Who pays for commercial building insurance? It’s not that simple
- RebuildCostASSESSMENT.com
- 13 hours ago
- 6 min read
Many landlords think that passing insurance costs to tenants protects them from risk. But what if this approach is leaving you exposed to legal and financial problems?
It’s common for landlords to take out building insurance and then recover the cost from tenants through a clause in the lease, often called “insurance rent.” This might seem simple, but it can lead to unexpected issues.
Even if the tenant pays, the landlord usually remains legally responsible for the building. That means you still carry the risk if the cover is wrong, incomplete, or unclear. This can lead to underinsurance, gaps in protection, or disputes if something goes wrong.
Lease terms vary, and they’re often misunderstood. Just because the cost is passed on, doesn’t mean the responsibility is.
UK law (Landlord & Tenant Act 1985) puts the duty to insure the building on the landlord, even when tenants help cover the cost.
Could your insurance setup be putting your investment at risk? Read on to find out.
What happens if your insurance doesn’t cover full rebuild costs?
79% of commercial properties in the UK are underinsured. That means most landlords could be facing a major financial shortfall if their property were damaged or destroyed. It’s a silent risk and it’s easy to miss, until it’s too late.
The problem often starts with confusion between market value and rebuild cost. Market value is the price your property could sell for. Rebuild cost is the actual amount needed to repair or rebuild the property after serious damage. Many landlords mistakenly insure based on market value, which can be much lower or, in some cases, higher than the cost to rebuild.
This creates a dangerous gap in cover. If you’re underinsured, your insurer may apply the "average clause", reducing your payout in proportion to how much cover is missing. In a worst-case scenario, this could mean tens or even hundreds of thousands of pounds not covered.
Then there’s the “insurance rent” misunderstanding. Even if your lease allows you to pass insurance costs on to tenants, the legal responsibility for getting the cover right still sits with you, the landlord. If a claim is denied or the payout falls short, you will be held liable.
Regularly updated rebuild cost assessments are the only reliable way to make sure your insurance reflects the true cost to reinstate the property. Relying on outdated figures or estimates invites serious financial risk.
Not sure if your cover is accurate?
Start with our free Rebuild Cost Checker to gauge the likelihood of underinsurance based on postcode-level data. Then, take the next step with a Desktop Assessment to ensure you have an accurate rebuild figure.
How to structure insurance costs in a commercial lease
A strong lease agreement does more than explain who pays for building insurance. It helps protect landlords from legal issues, unpaid premiums, and confusion when something goes wrong.
Many landlords think passing insurance costs to tenants is enough. But if the lease is unclear, it can lead to disputes and out-of-pocket expenses. That’s why how you write your lease matters just as much as who pays the premium.
One common issue is mixing up insurance rent with service charges:
Insurance rent is a separate charge for building insurance only.
Service charges cover general costs like cleaning, repairs, or lighting.
If you put insurance into a general service charge or don’t explain it well, tenants may challenge the payment. They might say it’s unfair or refuse to pay if the clause is vague. This can lead to unpaid premiums or legal trouble.
Why landlords must arrange commercial buildings insurance
Under UK law, the landlord is responsible for arranging building insurance for commercial properties. This ensures the property is properly covered and the landlord's financial interest is protected.
Letting tenants arrange building insurance creates unnecessary risks and legal complications. It can lead to cover gaps, confusion over responsibilities, and serious problems when making a claim.
Here’s why the landlord must always control the policy:
The tenant might choose poor cover or underestimate the rebuild cost
The policy may not include the landlord, which could make it invalid
Missed payments could cancel the policy without the landlord knowing
Most leases include an insurance rent clause, which allows the landlord to recover the cost of the premium from the tenant. But the policy itself—what it covers and how it’s managed—must stay with the landlord.
A good insurance clause should:
Let the landlord recover the cost from the tenant, including monthly premiums and excess charges if a claim is made.
List the risks the insurance must cover (fire, flood, etc.)
Explain how tenants will be told if the premium changes
State that tenants must not take out their own buildings insurance
Want to be sure your lease is protecting you, not exposing you? Read our landlord’s guide to commercial property insurance for practical help.
The underinsurance trap: why landlords need rebuild cost assessments
You may think you're fully insured, but if your rebuild value is wrong, your cover could fall short when you need it most.
Many landlords fall into the underinsurance trap without realising it. They believe their insurance will pay out in full. But if the rebuild cost is too low, the payout may be reduced or refused altogether.
A real example: £2 million shortfall
One landlord insured an office block using a rebuild cost from 15 years ago. When a fire destroyed the building, construction prices had increased sharply. The insurer applied the average clause and paid out much less than expected, leaving the landlord with a £2 million shortfall.
This isn’t rare. Rebuild values change quickly due to inflation, labour shortages, and rising material costs. If your figure is out of date, you may not get the full amount needed to rebuild.
What is a Rebuild Cost Assessment?
A Rebuild Cost Assessment (RCA) gives you a clear, up-to-date figure for how much it would cost to fully rebuild your property. It includes:
The cost of clearing the site
Labour and materials
Professional fees
Compliance with current building regulations
At RebuildCostASSESSMENT.com, all assessments are delivered by a team you can trust. We’re a ‘Regulated by RICS’ organisation, meaning we follow the highest standards in property valuation and professional conduct.
As part of our RICS accreditation, we:
Work to globally recognised standards
Operate with integrity and transparency
Maintain the skills, indemnity, and governance needed to protect your interests
Whether you're managing a standard unit or a complex portfolio, our assessments are built to give you the confidence that your insurance is based on the right data.
We offer three options depending on your property:
Desktop Assessment – A fast, remote review ideal for standard properties
Enhanced Commercial Desktop Assessment – Extra detail for larger or complex buildings
Site Assessment – A full on-site inspection for unique or complex properties
How often should you update it?
We recommend reviewing your rebuild cost:
At least every three years
Immediately after major works like renovations or extensions
Avoid guesswork. Get certainty.
Without a recent assessment, your cover is based on guesswork. That guess could cost you everything in a serious claim.
Start with our free Rebuild Cost Checker to see if you're at risk. Then choose the right assessment to confirm your cover is accurate.
Future-proof your insurance strategy
As a commercial landlord, your insurance approach can either protect your investment or expose it to serious risk. Many rely on outdated rebuild values or unclear lease clauses, assuming that passing costs to tenants is enough. But as we’ve seen, this can lead to underinsurance, legal disputes, and costly claim shortfalls.
To stay protected, it’s time to rethink how you manage building insurance.
Here’s what to do next:
Review your lease agreements to make sure insurance clauses are clear and legally sound
Book a rebuild cost assessment to confirm your cover matches today’s rebuild values
Choose the right insurance coverage based on accurate data, not assumptions
At RebuildCostASSESSMENT.com, we help landlords protect what matters. Whether you need a quick Desktop Assessment or a full Site Assessment, our expert team will give you the clarity you need to move forward with confidence.
Book your rebuild cost assessment today because when the worst happens, you’ll want to know your cover is right.