You should read your lease at the start of your tenancy to identify your obligations correctly. If your landlord is responsible for your building’s insurance, you should ask to see a copy of the policy and understand the risks covered. The landlord’s policy will cover the building against specified risks or ‘all risks’ and may cover things like terrorist attack and vandalism. But it is unlikely to cover your contents or fit-out. You need to ensure the policy provisions cover buildings you occupy and reflect a realistic reinstatement costs assessment.
You can ask to see details of a reinstatement cost assessment (formally known as a fire insurance valuation) to confirm the right level of insurance cover – or to allow you to obtain quotations if you are responsible for buildings insurance.
The recommended policy value will take into account the size and materials used in the construction of the property, plus the cost of demolition and waterproofing (if there are any party walls/adjacent properties) together with an allowance for professional fees and appropriate building regulations and planning costs. Assessments can either be on a ‘day one’ basis or include an allowance for inflation and if the building is to be reconstructed to a modern equivalent or like for like basis.
Once you know the building is covered by adequate insurance provision, your next question will be about cost. What will cause your insurance to increase and is it worth pursuing measures that will have a positive effect on your premium? As you might expect, fire is considered the single biggest risk to most properties and it is the responsibility of occupiers to minimise their specific risk wherever possible.
The Government plans to bring more than 100 pieces of legislation together under a single regime outlined by the Regulatory Reform (Fire Safety) Order with effect from April 2006. While fire certificates for commercial premises will be abolished and replaced with fire risk assessments, these self-assessments apply to all workplaces and it is not yet certain how these will affect insurance premiums.
Currently, the principal factors that cause insurance premiums to go up relate to operational change or major alterations to the building as well as the general state of the insurance market. Specific issues can be identified at the outset of a tenancy, enabling landlords and tenants to negotiate terms and costs at an early stage.
During the course of a tenancy, if the building needs to be altered in order to meet the needs of the business or the business introduces a new way of working that introduces a new area of risk, the building’s insurer must be informed of the changes. If you misrepresent the facts, the insurer can continue to pocket your premium, but in the event of a claim, your insurance would be declared void. It is vital to consult with the landlord on alterations and significant changes to business operations.
Check your lease to identify specific needs, some leases require landlord consent, others only require to be informed. If you propose to store flammable products, your lease could require you to ensure that your landlord knows as well as getting any necessary regulatory approval. If the landlord is also responsible for buildings insurance, you will need written confirmation that the level of cover and specific risk has been addressed with the insurer.
You will need to consider if any major alterations will affect the nature and level of risk. Building Regulations require precautionary measures for buildings over a certain size. This may mean installing smoke vents, sprinklers and fire shutters to help prevent the spread of fire throughout a building. Buildings insurers take a positive view of sprinkler systems, albeit that the impact on premiums is unlikely to cover the installation cost.
From the insurers’ perspective, a key strength of sprinkler systems is in the improved access provided for fire and rescue services, helping to minimise damage and preserve the building. But sprinklers also create another kind of risk to certain categories of stock. Accidental sprinkling would be detrimental to book distributors and food manufacturers. The benefits of sprinklers are outweighed by their cost, additional risk of accidental damage and limited impact on insurance premiums. Businesses have had some success in resisting the enforcement of the most rigorous fire safety building rules. These were instrumental in bringing about the demise of fire certificates. The success of claims such as City Logistics v Northamptonshire County Fire Officer clarified the role of fire precautions regulations to provide for escape from a burning building and not for reasons unrelated to escape. Operators face a postcode lottery in terms of fire precaution methods. In areas where a Local Act specifies fire precaution methods, such as in Hampshire and Berkshire, local Building Regulation Offices require sprinkler systems in large warehouses.
Following several appeals against Building Regulations as set out in Local Acts, the Secretary of State for the Environment, Transport and the Regions has decided in favour of enforcing the Local Act.
For some insurers, legislation does not go far enough to protect property. To minimise fire spreading, insurers may insist on firewalls and fire shutters to compartmentalise a warehouse. Many operators see this as inefficient, expensive and disruptive of workflows. The option of reaching an agreement on the extent of fire precaution methods and associated insurance premiums depends on the operator’s commercial ‘clout’ as well as the size and nature of the property.
Some occupiers choose to break up large interior spaces for operational purposes. Food manufacturers and distributors will divide their buildings for hygiene and temperature control reasons. Sandwich panels are a cost effective, construction solution. For food manufacturers, these panels are an industry standard, and are a good insulator, easy to clean and carry a low risk of condensation. Yet where occupiers use heat and cold storage techniques, the building’s exposure to fire risk is increased.
In the past decade, fires have occurred involving metal-faced sandwich panels filled with insulation. An Association of British Insurers (ABI) report found that some types of insulation (polyurethane or polystyrene) contribute to the rapid spread of fire. To still use sandwich panel systems, you need to choose fire resistant materials to reduce the impact on insurance costs. ABI technical guidance on the ‘Fire Performance of Sandwich Panel Systems’ states; ‘while experience suggest there are difficulties associated with buildings containing sandwich panel systems the basics of fire hazards assessment and insurability apply, just as for other types of risk where significant fire loads are present’.
There will always be a conflict between the Building Regulations’ needs and those of insurers and operators. Building rules are aimed at ensuring the health of users and neighbours of the building. Insurers want high standards of protection, fire suppression and more reliance upon non-combustible materials whilst the operator wants to cut costs and maximise operational efficiency. If the occupiers’ trade has an inherent fire risk, due to processes or the combustible nature of materials this may attract a stricter approach than a premise with a lower fire risk.
There are uncertainties ahead, not least the impact of the fire safety reforms and fire risk self-assessment. the reforms will see the buck stop with the occupier. Taking an active and rigorous approach to your lease obligations, fire risk assessment and choice of building materials will be vital in helping to keep your insurance costs down; understand who is buying your building insurance, check the cover is appropriate and, if not, resolve any inaccuracies quickly. n
Robert White (tel: 0207 333 6208) and John Upton-Prowse
(tel: 0207 333 6248) are at Gerald Eve.