Deep Dive: Commercial Property Insurance

Owning commercial property can be a highly rewarding investment, but it also carries significant financial risk.

Fires, storms, tenant damage and liability claims can result in substantial losses if the insurance program is not structured correctly.

Commercial property insurance is designed to protect building owners from these risks by providing cover for physical damage to the building, loss of rental income and liability exposures arising from the ownership of the property.

At Assura, we work with commercial property owners, investors and developers across Australia to ensure their insurance programs are properly structured and that common coverage gaps are addressed before a claim occurs.

What Is Commercial Property Insurance?

Commercial property insurance protects the physical building and associated financial exposures arising from the ownership of a commercial property.

This type of insurance is commonly arranged by:

• commercial property investors
• building owners
• property trusts
• developers
• asset managers
• family offices

Policies are typically structured under a Property Owners Insurance program.

The coverage is designed to respond to losses arising from events such as fire, storm damage, malicious damage and other insured events that may affect the building.

Commercial Property Insurance for Building Owners

  • Commercial property insurance typically protects both the building and certain fixtures, fittings and equipment owned by the landlord.

    Building cover generally includes structural elements such as walls, roofing, foundations, ceilings, flooring and other permanent fixtures attached to the property.

    Policies may also cover landlord-owned fixtures and building services, including:

    • air conditioning and HVAC systems
    • lifts and escalators
    • lighting and security systems
    • carpets in common areas
    • plant and equipment servicing the building

    The sum insured should reflect the full replacement cost of the property, including demolition, debris removal and professional fees required to rebuild following a major loss.

    An independent insurance valuation can help ensure the building is insured appropriately and reduce the risk of underinsurance.

  • If a building becomes untenantable following an insured event, the owner may lose rental income while repairs are carried out.

    Loss of rent insurance helps protect the property owner’s income by covering rental income that would have been earned during the period of reinstatement.

    For commercial properties, the indemnity period is commonly structured between 12 and 24 months, although longer periods may be appropriate depending on the complexity of the building.

  • Commercial property owners can also be exposed to liability claims if someone is injured or suffers property damage while on the premises.

    Property Owner’s liability insurance provides protection if the owner becomes legally liable for injury or property damage arising from the ownership or management of the property.

    This may include claims arising from:

    • slips and falls
    • structural issues
    • maintenance failures
    • hazards within common areas

    Public liability limits are typically structured at $20 million.

What Does Commercial Property Insurance Cover?

While coverage can vary depending on the insurer and policy wording, a typical commercial property insurance program may include the following key components.

  • Many commercial buildings rely on mechanical and electrical equipment to operate effectively.

    Machinery breakdown insurance can provide protection for sudden and unforeseen mechanical or electrical failure affecting equipment such as:

    • lifts and escalators
    • air conditioning and HVAC systems
    • refrigeration plant
    • electrical switchboards
    • pressure vessels

    Breakdown of these systems can lead to significant repair costs and may also disrupt tenants’ operations, which is why this extension can be an important consideration for certain properties.

  • Glass insurance provides protection for accidental breakage of fixed glass forming part of the building.

    This may include:

    • external windows
    • shopfront glass
    • internal partitions
    • glass doors and panels

    For retail properties in particular, glass exposure can be significant, and this cover helps ensure that damaged glass can be replaced quickly to maintain the security and appearance of the premises.

  • Depending on the insurer and policy wording, commercial property policies may also provide additional coverage such as:

    • removal of debris
    • professional fees (architects, engineers, surveyors)
    • temporary protection costs
    • catastrophe escalation provisions

    These extensions can be important in ensuring that the building can be properly reinstated following a major loss.

Key Risks Commercial Property Owners Face

Commercial buildings are exposed to a range of risks that can result in significant financial loss.

Some of the most common exposures we see include:

  • Fire remains one of the most severe risks for commercial buildings.

    Major fire losses can result in complete destruction of the building and extended loss of rental income while the property is rebuilt.

  • Storm events, including hail, wind and heavy rain, can cause substantial damage to roofs, cladding and building infrastructure.

    Storm damage can also lead to water ingress and subsequent damage to internal building components.

  • In some circumstances tenants may cause damage to the property either accidentally or maliciously.

    Insurance programs should be structured to address these risks and ensure appropriate coverage is in place.

  • Property owners may be exposed to liability claims arising from injuries sustained by visitors, contractors or tenants on the premises.

    These claims can involve substantial legal costs and damages if the owner is found legally liable.

The Risk of UNDERINSURANCE

One of the most significant issues affecting commercial property insurance programs in Australia is underinsurance.

Underinsurance occurs when a building is insured for less than its true full replacement value (the cost required to demolish, clear the site and rebuild the property to a similar standard following a total loss).

If a building is underinsured, most property insurance policies contain an underinsurance clause (commonly referred to as the average clause). This clause allows insurers to reduce claim payments proportionally if the sum insured does not represent the full replacement value of the building.

This means the property owner effectively becomes responsible for part of the loss.

Example of How Underinsurance Works

If a building should be insured for $10 million but is insured for only $6 million, the property is effectively insured for 60% of its true value.

If a loss occurs and the damage costs $2 million, the insurer may only pay 60% of the claim, which would be $1.2 million.

The remaining $800,000 would need to be funded by the property owner.

This outcome can occur even where the loss is only partial, not a total loss.

Rising Construction Costs

Underinsurance has become an increasingly common issue in recent years due to the significant rise in construction costs across Australia.

Over the past five years, building costs have increased substantially due to a combination of factors including supply chain disruptions, higher material costs and labour shortages in the construction sector. Industry data from the Australian Bureau of Statistics (ABS) indicates that construction costs increased by approximately 30–40% between 2020 and 2023 in many parts of Australia.

As a result, properties that were insured several years ago may now be materially underinsured if building replacement values have not been reviewed or updated.

For this reason, ensuring that buildings are insured for an appropriate replacement value is critical when structuring a commercial property insurance program.

Insurance for Different Types of Commercial Properties

Commercial property insurance can apply to a wide range of building types, including:

• office buildings
• retail buildings
• mixed-use developments
• warehouses and industrial facilities
• shopping centres
• medical centres
• strata titled buildings

Each property type carries its own unique risk profile and insurance considerations.

This is why commercial property insurance programs should be tailored to the specific characteristics of the building.

  • We review the property, occupancy profile and current insurance program to identify potential exposures and coverage gaps.

  • We assess the most appropriate policy structure including:

    • building sums insured
    • indemnity periods for loss of rent
    • liability limits
    • key policy extensions

  • We approach appropriate insurers to obtain competitive terms from markets that specialise in commercial property risks.

  • Our ongoing support typically includes:

    • annual policy reviews to reassess coverage and building sums insured
    • remarketing the insurance program to insurers where appropriate to ensure competitive and suitable terms are maintained
    • claims assistance and advocacy should a loss occur
    • risk advice as the property portfolio evolves

    Our goal is to ensure that the insurance program continues to reflect the evolving needs of the property owner.

How Assura Structures Commercial Property Insurance Programs

At Assura Insurance, we take a structured approach to designing insurance programs for commercial property owners.

Our process generally includes:

Why Work With a Specialist Insurance Broker?

Commercial property insurance policies can vary significantly between insurers.

Policy wordings, coverage extensions and exclusions may differ, and these differences can have a significant impact on how a claim is handled.

Working with an experienced insurance broker can help ensure that:

• the policy structure is appropriate for the property
• coverage gaps are identified and addressed
• insurers with the right appetite for the risk are approached

This helps ensure that the insurance program performs as expected if a loss occurs.

Request a Commercial Property Insurance Review

If you own or manage commercial property, it is important to ensure that the insurance program is structured correctly and that building values are up to date.

Assura Insurance works with property owners and investors across Australia to review existing insurance arrangements and provide advice on appropriate coverage structures.

If you would like a review of your current commercial property insurance program, please contact our team to discuss your requirements.

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