Questions surrounding the insurance of leased premises have evolved and come into sharp focus with the Coronavirus pandemic.
Everyone agrees that whilst tenants can be expected to carry out routine maintenance in terms of their lease, insuring against certain risks that could lead to large one-off costs makes sense. If the property is damaged by one of the risks insured against, such as lightning, suffering burst pipes or an explosion (the "Insured Risks") the insurer will meet the costs of repairing the damage.
What is insured against? The Insured Risks will not be the same in every lease. They will be negotiated between the landlord and the tenant and will also be dictated by what is actually available on the insurance market. There may be discussion if there is, for instance, a history of subsidence as to whether such cover is available at reasonable rates. Terrorism is another risk for discussion. Having in the past been a feature in very few leases, insuring against terrorism has become more standard for city centre properties over the last few decades following, in particular, the Manchester city centre bombings.
The most recent risk for discussion has been pandemic cover with debates about whether existing insured risks stretch to cover it and whether new policies should include it.
As well as risk of damage to the premises, other losses insured against include public liability and loss of rent/service charge. If agreed in terms of the lease, a tenant's obligation to pay rent will be suspended if the premises are damaged and cannot be used. A landlord will insure against any such loss of income, generally for up to 3 years. If the premises have not been repaired when the insurance expires, either party can terminate.
What is not insured against? Landlord insurance will rarely cover the tenant's possessions and so a tenant should arrange such cover before taking entry. In a shopping centre plate glass forms part of a unit and can be expensive to repair and so landlords sometimes insist that a tenant gets plate glass insurance.
"Uninsured risks" were left to chance in the past but have now become a regular feature in leases. In essence they are risks from the agreed list of Insured Risks that, for whatever reason, cannot actually be insured against. For example, "flooding" could be listed in the Insured Risks but such cover may become unavailable during the term of the lease making flooding an "Uninsured Risk".
Responsibility for uninsured risks over the last few years has tended to shift from tenants towards landlords, but the position depends on the particular circumstances of the lease. In return for taking these Uninsured Risks on, the landlord tends to be given the option of whether or not to make them good and the option to terminate instead. Also, the tenant will generally remain responsible for repairing any damage they caused if the risk was uninsured.
What does insurance pay for? A landlord will generally insure for the full reinstatement cost including all professional fees that would be incurred, costs of demolition/site clearance and all incidental expenses – essentially all the costs involved in dealing with what remains of the damaged/destroyed building and getting its replacement in place. Any shortfall in the insurance monies tends to be met by the landlord unless the shortfall is caused by the tenant.
When can insurance be claimed? Insurance proceeds can be claimed when damage to the property or loss is caused by one of the Insured Risks. Seems simple but, as borne out by the court cases during the pandemic, it is not always so black and white. When the pandemic struck and lockdown was ordered, tenants sought to argue that, since they could not occupy and use their premises, they could stop paying rent and the landlord could claim against their insurance for loss of rent. These claims were rejected by the Courts. The legal ban on using the premises was not an instance covered by most loss of rent policies. They only kicked in when the premises could not be used due to physical damage occurring. Tenants seeking to rely on the loss of rent argument have been told that they should instead be seeking to claim under their own business interruption insurance cover. Whether that will be successful depends on individual policy terms and there has already been quite a lot of litigation about that.
What's the future for insurance? Between the pandemic and the climate change emergency, discussions on insurance are moving in a very different direction. The Swiss Re Institute has predicted that climate risks will add £132bn a year to global property insurance costs by 2040 resulting in soaring property insurance premiums over the next two decades. With both landlords and tenants seeking to be protected against any future lockdowns and seeking protection against the impending demands that climate change will bring, insurance policies will have to become ever more elastic to stretch far enough. But that will be down to negotiation and no doubt a higher price being paid.
This commentary deals with some general issues that may occur in relation to insurance but detailed advice tailored to the particular situation should always be taken.
Climate risks are forecast to add $183bn (£132bn) a year to property insurance costs by 2040.
Swiss Re Institute, the reinsurer’s research unit, predicted that the growing frequency of extreme weather events would cause property premiums to soar over the next two decades.
Jerome Haegeli, Swiss Re’s group chief economist, said the changing climate is the “number one” risk to the global economy.
Property insurance is expected to rise from a 25% share of total property and casualty premiums in 2020 to up to 29% by 2040.
The institute said that climate-related risks would account for just over a fifth of the overall rises, with other factors categorised as “economic development”, such as inflation and a growth in insured assets.
It predicted the market would be worth $1.3tn by 2040.