What Is Commercial Property Insurance?
Commercial property insurance — often referred to as commercial buildings insurance — protects the physical structure of a commercial building against damage from insured perils such as fire, storm, flood, and impact. For landlords who own offices, retail units, warehouses, or industrial premises, this cover is typically a fundamental requirement, both legally and commercially.
Unlike residential landlord insurance, commercial property policies are designed to address the specific risks associated with business premises. These may include higher reinstatement costs, more complex lease structures, and a wider range of tenant activities that could affect the risk profile of the building.
Who Needs It?
Any individual or organisation that owns commercial property in the UK should consider buildings insurance. This includes:
- Landlords who let offices, shops, or industrial units to tenants
- Property investors with mixed-use portfolios (residential and commercial)
- Businesses that own their own premises (owner-occupiers)
- Developers holding completed commercial units prior to sale or letting
- Pension funds and trusts that hold commercial property as investments
If you have a mortgage on the property, your lender will almost certainly require buildings insurance as a condition of the loan. Even without a mortgage, the financial exposure of owning an uninsured commercial building is significant — a total loss could cost hundreds of thousands or even millions of pounds to rebuild.
What Does It Cover?
A standard commercial property insurance policy typically covers the building structure against a range of insured perils:
- Fire, lightning, and explosion
- Storm and flood damage
- Escape of water from tanks, pipes, and fixed heating systems
- Impact by vehicles or aircraft
- Subsidence, ground heave, and landslip
- Malicious damage and vandalism
- Theft and attempted theft
- Accidental damage (if selected)
The policy covers the cost of repairing or rebuilding the structure to its pre-loss condition. This includes the walls, roof, floors, foundations, and permanently installed fixtures such as lifts, heating systems, and fitted kitchens in communal areas.
Lease Obligations and Insurance
The commercial lease is the key document that governs insurance responsibilities between landlord and tenant. Most commercial leases contain specific insurance provisions that set out:
- Who must insure the building (typically the landlord)
- What risks must be covered (the insured perils)
- The basis of cover (reinstatement or indemnity)
- How the cost is recovered (usually through the service charge or insurance rent)
- The tenant's obligations regarding risk management and notification
Under a full repairing and insuring (FRI) lease — the most common type for single-let commercial properties — the tenant is responsible for all repairs and the cost of insurance. However, the landlord typically arranges the insurance and recovers the premium from the tenant as "insurance rent."
It is essential that the insurance policy matches the requirements set out in the lease. If the lease specifies certain perils or a minimum level of cover, the policy must meet those requirements. Failure to do so could leave the landlord in breach of the lease terms.
Getting the Reinstatement Value Right
The reinstatement value is the amount it would cost to completely rebuild the property from scratch, including demolition, site clearance, professional fees (architects, surveyors, project managers), and compliance with current building regulations. This figure is used to set the sum insured on the buildings insurance policy.
The reinstatement value is not the same as the market value or the purchase price. In many cases, the reinstatement cost is higher than the market value because it includes the full cost of construction, whereas market value reflects supply and demand factors.
Additional Covers to Consider
Beyond the core buildings insurance, commercial property landlords should consider the following additional covers:
Loss of rent. If the property is damaged and the tenant cannot occupy it, you may lose rental income during the repair period. Loss of rent cover protects against this, typically for a period of 24 or 36 months. The sum insured should reflect the annual rent plus any service charge contributions.
Property owners' liability. This covers your legal liability if a third party is injured or their property is damaged as a result of a defect in the building or a failure to maintain common areas. A minimum of £5 million is typical, though £10 million is increasingly common.
Terrorism cover. Standard commercial property policies exclude terrorism. Cover is available through Pool Reinsurance Company Limited (Pool Re), which provides government-backed terrorism insurance. Mortgage lenders often require this cover.
Engineering inspection and insurance. If the property has lifts, boilers, pressure vessels, or other mechanical plant, you may need engineering inspection cover to meet statutory requirements under the Lifting Operations and Lifting Equipment Regulations 1998 (LOLER) and the Pressure Systems Safety Regulations 2000.
Common Mistakes to Avoid
- Underinsuring the building — always use a professional reinstatement valuation
- Failing to update the sum insured for construction cost inflation
- Not checking the lease requirements before placing the insurance
- Overlooking loss of rent cover — a major claim could leave you without income for months
- Not disclosing material facts to the insurer — this can void the policy
- Assuming the tenant's insurance covers everything — it does not cover the building structure
- Ignoring terrorism cover when mortgage lenders require it
Next Steps
If you own commercial property in the UK, reviewing your insurance arrangements regularly is essential. Construction costs, lease terms, and risk profiles change over time, and your insurance should keep pace.
Focus Insurance Services works with commercial property landlords across the UK, from single-unit owners to large portfolio investors. Our team can review your current arrangements, identify any gaps in cover, and access specialist markets to find competitive terms for your specific requirements. Learn more about why using a broker matters for commercial property risks.
Contact us for a no-obligation discussion about your commercial property insurance needs.
Important Disclaimer
This article is for general information only and does not constitute insurance advice. The specific terms, conditions, and exclusions of any policy will vary. Always read your policy documentation carefully and speak to a qualified broker for advice tailored to your circumstances.
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