Buildings insurance

Property insurance will generally cover:

• damage or destruction

• loss of rent

• public liability

Where property is let, the landlord will usually be responsible for maintaining insurance, recovering some or all of the costs from the tenants. Where damage or destruction occurs, the landlord must use insurance monies to reinstate the property, making up any shortfall out of its own pocket.

Modern policies are generally written on an 'all risks' basis, subject to specified exclusions and excesses. They usually include a 'noted interest' clause which entitles tenants to be notified of any claim, or of any event (such as non-payment of the premium) that invalidates the policy. Landlords will often cite the standard 'noted interest' clause when resisting tenant demands for joint or co-insurance, or for the noting of a particular tenant's interest on the policy.

Since the 1990s, tenants have increasingly resisted provisions that place on them the risk of damage or destruction by uninsured risks. That market trend has been reinforced by the Code for Commercial Leases, which recommends that uninsured risks should remain with the landlord as owner of the major capital interest in the property.

Commission and discounts

Landlords with portfolios of property can often obtain discounts from insurers for block and repeat business. They also receive commission payments for providing claims handling services to the insurer. In Williams v Southwark London Borough Council [2000] All ER (D) 377 the court indicated that a landlord is entitled to retain genuine commission payments, but ought to pass on to the tenant any discount so that the tenant pays the actual cost of insurance.

Subrogation

An insurer who pays out on a claim is entitled to 'step into the shoes' of the insured and take over any rights to sue in respect of the damage that gave rise to the claim. This right of subrogation will not be available against a tenant who has paid the premium. Insurance will be for the benefit of both parties (Mark Rowland v Berni Inns [1985] 3 All ER 473). Where there is no evidence that insurance is for the benefit of both parties (for example, where there is an oral tenancy and the tenant does not pay an 'insurance rent'), then a right of subrogation might be available against the tenant. However, a claim would be likely to succeed only where the tenant's conduct in causing the damage is reckless rather than negligent (Lambert v Keymood [1997] 2 EGLR 70).

Terrorism

Commercial 'all risks' policies cover only the first £100,000 of damage caused by terrorism. Above that level cover must be obtained from the Pool Reinsurance Company ('Pool Re'). For this purpose, damage must be caused by an action certified by the Treasury as an act of terrorism. There are differences between the definition of 'terrorism' in Reinsurance (Acts of Terrorism) Act 1993 which established Pool Re and the Terrorism Act 2000. One result of the different definitions is that Pool Re cover may not extend to damage caused by lone activists not connected with an organisation, or to damage by computer virus or hacking.

If a landlord elects to take out Pool Re cover then it must insure its whole portfolio. It is not possible to 'cherry pick' properties thought to be in high risk areas. Landlords generally prefer to have an option, rather than an obligation, to insure against terrorism.

Flood risk

In 2003, the Association of British Insurers (ABI) issued a statement of principles which aimed to 'provide reassurance to the overwhelming majority of insurance customers living in the floodplain about the continued availability of insurance in future'. In June 2008, an ABI report on the summer floods of 2007 warned that 'without government action and stricter enforcement of planning controls to prevent new homes being built on flood plains, some properties could become uninsurable, unsaleable and uninhabitable'. As well as risks from river or tidal sources, the ABI has expressed significant concerns about 'intra urban' flooding as drains and sewage systems overflow. Insurers' flood risk maps are becoming increasingly sophisticated, and modelling at postcode and individual property level is likely. In 2008, the assessment of flood risk was refined further towards the ewith publication of the UK Climate Impacts Programme UKCIP08 data.

The Code for Commercial Leases

The 2007 reissue of the Code for Commercial Leases recommended:

• rent suspension should apply if the premises are damaged by an insured risk or uninsured risk except where caused by a deliberate act of the tenant

• if damage by an uninsured risk prevents occupation, tenants should be allowed to terminate their leases unless landlords agree to rebuild at their own cost

In the current market, tenants are increasingly pressing for lease provisions that adopt these recommendations.