With so many retail properties damaged during the riots which swept across the UK’s cities and towns last week, many store owners will be wondering where they stand in regards to property insurance. Prime Minister David Cameron has confirmed that the government will support even those who are uninsured but as John Castell - special counsel in the London real estate group of international law firm Faegre & Benson - argues, now may be a good time for landlords and tenants to look again at existing agreements.
By John Castell
The cost of the damage caused by the recent riots in London and other English cities runs into many millions of pounds, and The Riot (Damages) Act 1886 provides for compensation from public funds to the extent that the property owner is not able to make a claim on its insurance policy.
Perhaps this is an opportune moment for retailers to consider their insurance arrangements generally. Owner-occupiers (or their mortgagees) will likely have control over their insurance arrangements, but in the case of leasehold premises, the responsibility for insurance will be set out in the lease. This is likely to provide for insurance to be effected by the landlord (at the tenant’s cost) although the tenant might be liable to effect insurance for the plate glass.
The retail occupier will want to know that effective insurance is in place. This will involve an adequate amount for the sum insured, and a sufficient breadth of insured risks to cover, so far as possible, all likely contingencies. The owner/occupier will usually work closely with its brokers or other insurance advisers, to ensure that proper insurance provision is made.
Check your policy
In the case of leasehold properties, the landlord would be expected to ensure that its capital asset is protected by having appropriate insurance in place. The lease would normally impose an obligation on the landlord to effect insurance, but there are a number of areas where drafting can sometimes be deficient, and where care needs to be taken.
A tenant should ensure that the landlord is under an absolute obligation to effect insurance in the full reinstatement value of the premises, including demolition and site clearance costs and all fees and incidental costs, as well as the actual cost of reinstatement.
The landlord would usually be under an obligation to reinstate, after damage or destruction, and if that is an absolute obligation, then the landlord has that responsibility, whether or not it is able to recover the whole cost from the insurers. However, if the insurance falls short, and if the landlord is unable to cover the shortfall, then there is an immediate problem.
Tenants may be responsible for repairs
Leases of commercial premises usually contain a fairly standard combination of insured risks, which would normally include riot and civil commotion, as well as fire and a number of other specified risks.
In recent years, particular problems have arisen in respect of cover for damage caused by acts of terrorism, and by flooding. Concerns as to potential damage from these causes will vary from place to place and the extent of the cover effected against such risks will need to be considered carefully, particularly in high-risk areas.
Landlords’ liability for effecting insurance will often be limited, so that the obligation to insure against any particular risk will continue only for so long as cover against that risk is “ordinarily available on economic terms, with a reputable insurer in the London insurance market” or words to that effect.
The question then arises as to what happens if cover against such a risk is not available in this way. If the tenant is subject to an obligation to repair the premises (which would be likely), that obligation will normally not apply in circumstances where repair is required as a result of damage caused by an insured risk.
If the risk causing the damage is no longer insured against because it is no longer ordinarily available, then the landlord is not in breach of its obligation to insure, and the tenant will likely be obliged to repair under the terms of the repairing obligation.
Secure the right deal
When negotiating a lease, therefore, a tenant should seek to make specific provision for cases of damage arising from uninsured risks. This might include an option for the landlord to agree to repair the damage as if it was caused by an insured risk, with the tenant than having the option to terminate the lease, if the landlord does not do so.
Leases will often contain other provisions providing for the lease to be terminated, following damage or destruction, if reconstruction works have either not been commenced or completed within specified periods. Whether or not the premises can ultimately be reinstated, so that they can be reoccupied as before, trading will usually be affected to some degree, perhaps significantly, particularly if the tenant has to move out, whether or not it subsequently reoccupies or the lease is terminated.
The tenant should ensure, therefore, that the necessary business interruption cover is in place, to cover the losses and costs involved. The lease should require the landlord to provide details of the policy and any subsequent amendments to it.
Most leases will impose an obligation on the tenant not to do anything which might invalidate the landlord’s policy, and the tenant should therefore see a copy of the policy and take advice upon it. An owner/occupier should also be aware of its policy terms, in order to ensure that it does not invalidate the policy.
Know your rights
Ideally, a tenant would want the landlord to insure the property in the joint names of landlord and tenant, but there are some drawbacks for the landlord which would normally mean that this will not happen. The tenant should therefore seek to ensure that its interest is noted on the policy by the insurers. The tenant will then be notified if there is a possibility of the policy lapsing.
Where the tenant pays the cost of the insurance, and particularly where its interest is also noted on the policy, the insurer is less likely to be able to exercise rights of subrogation against the tenant, although, to be certain on this point, the tenant should seek confirmation from the insurers that they will not exercise those rights.
Those rights allow the insurer to recover from the tenant the amount which the insurers pay to the landlord under the contract of insurance where the damage has been caused as a result of some act or default on the part of the tenant.
Let us hope that there is no escalation of civil unrest, to the extent that damage by riot becomes a risk against which insurance cover ceases to be ordinarily available on economic terms.
Note: The views expressed here are those of John Castell and do not necessarily represent the views of Retail Gazette.