assumed the other insured it. Or the building is insured, but for less than it costs to rebuild, and the shortfall lands on the owner.

The policy is in the wrong name. The building is owned by a trust and the policy is in a personal name, or the other way round. The insurer's position is simple and hard to argue with: the entity that suffered the loss is not the entity on the contract.

Nobody insured the asset. This is the fitout, almost every time. The tenant believed the building policy they were funding through outgoings covered their kitchen and their partitions. It did not. The owner believed the tenant had insured what the tenant installed. They had not. The kitchen burns and the loss sits with whoever owned it, uninsured.

The sum insured nobody wanted to raise. The building is insured, in the right name, for a figure set some years ago. Construction costs have moved since. Now the co-insurance clause in the policy comes into play, and it behaves in two different ways depending on how big the loss is.

On a partial loss the clause scales the payout down in proportion to how far short the sum insured was. Insure a building for half what it should be, and a partial claim can be settled at a proportion of what you claimed, not the full amount.

On a total loss the clause scales nothing. You receive your full sum insured, no more, and the shortfall between that figure and what it actually costs to rebuild is yours to fund. Both cases matter, because the first one surprises people who thought a small claim was safe, and the second one ruins people who thought a full sum insured payment meant a rebuilt building.

The full arithmetic is in The Co-Insurance Clause: What Every Building Owner Must Know, and why the gap is so common is in Underinsurance: The Biggest Risk to Commercial Building Owners. How to arrive at the right figure in the first place is in the building sum insured guide.

There is a version of this that specifically involves the outgoings arrangement, and the pressure does not come from where most people assume. In our experience the great majority of commercial landlords we see are underinsured, gross lease or net lease, and the reason is rarely a decision at all: most owners simply have no current idea what their building would now cost to rebuild. What we do see, regularly, is the pressure coming from the other side. A tenant who funds the building premium through their outgoings has every reason to want that premium lower, and some ask us to insure the building for less to achieve it. The sum insured is not their asset and the shortfall is not their loss. It is the owner who is left funding the gap, which is why the rebuild figure is the owner's decision to make on the evidence, not a number to negotiate down to suit whoever is paying the invoice. A desktop building replacement valuation settles it, and we commission one at no cost to you. The desktop valuation is commissioned for our purposes as your broker, to inform the advice we give you.

What a broker checks in your lease

Quick answerInsurance and leases are written by different people at different times, and they are supposed to line up. Handing your broker the lease is what lets somebody check that they do. It is not something we insist on, but when a client gives us the lease we read it, and it is where most of the mismatches on this page get caught before a claim tests them.

These are the specific things worth checking, whether we do it or you do:

The insured name against the title and the lease. They have to be the same legal entity. This is first because it is the one that can void everything else.

The outgoings clause, item by item. Is building insurance recoverable at all. Which policies are included. Is there a cap, an estimate obligation, or a reconciliation.

Who insures the fitout, and which fitout. Landlord supplied and tenant installed are different answers, and a lease can allocate them separately.

Glass and plant. The two items most often assumed and least often read.

The loss of rent figure. If the lease lets the owner recover outgoings, the loss of rent sum insured needs to include them, or a claim replaces the rent while the owner keeps funding rates, water and insurance out of pocket.

The apportionment method in a multi-tenancy building. Whether the lease states one at all, and whether the method matches what the invoices actually do.

The liability limits the lease requires of the tenant. A lease minimum is a floor set by somebody protecting the owner, not a considered figure for the tenant's own exposure. The two are often a long way apart.

Make good and reinstatement obligations. Not an insurance item, but the one that surprises tenants most at the end of a term, and worth knowing about while there is still time to budget for it.

None of this requires the client to become an insurance expert. It requires somebody to read two documents side by side and ask whether they agree with each other. That is a half hour job that almost nobody does, and it is where the argument on this page usually gets settled before it starts.

Most of our clients are in Queensland, New South Wales and Victoria, and we work with businesses in every state.

FAQ

My lease says I pay the outgoings. Does that make the building insurance mine?

No. It makes the cost yours, not the policy. Outgoings are a reimbursement of costs the owner has incurred, so you are contributing to the premium on a policy that insures the owner's building. The owner remains the insured party, and the owner is who the insurer pays if the building is damaged.

I pay the building insurance through my outgoings. Can I claim on it?

Generally no. You are not the insured, and you do not own the building, so you have no insurable interest in it. Your own losses as a tenant, your fitout, your stock, your equipment and your lost trading, come back from your own business policy. If you do not hold one, those losses stay with you.

Our lease says nothing about insurance. Who pays then?

Nobody has agreed to anything, so the loss simply falls on whoever owned the damaged asset and did not insure it. In practice that is most often the tenant's fitout. A short written exchange confirming who is insuring the fitout, who is insuring the glass and what the building sum insured is will settle it, and it is worth doing before anything happens rather than after.

As a tenant, what should I be insuring if the landlord insures the building?

Typically the things you own and the things you brought with you: your fitout and any permanent improvements you installed, your stock, your equipment and contents, and your own liability to customers and visitors. Business interruption cover replaces the income you lose if you cannot trade. Your lease may also make glass your responsibility.

I am one of four tenants. How is the premium meant to be split?

By whatever method your lease sets, and if it sets none, by agreement. Floor area is the simplest method and ignores risk. Apportioning by risk is fairer where one tenancy clearly drives the premium, such as a workshop beside an office. The important part is that the method is known before the invoice arrives, not explained afterwards.

Can my landlord increase what I pay for insurance during the lease?

Premiums move at renewal, and if your lease passes insurance through as an outgoing then your share moves with it. What your landlord can pass on, and whether an estimate or a cap applies, is set by the outgoings clause, and retail tenancies carry rules of their own on top of it.

I own a commercial strata lot and lease it out. Who pays the building insurance?

The body corporate insures the common property and usually the structure, and you pay your share of that through your levies. Your lease then decides whether your tenant reimburses that as an outgoing. What sits outside the scheme's policy, the fitout inside your lot, your contents and your own liability, stays yours to insure.

Can the tenant just be named on the landlord's policy instead of taking their own?

Being noted on somebody else's policy is not the same as being insured under it, and it is a common misunderstanding. Interested party notations, cross liability clauses and named insured status all mean different things and have different effects. If a lease requires one of them, it is worth having somebody confirm that the policy actually does what the lease asked for.

Related content

Product pages: Commercial Building Insurance, Commercial Landlords Insurance, Commercial Property Insurance, Commercial Strata Insurance, Property Owners Liability.

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

Guides: Commercial Landlord Insurance: The Complete Guide, The Co-Insurance Clause, Underinsurance: The Biggest Risk to Commercial Building Owners, How to Calculate Your Building Sum Insured, Why Did My Commercial Insurance Go Up?, Is Commercial Property Insurance Tax Deductible?.

Tool: Underinsurance Risk Checker.