The Great Insurance Swindle: Hidden Costs for Tenant Occupiers

Navigating Insurance Obligations for Retail and Commercial Tenants

In this episode of 'That Retail Property Guy,' host Gary Marshall explores the often-overlooked complexities of insurance obligations within retail leases. He explains the typical insurance responsibilities that tenants face, including reinstatement, loss of rent, and terrorism coverage, and advises tenants to thoroughly review their lease agreements to be clear what the landlord is entitled to recharge, as well as the implications of clauses that label insurance as 'rent. The discussion also highlights the importance of diligent check-ups on apportionment and competitive pricing, and how tenants should protect themselves from potential pitfalls like overpaying premiums or hidden fees.

00:00 Retail Property Insights

00:20 The Dilemma of Insurance in Retail Leases

00:59 Understanding Insurance Obligations in Leases

03:08 Insurance Recharges and Rent: The Hidden Costs

04:16 VAT and Insurance Premium Tax Explained

06:56 Diving Deeper into Insurance Types – Reinstatement, Loss of Rent, Terrorism

09:09 Unfair Loading

11:56 Rent Cesser

13:29 Terrorism and Pool Re

15:02 Ensuring Fair Insurance Costs

16:06 Sharp practice and the Trocadero Case

18:39 The Importance of Reading Your Lease

19:04 Acts of God and Other Items

22:22 Conclusion and Further Resources

How RCA insurance valuations should be done, by RICS (the Royal Institution of Chartered Surveyors)

PoolRe insurance for terrorism

Shoosmiths article about that Trocadero case 

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Transcript

0:00

Welcome to that Retail Property guy with your host, Gary Marshall. In each episode, we delve into topics relating to the particular overlap between estate management and accounts payable from the perspective of a retailer as tenant. We hope you'll be entertained, enlightened, and may be a little inspired. In this episode, let's discuss one of life's imponderable challenges. Insurance. Nobody wants to pay for insurance that they most likely will never claim on, but everybody worries that not having insurance is like tempting fate. The moment you decline it, cancel it, downgrade it, the unthinkable will happen and you'll be left out of pocket. This applies in travel health car. Home and business areas like public liability and professional indemnity, you ignore insurance at your own risk and peril. Today we're focusing on the kind of insurance that's usually embedded in a retail lease. Every tenant occupier should read their leases, especially the draft version before they sign it, to establish just what their insurance obligations are going to be and what obligations passed to the landlord. And what, if anything, falls between the two? Generally it's the tenant who ultimately pays for the cost of the insurance, but it's also generally the landlord who obtains the policy and then recharges that cost. There's a fairly obvious logic to this. The landlord wants the tenant to pay the cost, but doesn't trust them to not forget to organize it or to overlook paying the premium. So usually the landlord will put a clause in the lease stating that they will procure the insurance and then charge it back to the tenants. They usually do this separately from any service charge, and there are a number of practical reasons for this from the landlord's perspective, a big one is that service charge generally requires a budget in advance, and service charges are subject to a test of reasonability. So they can be challenged if the tenant thinks they're unreasonable. Also service charge might be payable quarterly, but the landlord just shelled out a huge sum on the annual insurance premium and doesn't want to split that recovery down into four chunks. They prefer full reimbursement in one go. So generally, a landlord will arrange the insurance and apportion across any tenants in the building and recharge it as a lump sum. Although one client queried why they were receiving multiple insurance demands for the same property, which we established were for three differing types of cover. One was for reinstatement of the building, another was for loss of rent, and the third was for terrorism. These are common types of insurance cover, though it's more common to see them as three separate lines on the same invoice. Then there's three separate invoices. So this all seems reasonable, right? The lease says the landlord will arrange the insurance and that the tenant will reimburse the landlord. The lease might even say that the tenant has to pay up within 14 days. Aha. But if the tenant acquiesces to this assumed state of affairs without asking the obvious questions, they could be throwing good money after bad. So what are those obvious questions? Well, let's start with something I see a lot. Is an insurance recharge, actually a rent? Hmm. It's insurance. How can it be rent? Well, some leases specifically define insurance recharges as rent with a capital R. The landlord has a good reason for this. Rent can be bailiff, whereas other charges can't By defining insurance and indeed anything else as rent With a capital R, the landlord grants themselves greater powers to recover an unpaid invoice. No faffing around in the small claims court. No expensive lawyers. Just serve a seven day warning under the standard car provisions. That's commercial rent, arrears recovery, and then if the invoice remains unpaid, send in a bailiff and charge his fees to the tenant. So this might be fair warning to a tenant to be prompt in reviewing and processing invoices for insurance. Another common and confusing aspect is VAT. A lot of people say that insurance isn't subject to VAT, and to some degree that's true. At the point of issuing the cover, it's subject to something called IPT Insurance Premium Tax. This is charged by the provider of the insurance. To whoever takes out the insurance. There are two rates of IPT, 20% and 12%, and generally the higher rate applies to travel insurance and certain policies relating to some classifications of motor vehicle or appliances and machinery. The lower rate applies to everything else, which tends to include our buildings related insurance. So 12% lower than VAT at 20%, that means we're saving a bit of tax. Right. Well, generally, no. Here's the rub, that 12% IPT only applies on the transaction between the insurer and the policy holder. In this case, the landlord. What we as tenants get is a double whammy, VAT, chargeable on the premium, plus the IPT. Now the VAT rules are complicated, but a sound interpretation could be the only people who can raise an invoice for insurance premium without charging VAT. Our insurance companies and brokers themselves, they apply the IPT to their clients. I. Consider that the landlord arranges the insurance, whether they're are tenants or not, to ensure that the building is insured, even if it's vacant. So the initial service is to the landlord, not to the tenants. If the cost that the landlord lays out is then recoverable from the tenants, then the landlord or their agent can't apply. IPT. But if they're registered for VAT, then they have to apply VAT at 20%. This is especially true if the lease describes the insurance as a form of rent with a capital law. But here comes the double whammy. The landlord can't recover the IPT that they paid out. They can't offset it against VAT or anything else, so they include it in the rechargeable sum. So the tenant ends up reimbursing 112% of the actual premium cost, and then the VAT registered landlord applies 20% VAT on the total, including the IPT. This is tax on tax. How fair is that? Now, some landlords, particularly those who are not registered for VAT, simply pass the insurance through like a form of disbursement. They just apportion the cost plus IPT with no added VAT. Interesting, eh. Let's dive a little deeper into those three types of insurance cover, building, reinstatement, loss of rent and terrorism. Reinstatement is an obvious one. If the building or any part of it or the retail park or is infrastructure gets damaged, the landlord wants to be sure that insurance will pay for the reinstatement. So they should get a proper RCAA reinstatement cost assessment done by a competent professional who can accurately assess the likely cost of rebuilding. But rebuilding might have to include demolishing the unsafe remains of the damage structure, clearing the site, making it ready for rebuilding to start. And that project isn't just materials and builder costs. It's likely to include fees for surveyors, assessors, architects, engineers, demolition experts, planning and project managers, local authority fees and licenses and so on. So a proper valuation should capture all of these possibilities, and the landlord should get a premium proposal that will cover the total risk and that valuation costs the landlord money. So that cost could also be charged back to the tenant. Read the lease and check if valuation fees are mentioned. The overall cost indicated in the RCA becomes known as the declared value, but it might differ from the actual SUM insured, which is the amount that the policy actually covers and may include an allowance for inflation. Other policies already absorb the likely impact of inflation into what they call a day one provision. Like I said, insurance is complicated. What the tenant needs to be sure on is that the landlord only requests reimbursements of RCA valuations once in every three or so years. It's unreasonable to expect a tenant to pay for annual revaluations. Although a shorter frequency might be necessary now and again if there's any material change in circumstances and probably when a new landlord takes over. But back to the reinstatement charge, the landlord should apportion the charge with any IPT across all of the tenants who occupy the property that's covered by the insurance and who have an insurance clause in their lease. But not every tenant's lease is the same, even in the same building or retail park. Maybe tenant A has a clear provision in their lease to pay a fixed percentage. Maybe their neighboring tenant B has a variable percentage, a fair proportion, but based on what parameters, is it a percentage of the overall floor area? Is it a proportion by rateable value? In which case the ground floor occupier usually pay more than their fair share if the upper floors are rated lower. And so a diligent tenant should check the basis of apportionment if necessary, asking for evidence of all the other contributing leases to ensure they're not being ripped off. Check and check again. I once came across a tenant who had unwittingly been paying four years for practically the whole reinstatement cost of a substantial tenement building. It turned out the landlord had made a genuine mistake apportioning the cost across only the ground floor commercial tenants. Not including all the residential tenants above. They apologized and were reasonable about reimbursing. They immediately agreed to go back six years, which is the statutory limitation. The diligent tenant should also check whether another tenant in the block or park is unreasonably loading the premium. In another case, I came across Tenant a's Lease had a clause that they should not do anything to compromise the insurance, including anything to make it more expensive. So they raised a point that a neighboring tenant might be impacting the cost of the cover. Tenant B operated a wood-fired pizza oven, and sure enough, it turned out that the insurers had loaded the premium of the whole building against excessive risk of fire. By arguing the point tenant A shifted that loading onto the tenant, which was triggering it and reduced their own proportional cost. So that's reinstatement cover. The second type of insurance we mentioned was loss of rent. I. This is a simple, yet important area for a retail tenant to check, read the lease. Most leases define whether the landlord should insure against loss of rent, and if so, for how many years? Is it three? Is it five? Check what the landlord is insuring. If the lease says three years, make sure they're not covering five years and making you pay for the oversights. Now, loss of rent is an important point, but it only helps the tenant if the lease contains another important clause, technically known as Rent cesa. This clause allows for the abatement of rent in the event of damage, which stops the tenant from occupying their premises. Abatement means reduced up to a hundred percent depending on how much the premises are damaged. In practical terms, assessor Clause can be implemented in two ways. Either the rent gets suspended until the building is fit for use again, or the tenant keeps paying the rent but joins the insurance claim to get it back. Whoever handles the tenant's claim, which might include lots of items, should be vigilant to ensure they don't miss the assessor or indeed claim it both ways, which isn't allowed. One point though is many rent assessors carry a threshold, like maybe the premises have to be out of service for at least six weeks before the provision kicks in. But then there's an argument about whether the Cesar only applies to rent from week seven, or whether the earlier six weeks also become covered. Once we get to week seven, the Cesar or abatement should continue until the premises are deemed suitable to be reoccupied. But this can be a subjective view and the diligent tenant should ensure that their lease provides for how to resolve any disputes. On this point, should disputes be referred to an independent third party? Is that a judge? Or is it the RICS? Do they act as arbitrator mediating between the viewpoints of the tenant and the landlord? Or is an expert giving their own unrestrained opinion, which is then binding? And who pays the costs, a referral, and can the winner claim the cost back from the loser? I've seen this type of CESA clause triggered by insured risks like fire and storm damage and flooding. Surprisingly, it doesn't take much to render a building unsafe or unusable, and the tenant shouldn't have to argue against a landlord who pushes that envelope. Unsafe is unsafe. The third item I mentioned is terrorism. The separate line of charge for insurance really stands apart from the other charges because many insurers would simply refuse to handle it. The risk seems incalculable, the threat variable, the likely cost could be massive, so it required government intervention to provide a form of cover that previously other insurers just wouldn't touch. This was motivated by the bombing in 1992 of the Baltic Exchange in London by the IRA. The one ton bomb was the biggest bomb detonated on Mainland Britain since World War ii. The following year, in 1993, the UK government worked with the insurance industry to create the pool reinsurance company Limited, generally known as Pool Re. A few years later, in 1996, the IRA detonated an even bigger bomb outside the Ondale Center in Manchester. The damage was huge. It impacted shops and other premises all through the center of Manchester, but by now many tenants had cover against this risk through pool re. So we've discussed three main types of insurance charge and the additional RCA valuation fee. Occasionally there is another charge for property owners liability. Basically this is the landlord covering their own banks for any risks that they might have as owners. Nothing to do with the tenant occupied space. Again, the diligent tenant should read the lease. Does it allow for this? If not, then don't pay it. You aren't in business to subsidize the landlord in their business. In general, insurance costs have been escalating in recent years in some cases by huge percentages, but these costs are unavoidable, right? The landlord does his best to get the best deal? Well, the diligent tenant should check that their lease actually requires the landlord to shop around. It might use a phrase like to use reasonable endeavors and reasonable can be slightly less than doing one's best to ensure that premiums are competitive. Hmm, what does competitive mean? And that the provider is of good repute, meaning not likely to disappear when the claims start. If the lease doesn't give the landlord this obligation to shop around, then in theory they could just call their best mates at the local brokers and arrange any cover with any provider at whatever cost because ultimately they aren't paying for it. The tenants are. Does that seem unfair? Well, it's been happening for years. Tenants must push back. Get the right wording in the lease and use that wording as the tool to do the job. Get costs down. Oh, and another thing, while the old boys at the club are cooking up their deal for expensive insurance at the tenants cost. How about they lubricate the process with a little sweetener for themselves, half for the broker, half for the landlord. After all, why not The tenant will pay for it. Well, this was once a common and very invisible practice, but maybe not anymore. A recent case in May, 2025 revealed the sharp practice and changed our expectations. There's a link in the show notes to an article by Shu Smith's lawyers. Generally referred to as the trod case. There was basically a dispute between a tenant, a cinema, and its landlord, which had arranged insurance across a wide portfolio of properties and then apportioned that cost down to the eventual end user tenants. But the cinema tenant challenged that the landlord had concluded undisclosed commissions and fees, which artificially inflated the insurance cost in some years up to 57%. Arguing that these commissions were not recoverable under the phrasing of the lease. Their point was that the lease allowed the landlord to recover the premium payable, but that didn't include the commissions that the broker shared back to the landlord. I. The courts agreed and the tenant claimed back those overpayments. Each individual case would depend on the wording of the specific lease. So the TRO case isn't a one size fits all, but it should prompt all diligent tenant occupiers to check their leases and then demand further evidence of what the landlords have been including in their insurance charges for the last six years. And remember that phrase about competitive in the insurance market. Bear in mind, this isn't saying the lowest price. There could be a good reason for accepting a higher price, but the landlord should demonstrate that. And how does the tenant know what is competitive? A few years ago, I worked with a client and their own broker to crosscheck some of their higher insurance invoices together, we checked the leases. Identified the risk covered, looked at the likely reinstatement costs and checked the three years loss of rent, the factors that should contribute to the calculation of the insurance premium. In many cases, the client's broker was able to source a much better deal. In some of those cases, the landlord yielded and provided a lower cost cover. And in some cases where the client occupied the whole building, the landlords even agreed for the tenant to place their own cover, cutting out the middleman, which improved cash flow for the landlord and reduced cost for the tenant. But the tenant needs to know their rights, which are written in the lease. So read it. But let's loop back to the main point of this discussion, insurance and why we need it. We are ensuring against risks, so the insurance company will pick up the tab if anything untoward happens. We've discussed reinstatement and loss of rent and terrorism. But insurance providers want to know the extent of their liabilities here. For example, should they provide cover against what is loosely termed an act of God? Something which absolutely could not be foreseen, couldn't be planned for, couldn't be guarded against interstellar object, crashing to earth, that kind of thing, pandemic maybe. So most leases spell out the actual physical risks that the landlord expects to cover in the insurance. It could be a huge list, including loss or damage by fire, flood, lightning strike explosion, earthquake riot, civil commotion, or malicious damage storm or tempest. It could include or specifically exclude impact by vehicles or by stuff falling from airplanes. It might include or exclude. Burst all leaky pipes, electrical incidents, structural failure. Oh, and don't forget the terrorism, if it's not in the lease, the landlord isn't expected to insure against it, and the tenant shouldn't accept any material. Hiking costs if the landlord goes off, messaging covers everything, possibly thinking it doesn't matter because the tenants are paying for it. And then let's say the unthinkable happens. A fire, a flood, frozen toilet waste falling from a passing airplane. The tenant's premises are rendered unusable. The tenants look to the landlord, A, so they can stop paying the rent and B, so the landlord instigates the process for the insurance to pay for the repairs or the rebuild. The lease should contain an actual provision requiring the landlord to do this, not just to take the payout and run. It should require the landlord to quickly and diligently take all steps. No shortcuts or reservations on this to see the project through. Which could include getting local authority, consents and licenses, and then to see the reinstatement through to completion if necessary, making up any shortfall from their own pockets. The tenant doesn't want to be deprived of their place of business, maybe for years while a landlord dithers around being unprofessional. The only possible justification for a delay in moving forwards is if there is a counterclaim that someone was at fault. By this, we generally mean that the tenant or a neighboring tenant or a culpable third party, maybe the local authority may be the airline with that overlying waste problem. Nobody wants a delay while the insurance company litigates. In good practice, the insurer should pay out first and then look for recovery of their damages afterwards, relying on the lease clause, which says a tenant shouldn't do anything to compromise the insurance. So in this case, the insurer isn't the landlord, but kind of steps into the landlord's shoes, a practice known as subrogation. From a tenant's perspective, the right kind of lease will specifically exclude subrogation against them. So the diligent tenant should check the leases. If they are negotiating new leases, they should try to avoid signing any document that doesn't exclude subrogation. If it isn't excluded, and the insurer eventually decides that all the damage was caused by a mishap, which the tenant could have guarded against, the insurer might use subrogation to chase the tenant for damages, meaning all their losses. So in that case, the tenant would have to pick up the whole tab, which kind of undermines the reason we have insurance. So there we are, a quick trip around the intricacies of insurance. Now, this isn't a fact sheet or a tick list, of course, just some observations that you might follow up on. If you want to dive deeper into how RCA insurance valuations should be done. There's a link in the show notes to an excellent document from the RICS, the Royal Institution of Chartered Surveyors. There's another link if you want to read more about the pool, ray insurance for terrorism, and a third link to the Schumann article about that TRO case. Meanwhile, that's all from me at that retail property guy. Tune in for more insights into the rights of retailers as tenants, and if you're in any doubt at all as to what your next step should be, and it's usually read the lease, then reach out directly. Thank you for listening to that Retail Property guy. I hope you enjoyed today's discussion and found it both entertaining and insightful. If you enjoyed the show, please consider leaving a review. Your feedback is greatly appreciated. For more information, visit that retail property guy.com. Thanks again for tuning in.