With the country well into its worst recession for some considerable time – although nobody knows how long it will last – property owners may find that some tenants are facing financial difficulties.
Residential landlords could see tenants losing their jobs and having to rely on state benefits to pay their rent – which is okay if the money reaches the property owner. Whilst owners of commercial property could see tenants going out of business – in which case there is generally nobody who will pick up the tab.
Worse still, the landlord may have to cover such items as insurance and business rates, with no income to cover them. As a result, this could lead to some property owners seeking to save money in any way possible and looking at their landlords insurance costs could be one of these.
But with the cost of commercial fire claims last year 15 per cent higher than 2007 – and domestic fire costs up 17 per cent – there are significant dangers in looking at property owners’ insurance as an optional extra. Insurance is there to provide protection against financial loss resulting from major events that cannot be prevented. In theory, cost can be reduced by excluding some covers such as subsidence and similar perils. But to do so at a time of financial uncertainty can expose the property owner to the risk of having to find massive amounts of money to reinstate damage that is by no means a remote possibility. For example, weather patterns over the past few years have been so different that the risk of ground subsidence is probably higher now than at any stage for a decade or more.
Accidental damage – as opposed to the more traditional risks – might look like an add-on that can be done without. However, this picks up a number of events that would fall outside the scope of most ordinary insurance covers and is therefore not only a way of protecting against unpredictable events, but is also an excellent way of reducing the time involved in negotiating a claim, as there is less scope for an insurance company to claim cover does not apply.
One of the most common mistakes people can make is to assume that, because the market value of their property is falling, the insurance sum insured can be cut. In fact, nothing could be further from the truth; there is no relationship between what a property can be sold for and what it would cost to replace, if destroyed. Rebuilding costs tend to rise at least with inflation and when market values are falling, the gap widens. There is no scope for cutting sums insured unless rebuilding costs fall. In fact, to cut the sum insured could result in significant financial loss, just at a time when rental income is less. This is simply because the insurance company is well within its rights to refuse to pay the full amount of a claim, if the sum insured does not reflect full rebuilding costs – even on a relatively small case.
Where rent cover is a proportion of the sum insured, this would be automatically reduced if the sum insured falls; where it is a separate item, reducing it just because the property is untenanted – or no rent can be collected – is not viable. This is due to in the event of a claim, the insurance company could easily protest that there is underinsurance and slash a settlement.
Of course, nobody likes to consider the possibility of someone they know deliberately harming their property. But it is a sad fact that incidences of malicious damage by tenants is on the increase – when times are hard, this could increase, so considering this form of cover is a necessity, not a luxury.
Reviewing your landlords insurance is always a good idea, but this should be done in the light of ensuring that adequate cover exists, at the right (not necessarily the cheapest) cost. Insuring commercial premises for property owners is a specialised area and you should always ask your insurance advisers what experience they have of dealing in this sector.