Commercial Property Insurance: Reinstatement Value and Occupancy

Two figures decide most commercial property claims and neither is the premium: the reinstatement value you declared, and the indemnity period you chose for business interruption. Both are routinely set too low.

Reinstatement value is a construction figure

It is what rebuilding the property would cost, including demolition, site clearance, professional fees and compliance with current building regulations. It is not market value, not the purchase price, and not the figure on a balance sheet.

Getting it wrong triggers average: the insurer reduces the settlement in proportion to the shortfall. Declare sixty per cent of the true figure and a partial loss can be settled at sixty per cent, on a claim that had nothing to do with the valuation.

Construction costs have moved considerably, so a figure set several years ago is probably low now. A periodic reinstatement-cost assessment is cheap relative to the exposure and is the single most valuable thing to review at renewal.

Watch for uplift provisions too. Some policies index the sum insured automatically and some do not, and knowing which yours does changes how often you need to intervene.

Business interruption is what saves the business

Rebuilding a building does not restore an income. Business interruption cover replaces lost gross profit while trading is prevented or reduced, and it is the section that determines whether the business survives the event.

The indemnity period is the number to get right. It is the maximum time cover will run, and twelve months is a common default that is frequently too short: planning permission, specialist trades and a fit-out can easily exceed a year on anything unusual.

Twenty-four or thirty-six months is normal for premises that would be slow to replace. Ask how long it would realistically take to be trading again, and set the period from that answer rather than from the default.

Occupancy conditions are strict and are checked

Commercial policies limit how long premises may be unoccupied: often thirty days, after which cover reduces sharply. They typically also impose conditions during any unoccupied period: inspections at stated intervals, services isolated, water drained, letterboxes sealed.

Seasonal businesses and premises between tenants are the situations that catch people. A closed season is an unoccupied period, and it needs declaring rather than assuming.

Keep a record of the inspections. Where a policy requires weekly visits, the evidence that they happened is what supports the claim.

Contents, stock and tenant's improvements

Contents and stock are separate from buildings, and stock valuation needs care where the level varies through the year. A limit set for a quiet month is the wrong limit in the run-up to Christmas.

Where you lease the premises, tenant's improvements — a fit-out, partitions, a shopfront — are usually your asset and your insurance responsibility, not the landlord's. That is a commonly uninsured value.

Read the lease to establish who insures the structure. Double-insuring is waste; assuming the landlord has it when they have not is worse.

The conditions attached to discounts

Alarm and sprinkler requirements are terms. Where a policy is priced on the basis of an alarm being set outside working hours, an unset alarm is a breach rather than an oversight.

Hot works, welding, cutting, roofing with a torch, usually carry specific conditions or a permit requirement, and fires arising from uncontrolled hot works are a classic refused claim.

Waste and combustible storage clauses matter to anyone with a yard, and they specify distances from the building rather than general tidiness.

What to do at renewal

Revisit the reinstatement figure, revisit the indemnity period against how long recovery would really take, and check stock limits against your actual seasonal peak. Then confirm nothing about occupancy or activities has changed without being declared.

See liability cover for the work, letting a property out and the clauses common to every policy.

Flood, subsidence and the properties insurers do not want

Commercial property has no equivalent of the domestic flood-reinsurance arrangement, so a business in a flood-prone location is exposed to the open market and can find cover expensive, heavily excluded, or genuinely unavailable. That is a material fact about a premises rather than a detail about a policy, and it belongs in the decision to take the lease.

Where cover is available with a flood exclusion, the practical question becomes what the business would do about a flood without insurance, which usually means either accepting the risk explicitly or spending on resilience: barriers, raised plant, moved stock, electrics above the likely water line. Insurers frequently price resilience work into the terms, so the spend can pay for itself twice.

Subsidence is the other exclusion to look for, particularly on older buildings, on clay, and near mature trees. It is commonly excluded outright or carries a much larger excess than the rest of the policy, and the excess is the number to check rather than the presence of the word.

Before signing a lease or completing a purchase, get an indicative quote on the specific address. An unquotable building is information you want before you are committed to it, not after.

Frequently asked questions