How Much to Insure A Commercial Building for?
To figure out how much to insure a commercial building for, it’s critical to get an accurate assessment of the property’s rebuild cost.
Commercial building owners have a few options for getting an estimate for the reinstatement cost of a property. In most cases, an RICS chartered surveyor uses special tools like the RICS Commercial Reinstatement Tool to help determine a building’s rebuild cost. This tool calculates reinstatement costs using historical databases that span more than 50 years of UK construction project data, such as tender prices.
Less valuable properties might be valued using desktop valuations methods, which means that the valuer does not visit the property in person but instead uses RICS tools, Google maps, etc., to determine a rebuild value. These can cost as little as £175 (Read more here).
More valuable, unique or complicated properties may need an in-person survey to be carried out to estimate the rebuild value accurately. This type of survey is more expensive, typically costing well over £1,000, but provides a more accurate figure. Getting a good valuation is critical to ensure a property has the correct level of insurance.
How to calculate commercial building insurance
Commercial building insurance companies in the UK use many factors to calculate the premium that a policyholder must pay for coverage.
One of the biggest drivers is the rebuild cost of a property. This is because the largest claims derive from situations where a building is destroyed, say in a fire. In that case, the destroyed property would need to be demolished and removed, and a new building constructed in its place. The rebuild cost is also referred to as a reinstatement value. In addition to demolition costs, rebuild values include the material, labour and professional costs needed to rebuild the property. Professional costs are for architect fees, surveying fees, local authority permissions, etc.
Can you use the market value to estimate the rebuild cost? Not really. The market value of a property will be higher than the rebuild cost. This is because the market value includes the value of the land on which the building sits. Even when a building is destroyed, the land still holds value. For this reason, rebuild costs are lower than market values.
Using a market value as the rebuild cost for commercial building insurance would result in a property being overinsured. This means that the building insurance would have a higher insurance limit than necessary, and the building owner would pay a higher premium as a result. To avoid overinsuring and overpaying for insurance, a building owner should get an accurate rebuild cost for their property.
In addition to the reinstatement value, other factors will impact commercial building insurance rate calculations. For example, the previous claims history of the property owner is a factor. If there’s been a history of claims, then a property owner will probably be required to pay higher premiums to insure a property than a property owner who has not made any claims.
The location of the property also impacts the insurance rate calculation. The rate of burglaries in an area will impact insurance premiums, as buildings in higher-crime areas are more likely to be burgled or vandalised. And whether or not a building can be easily insured against flooding and the price a building owner needs to pay for this coverage depends on the local areas as well. For this reason, anyone buying a commercial property should always check the flood risk in an area before making the purchase.
Insurers also incorporate building security into their calculations. The types of locks, gates, cameras, alarms and other security measures are all considered. The better the security, the lower the premium might be. Building security has the biggest impact on the risk of burglaries but can even impact the risk of fire, as some burglars set fire to a property before they leave.
Another factor included in the calculation of commercial building insurance is the type of business occupying the building. This information is important because it affects the chance of a claim. Businesses with higher foot traffic may be more prone to a property owner liability claim, for example. These are claims where a member of the public is injured (or their property damaged), and the building owner is to blame.
Some business residents also leave a building more prone to flood or fire. For example, a restaurant might pay more for commercial property insurance than a gift shop because there’s more risk of fire in a restaurant.