Securing appropriate cover for multi-tenant commercial properties

Multi-tenant commercial properties are only as safe as the riskiest tenant. Multi-tenant commercial properties typically house a variety of occupants, each of which carries a unique level of risk. Where these occupants are in close proximity, a risk management failure in one unit can have consequences for the entire property.  A recent incident in The Netherlands where a fire destroyed ten connected warehouse units has highlighted some key concerns. The fire started in the paper recycling facility before intense winds spread the flames to other, less risky occupants. In fact, the recycling unit survived – the only unit to do so. This was still considered a total loss for insurers and required a full rebuild.  

Risk assessment

Before insuring a multi-tenant industrial and logistics property, underwriters will assess the type of goods and machinery that are stored and operated at the property. Some of the items might be combustible or the processes may result in machinery operating at high temperatures. Keeping track of the types of tenants and their processes is the best way to mitigate risk. Businesses and activities that are generally considered higher risk include: 

  • Cement works, sheet metal production 

  • Data processing 

  • Metal working, bakeries, biscuit factories, breweries, confectionary, factories, laboratories, laundrettes 

  • Water based paint application shops, electronics factories, woodworking factories, furniture factories (no foam) 

  • Alcohol distilleries, paper waste processing, plywood factories 

  • Floor cloth and linoleum manufacture, resin manufacture, match manufacture, printing works, Injection moulding, carpet factories 

  • Fire lighter manufacture, tar distilling, paper machine halls, carpet factories including rubber and foam plastics 

  • Cellulose nitrate manufacture, rubber tyres, manufacture of foam plastics, foam rubber and foam rubber goods 

  • Firework manufacturer 

 The underwriter’s view

In submitting information to underwriters, property owners need to consider their obligations under The Insurance Act 2015. The Act states that ‘before a contract of insurance is entered into, the insured must make to the insurer a fair presentation of the risk.’ Fair presentation is defined as:  

  1. Disclosure of every material circumstance which the insured knows or ought to know. 

  2. Failing that, disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances. 

The Act also stipulates that the policyholder should consider the following when submitting material information to insurers:  

  • The knowledge of senior management - The policyholder must disclose material information known (or ought to be known) by senior management, to its insurers. 

  • The knowledge of individuals responsible for insurance - The policyholder must disclose material circumstances known by those individuals who participate in the process of procuring the policyholder’s insurance 

  • Reasonable search - The material information disclosed by the policyholder should be reasonably achieved by a reasonable search. 

  • Clarity and accessibility - The policyholder is required to present its disclosure in a clear and accessible manner.

Some relevant information may not be accessible to property owners, and it might be worth flagging this to an underwriter. If crucial information is omitted in communications with an insurer, or relevant changes are not passed on to them in a timely manner, there is a risk that the insurer may refuse to pay a claim. In addition to the financial impact this may have for the property owner, such an event can cause wider issues. Depending on the size of the loss, it might result in issues with investors. Facility agreements with banks which impose responsibilities on property owners should also be considered.  

Risk management advice 

To avoid such a situation, property owners need to make sure that they, and all parties involved with management of the property, pass on material information to insurers in a consistent and timely manner. A continuous flow of information between property managers, owners, and insurers suggests professionalism and will increase trust and create a good relationship with insurers. This is set to benefit property owners when it comes to negotiating with insurers around insurance premium rates and terms and conditions.  It isn’t just the potential lack of material information that requires noting, either. There are various other factors to consider, such as:  

  • Environmental risks – the storage of fuel and oil combined with any previous tenant’s processes could pose a future risk. 

  • Sprinklers – given the risk of fire, sprinklers are an excellent defence system. Ensuring regular maintenance is key to mitigating future risk. 

  • Location proximity – connected buildings without compartmentation are considered higher risk, especially if they lack sprinklers. 

  • Rapport – an open dialogue with tenants and management is important to understand potential changes in the risk exposure. 

  • Insurance cover – understanding the extent of cover provided by the various policies is required to secure appropriate protection. 

Ultimately, an open and transparent dialogue with all parties involved in an asset is key to ensuring that insurers are fully aware of the risks associated with the property. This will help your broker negotiate the best terms possible and also assist when there are contentious claims.  For further information, please visit the Lockton Real Estate and Construction page (opens a new window), or contact:  

Samuel Leader, Vice President, Global Real Estate and Construction 

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