A Building Owner’s Guide to Insurance for Commercial Leases

Introduction

If you own a commercial building and lease it to a tenant, insurance is one of the fastest ways a “simple” tenancy can turn into a costly dispute. The lease might say the tenant must reimburse your premium. The tenant might assume their own policy covers everything. Meanwhile, a burst pipe, fire, storm damage, or a liability claim can expose gaps between landlord and tenant responsibilities.

This guide breaks down the core insurance considerations for building owners in the UK: what cover you typically need, how insurance interacts with lease terms, what to watch for in service charge and rent schedules, and how to reduce the risk of underinsurance or uninsured losses.

1) The basics: landlord vs tenant insurance responsibilities

Commercial leases vary, but most follow a familiar structure:

• The building owner (landlord) insures the structure and any landlord-owned fixtures.

• The tenant insures their contents, stock, equipment, and often their own liability and business interruption.

• The tenant reimburses the landlord for the building insurance premium, usually as an “insurance rent” or through the service charge.

Where it gets complicated is in the detail: what counts as “the building”, whether improvements are included, whether loss of rent is insured, and whether the tenant is required to maintain cover to a specific standard.

Common lease structures

• Full Repairing and Insuring (FRI) lease: The tenant takes on repairs and reimburses the landlord’s building insurance. The landlord still typically arranges the building policy.

• Internal repairing lease: Landlord retains responsibility for structure/external elements; tenant covers internal repairs and their own property.

• Multi-let buildings: Landlord insures the whole building; tenants pay their share via service charge.

2) What “buildings insurance” should cover for a commercial landlord

A landlord’s buildings policy is designed to protect the structure and landlord-owned property. Key areas to consider:

Core insured perils

Most commercial buildings policies can include cover for:

• Fire, lightning, explosion

• Storm and flood

• Escape of water (burst pipes)

• Impact (vehicles, falling trees)

• Theft and malicious damage (often with conditions)

• Subsidence (sometimes optional or restricted)

• Accidental damage (optional)

The right mix depends on the building type, location, construction, and occupancy.

Property owner’s liability

If someone is injured and you’re legally liable as the building owner (for example, due to a defect in a common area), property owner’s liability can respond. This is especially important for:

• Multi-let premises

• Shared access routes, car parks, stairwells

• Older buildings or buildings with higher footfall

Loss of rent / alternative accommodation

A major claim can stop the tenant trading and may make the premises unoccupiable. Landlords often insure:

• Loss of rent (or “rent receivable”) for a defined indemnity period (commonly 12–36 months)

• Alternative accommodation costs (more common in residential, but still relevant where lease terms require it)

Loss of rent is frequently a lease requirement because it supports the “rent suspension” clause (more on that below).

Terrorism insurance

In some areas and for certain tenants (banks, national brands, city-centre locations), terrorism cover may be requested. In the UK this is often arranged through Pool Re backed solutions.

Engineering inspection / statutory inspections

If the building has plant such as:

• Lifts

• Pressure systems

• Air receivers

• Boilers

You may need engineering inspection cover to help meet statutory inspection requirements and reduce downtime.

3) The single biggest risk: underinsurance and the “average” clause

Underinsurance is one of the most common and expensive problems for building owners.

Reinstatement value vs market value

Buildings insurance should be based on reinstatement cost (the cost to rebuild, including demolition, debris removal, professional fees, and compliance with current building regulations), not the purchase price or market value.

The average clause

Many policies apply “average” if the sum insured is too low. Example:

• True reinstatement value: £1,000,000

• Sum insured: £700,000 (30% underinsured)

• Claim: £200,000

With average, the insurer may pay only 70% of the claim (e.g., £140,000), leaving you to fund the shortfall.

Practical steps to reduce underinsurance

• Get a professional rebuild valuation periodically (especially after refurbishments)

• Include professional fees and demolition costs

• Consider index-linking

• Review sums insured at renewal, not just when you buy the building

4) Key lease clauses that interact with insurance

Your insurance should be aligned with your lease wording. If not, you can end up with a policy that doesn’t support the lease mechanics.

The insurance clause

Typically sets out:

• What the landlord must insure (perils, risks, sums insured)

• Whether the landlord must insure with a “reputable insurer”

• Whether the tenant must be noted (or whether the policy must waive subrogation)

• How the tenant reimburses the premium

Tip: If the lease requires “all risks” cover, confirm what that means in practice. Modern policies are “specified perils” with optional extensions. Make sure the policy meets the lease intent.

Rent suspension clause

Often states that if the premises are damaged by an insured risk and become unfit for occupation, rent is suspended until reinstatement.

This is why loss of rent cover matters. Without it, you may lose income during repairs.

Reinstatement clause

Sets out the landlord’s obligation to reinstate following damage, usually using insurance proceeds.

Check:

• Any time limits

• Whether reinstatement is conditional on insurance proceeds being sufficient

• Whether the tenant can terminate if reinstatement takes too long

Alterations and improvements

Tenants often fit out premises: partitions, flooring, kitchens, racking, specialist electrical work.

Clarify in the lease:

• Are tenant improvements treated as part of the building?

• Who insures them?

• What happens at lease end?

A common approach is:

• Landlord insures the original structure

• Tenant insures their fit-out and contents

But in practice, some fit-out becomes “fixtures” and can blur the line.

Subrogation and waiver of recourse

If a fire starts due to tenant negligence, the landlord’s insurer might pay the claim then pursue the tenant (subrogation). Many commercial leases aim to prevent landlord/tenant litigation by requiring:

• Waiver of subrogation against the tenant (where available)

• Noting the tenant’s interest

This needs to be discussed with your broker/insurer because not all markets will agree to broad waivers.

5) Multi-let buildings: service charge, apportionment, and common areas

If you own a building with multiple tenants, the insurance structure must handle:

• Common parts (stairs, corridors, lobbies)

• Shared services (fire alarms, lifts)

• Different tenant risk profiles (e.g., office vs light industrial)

Service charge and insurance rent

Your lease should clearly allow you to recover:

• The building insurance premium

• Insurance-related fees (valuation, broker fees where permitted)

• Claims handling costs (where recoverable)

Tenants will expect transparency. Keep:

• Policy schedule

• Statement of premium

• Sum insured and valuation basis

Occupancy changes

A tenant change can alter the building’s risk. For example:

• A warehouse becomes a spray shop

• A café installs deep fat fryers

• A vacant unit increases arson and escape of water risk

Many policies require you to notify changes in occupancy or material alterations. Build a process to capture this.

6) What tenants should insure (and what you should require)

Even though your policy is the landlord’s, your risk is affected by whether the tenant carries the right cover.

Tenant’s public liability

Tenants should have public liability for their operations and visitors. You may want:

• A minimum limit (often £2m–£10m depending on premises)

• Evidence of cover annually

Employers’ liability

If the tenant employs staff, employers’ liability is legally required in most cases.

Contents, stock, and equipment

Tenants should insure:

• Contents and stock

• Plant and machinery

• Tools and portable equipment

Business interruption

If the tenant can’t trade after damage, business interruption helps them survive. While this is the tenant’s issue, it can affect your income and the stability of the tenancy.

Tenant’s improvements

If the tenant has invested heavily in fit-out, ensure it’s insured by the right party.

7) Common claim scenarios and where disputes happen

Here are typical real-world scenarios where landlord/tenant insurance responsibilities can clash.

Escape of water in an upper unit

A pipe bursts in a first-floor unit and water damages the unit below.

• Landlord’s buildings policy may cover damage to the structure

• Tenant’s contents policy covers stock and equipment

• Liability may depend on negligence and maintenance responsibilities

Dispute trigger: Who pays the excess? Who pays for betterment (upgraded materials)?

Fire caused by tenant operations

A tenant’s process causes a fire.

• Landlord’s policy may pay for reinstatement

• Insurer may seek recovery from the tenant unless waiver of subrogation applies

Dispute trigger: Lease says tenant is protected from subrogation, but policy doesn’t include the waiver.

Storm damage to roof

Storm damages the roof and water enters.

• Buildings policy should respond if storm is covered

• Maintenance issues can complicate claims if the roof was already in poor condition

Dispute trigger: Was it storm damage or wear and tear?

Vacancy and malicious damage

An empty unit is vandalised.

• Some policies restrict cover during vacancy

• You may need additional protections: inspections, draining down, security

Dispute trigger: Policy conditions weren’t met, claim is reduced or declined.

8) Excesses, claims handling, and who pays what

Commercial property policies often have:

• Standard excesses (e.g., £250–£1,000)

• Higher excesses for escape of water

• Very high excesses for flood or subsidence

Your lease should address:

• Whether the tenant pays the excess when damage arises from their demise

• Whether excesses are recoverable through service charge

• How claims are notified and managed

Good practice is to set expectations upfront and keep a simple claims process document for tenants.

9) Risk management that can lower premiums and reduce claims

Insurers price commercial buildings based on risk controls. A few practical measures often help:

• Regular inspections (especially for vacant units)

• Leak detection and stopcocks clearly labelled

• Heating maintained to prevent frozen pipes

• Electrical testing and maintenance

• Fire risk assessment and compliance with fire safety duties

• Security: locks, shutters, alarms, CCTV where appropriate

• Clear contractor controls for hot works

Even if premiums don’t drop immediately, these steps reduce claim frequency and protect your rental income.

10) A simple checklist for building owners

Use this as a renewal and lease-alignment checklist.

• Confirm the lease insurance clause: perils, sums insured, who pays, and evidence requirements

• Ensure buildings sum insured is reinstatement-based and up to date

• Add loss of rent with a suitable indemnity period

• Include property owner’s liability at an appropriate limit

• Review vacancy conditions and your inspection routine

• Clarify tenant improvements: who insures what

• Consider terrorism cover where relevant

• Confirm subrogation/waiver requirements and whether the policy supports them

• Keep documentation ready for tenants: schedule, premium, and summary of cover

Frequently asked questions (FAQ)

Does a commercial landlord have to insure the building?

There’s no single legal rule that applies to every situation, but most commercial leases require the landlord to insure the building and allow the landlord to recover the premium from the tenant. If you have a mortgage, your lender will usually require buildings insurance.

Can I force a tenant to use my insurer?

Typically, the landlord arranges the buildings insurance. Tenants usually arrange their own contents and liability cover. If you want tenants to meet minimum standards (limits, insurer rating, specific extensions), set this out in the lease.

What is “insurance rent”?

Insurance rent is the tenant’s contribution towards the landlord’s building insurance premium, often paid alongside rent or via service charge.

Should the tenant be named on the landlord’s buildings policy?

Often the tenant’s interest is noted, or the policy includes clauses that recognise the tenant’s position. The exact approach depends on the insurer and lease wording.

What happens if the building is underinsured?

If the sum insured is too low, the policy may apply average and reduce claim payments. That can leave the landlord (and potentially the tenant, depending on lease wording) funding the shortfall.

Who insures tenant fit-out?

It depends on the lease and what the fit-out includes. Many tenants insure their own improvements, but some leases treat certain fixtures as part of the building. Clarify this before the tenant starts work.

Do I need loss of rent cover if the tenant has business interruption insurance?

Yes, often you do. Tenant business interruption protects the tenant’s income; loss of rent protects the landlord’s rental income and supports rent suspension clauses.

Can the landlord recover the policy excess from the tenant?

Sometimes. It depends on the lease wording and the circumstances of the claim. Many landlords set out in the lease or service charge provisions when excesses are recoverable.

What if the tenant changes what they do in the premises?

A change in trade can be a material change in risk. You should be told and may need to notify your insurer. Consider a lease clause requiring the tenant to inform you before changing use.

Final thoughts

Commercial lease insurance isn’t just about buying a policy—it’s about aligning the policy with the lease and the reality of how the building is used. A well-structured buildings policy, clear lease clauses, and a simple annual review process can prevent disputes, protect your rental income, and keep both landlord and tenant on solid ground.

If you want, tell me what type of building you’re insuring (single let vs multi-let, office/retail/industrial, and whether there’s any tenant fit-out) and I’ll tailor this guide into a more niche, SEO-targeted version for your ideal audience.