Who Pays for Building Insurance on a Commercial Property?
Quick answerThe owner holds the building policy, because the owner suffers the loss. The lease decides who funds it, and most Australian commercial leases pass the premium to the tenant as an outgoing. If you are a landlord or a tenant unsure which side you are on, ring us and we will read the lease with you.
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.
So an insurer will not usually move a building policy into a tenant's name just because the tenant funds it.
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.
One. You cannot claim on a policy you fund. 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.
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. Your own lease's outgoings clause does.
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. The lease overrides that pattern, and the items in the middle of the table below are the ones the lease is most often quiet or ambiguous about.
| The asset or exposure | Who usually insures it | What actually decides it | Where it goes wrong |
|---|---|---|---|
| The building structure, roof, walls, slab | The owner | Ownership and insurable interest. This one is not really negotiable. | Sum insured set years ago and never revisited, so the building is insured for less than it costs to rebuild |
| Landlord's fixtures and fittings, the parts of the fitout the owner supplied | The owner | Whose asset it is at law, then what the lease says about insuring it | A lease that makes the tenant insure an asset the owner owns, which works until the tenant's policy will not respond to it |
| Tenant's fitout and tenant's improvements: the new kitchen, the special flooring, the partitions, the signage | The tenant | Who installed it and what the lease says about removal at the end of the term | Neither side insures it, because each assumed the other had. This is the most common gap on the whole list |
| Glass, shopfronts and internal glazing | Commonly the tenant in retail, sometimes the owner | The lease clause, and it varies more than any other item | Both sides insure it and pay twice, or neither does |
| Plant such as air conditioning, hot water and lifts | The owner usually replaces, the tenant often services | The lease's repair and maintenance clause, read alongside the insurance clause | Servicing and replacing are two different obligations, and the gap between them is where a failed unit ends up nobody's |
| Tenant's stock, equipment and contents | The tenant | Ownership. Straightforward | Underinsured stock, or seasonal peaks not declared |
| Loss of rent | The owner | Ownership of the income stream | The figure covers rent only and leaves out the recoverable outgoings the owner keeps paying during a rebuild |
| Owner's liability for the property itself, common areas, car parks, stairwells | The owner | The owner's own duty as occupier or controller of the land | An assumption that the tenant's public liability policy defends the owner. It generally does not |
| Tenant's liability for their own business activities | The tenant | The tenant's own duty to their customers and visitors | A lease minimum treated as a sensible limit rather than a floor |
| Make good (putting the premises back how you got them) and reinstatement at the end of the lease | Neither, usually. It is a lease obligation, not an insured event | The make good clause | An owner budgeting for it as if insurance will help, which it will not |
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.
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.
Just as common is the clause that says only "the tenant shall pay the landlord's insurance". It answers the funding question and nothing else.
The practical position when the lease is silent:
- 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: 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.
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.
Start with the outgoings clause, and read it 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.
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.
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?.
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.
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. 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.
There is no single legally correct split. 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.
Set the expectation before the tenant signs, not when the invoice arrives.
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: one premium invoice per tenant, rather than one bill for the owner to apportion and explain. We can also 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. Each tenant's own invoice 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.
The body corporate holds the policy over the common property and, in most schemes, the structure, and pays the premium. Where the lots sit in a standard format plan and the buildings are detached, insuring the structure is optional and it is the lot owner's, so check which plan your scheme is on. The body corporate recovers the premium 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. The lot owner insures whatever the scheme's policy does not reach. That is 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.
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. That value must be independently reassessed at least once every five years under the Body Corporate and Community Management Act 1997. With building costs rising as fast as they have, a valuation even two or three years old can already be short.
The full treatment is on Commercial Strata Insurance.
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: 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.
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.
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.
In our experience the great majority of commercial landlords we see are underinsured, gross lease or net lease. 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. So 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. We do not insist on it. When a client gives us the lease we read it, and that is where most of the mismatches on this page get caught, before a claim tests them. Most of our clients are in Queensland, New South Wales and Victoria, and we work with businesses in every state.
What is 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.
Glass and plant. The two items most often assumed and least often read.
The loss of rent figure.
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.
Make good and reinstatement obligations.
FAQ
My lease says I pay the outgoings. Does that make the building insurance mine?
No. It makes the cost yours, not the policy. You are reimbursing the owner's premium on the owner's policy. The owner stays 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 have no insurable interest in a building you do not own. Your own losses, fitout, stock, equipment and lost trading, come back from your own business policy, if you hold one.
Our lease says nothing about insurance. Who pays then?
Nobody has agreed to anything, so the loss falls on whoever owned the damaged asset and had no policy on it. In practice that is most often the tenant's fitout. Settle it in writing before anything happens, not 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, usually floor area or risk. What matters 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, funded through your levies. Your lease decides whether your tenant reimburses that as an outgoing. The fitout, contents and your own liability inside your lot stay 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. 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. What a notation positively does, and how to tell whether your policy answers the clause, is set out in what is in the insurance clause of a commercial lease.
Related content
Commercial Property Insurance, For Commercial Building Owners, For Commercial Property Owners, Underinsurance Risk Checker.