Building Insurance on a Commercial Lease: Who Pays?

A common question from businesses signing their first commercial lease is whether they need to arrange building insurance for the premises. The short answer is no. The building belongs to the landlord and building insurance sits with them. Taking out a building policy as a tenant would not respond to any claims, because you have no insurable interest in the property itself.

What tenants do need to arrange is cover for what they bring into that building: their stock, equipment, fit-out and the liability that comes with operating a business on the site.

Who is responsible for building insurance on a commercial lease?

Building insurance is the landlord’s responsibility, not the tenant’s. The building is the landlord’s asset and only they hold an insurable interest in the structure itself. In most commercial leases, the landlord arranges the building policy and may pass the cost of that premium on to the tenant as a lease outgoing.

This is a common source of confusion for businesses signing their first commercial lease, particularly for warehouses where the tenant occupies the entire building. Even in a sole-occupancy arrangement, the building remains the landlord’s property and the insurance stays with them.

Why would a building policy not work for a tenant?

If a commercial tenant took out building insurance and a claim arose, the insurer would decline it. Insurance responds to an insurable interest, meaning a financial stake in the thing being insured. Tenants do not own the building, so there is nothing for a building policy to protect on their behalf.

Taking out building cover as a tenant is not just unnecessary. It is ineffective. The premium is wasted and the cover would not respond.¹

What insurance does a commercial tenant actually need?

Tenants are responsible for insuring their own assets and their own liability. The split is clear: the landlord insures the building structure and the tenant insures everything inside it and the operations they run from it.

Cover that commercial tenants commonly arrange:

• Contents and stock. Equipment, machinery, inventory and supplies stored at the premises. If the business holds significant stock or relies on specialist equipment, this is often the most financially important cover to get right.
• Fit-out and tenant improvements. Any fit-out the tenant installs, such as shelving, partitioning, flooring or joinery, is usually the tenant’s responsibility to insure, not the landlord’s.
• Public liability. Covers the business against third-party claims for injury or property damage that occur on the premises. Leases commonly specify a minimum limit.
• Business interruption. Covers lost income if an insured event (fire, flood, storm) prevents the business from operating from the premises while repairs are carried out.

The specific requirements vary by lease. Some leases also ask for plate glass cover and evidence of workers compensation. It is worth reading the insurance provisions in the lease before signing to understand exactly what is expected.

Does it matter whether I am in a warehouse, office or retail space?

The same principle applies regardless of premises type. Whether you are leasing a warehouse, a retail shopfront, an office or an industrial unit, the structure belongs to the landlord and the building policy is theirs to arrange.

What changes between premises types is the nature of the assets inside. A warehouse typically holds high-value stock or equipment. A retail space has fit-out and customer foot traffic. An office has technology and data exposure. The right cover reflects the specific risks of the business operating in the space, not the type of building.

What is a certificate of currency and will my landlord ask for one?

A certificate of currency is a one-page document from your insurer confirming that a policy is current, what it covers and the limit in place. Most commercial landlords require one before the lease commences, at each renewal and sometimes on request throughout the term.²

When providing a certificate of currency, check that it reflects the correct policy type and limit. A certificate showing a public liability policy of $10 million will not satisfy a lease that specifies $20 million. Getting this wrong at the start of a tenancy is an avoidable problem.

Key Takeaways

• Building insurance sits with the landlord, not the tenant. The building is the landlord’s asset and only they have an insurable interest in the structure.
• A tenant taking out a building policy would not receive any benefit. The insurer would not respond to claims where the insured has no ownership interest in the property.
• Commercial tenants are responsible for insuring their contents, stock, fit-out and public liability.
• Business interruption cover protects income if an insured event prevents the business from operating from the premises.
• Most leases require a certificate of currency before commencement. Check the policy type and limit match what the lease specifies.

If you are taking on a new commercial lease and want to understand what cover to arrange, Cipher can walk through the lease provisions with you. Get in touch.

The information in this article is general in nature and does not constitute legal, financial or insurance advice. Please speak with a qualified adviser about your specific circumstances.

Footnotes

1. Insurance explained, Insurance Council of Australia ↩

2. Types of business insurance, business.gov.au ↩