Commercial landlords are being urged to look beyond their insurance policies and examine the small print in their leases, amid concerns that hidden gaps in responsibility and inaccurate rebuild values could leave properties significantly underinsured.
New guidance from insurance agency, RebuildCostASSESSMENT.com, warns that many landlords focus on securing commercial landlord insurance without fully understanding how lease wording can affect who arranges cover, who pays for it, and what happens if a property suffers major damage.
The warning comes as landlords continue to navigate increasingly complex property arrangements, including mixed-use developments, multi-let buildings and fit-outs that can materially alter the true cost of reinstating a property.
While landlords typically arrange buildings insurance and recover costs through insurance rent or service charges, lease structures such as full repairing and insuring (FRI) agreements can shift responsibilities and create confusion around claims, repairs and reinstatement obligations.
The firm's research found that some of the biggest risks arise when landlords assume their insurance is sufficient without checking whether the sum insured reflects the actual rebuild cost of the property.
Market value, purchase price or outdated estimates are still commonly used as the basis for insurance figures, despite having little connection to the real cost of rebuilding after a loss. This can leave landlords exposed to underinsurance and the application of the average clause, which reduces the amount paid out on a claim.
"Many landlords assume that once an insurance policy is in place, they are protected, but the reality is that the lease and the rebuild value are just as important," said a spokesperson for RebuildCostASSESSMENT.com.
"You can have a policy in place and still be exposed, if responsibilities are unclear or the sum insured doesn't reflect the actual cost of reinstatement."
They added: "Commercial properties evolve over time. Fit-outs change, buildings are extended, uses shift and mixed-use arrangements become more common. If insurance figures are based on assumptions or outdated information, landlords can discover gaps only when they need to make a claim."
Landlords are being encouraged to review key lease provisions before signing, renewing or renegotiating agreements. Particular attention should be paid to:
- insurance responsibilities and who is liable for arranging cover
- loss-of-rent provisions
- reinstatement obligations
- any changes to the property that could affect rebuild costs
According to the insurance agency, aligning lease wording, insurance arrangements and accurate rebuild cost data can help reduce disputes, strengthen claims positions and provide greater protection against costly underinsurance issues.
