Commercial Building Insurance: How Much Should You Insure Your Property For?
Commercial building insurance should reflect the cost of rebuilding the insured property on the basis required by the policy. The purchase price, mortgage balance and council valuation are not reliable substitutes for an insurance reinstatement assessment.
For owners of offices, shops, warehouses, industrial buildings and medical suites, choosing an appropriate building sum insured is a critical part of arranging cover.
An outdated figure can leave a gap between an insurance payment and the cost of reconstruction. Depending on the policy, underinsurance can also affect a partial damage claim—even when the repair bill is below the building sum insured.
This guide explains what commercial property owners should consider when reviewing rebuilding values and how those values connect with the insurance policy.
What Is the Building Sum Insured?
The building sum insured is the amount shown for the insured building in the policy schedule. It operates alongside the policy’s settlement provisions, limits, extensions and exclusions.
It is not necessarily the total amount available for every expense associated with rebuilding. Some additional costs may sit within that figure, while others may have separate limits or conditions.
When reviewing a commercial building insurance quote, establish:
What property is included in the building definition.
How the policy settles an accepted claim.
Which costs must be included in the building sum insured.
Whether additional benefits have separate limits.
Whether an underinsurance condition applies.
A professional assessment provides the rebuilding figures. The insurance review checks how those figures should be reflected in the proposed policy.
Why the Purchase Price Is Different From the Rebuilding Cost
The purchase price of a commercial property can reflect its land, location, lease income, development potential and investment demand.
Rebuilding costs address a different question: what would it cost to reconstruct the insured property following damage?
A small building on valuable land may sell for substantially more than its reconstruction cost. Conversely, a specialised building in a less expensive location may be costly to rebuild relative to its market value.
The mortgage balance is also unsuitable as the basis for building insurance. It measures outstanding debt, not the cost of reinstating the property.
Insure against the relevant rebuilding exposure rather than simply copying a transaction or finance figure.
What Should a Commercial Building Insurance Valuation Consider?
A suitably qualified valuer or quantity surveyor can assess the property for insurance reinstatement purposes.
The instruction matters. Specify that the assessment is for insurance, and provide the relevant policy requirements or ask the professional to coordinate with the broker.
The assessment should make clear what it includes and excludes.
Building Construction and Specification
Floor area alone does not describe the full reconstruction task.
Provide information about building height, construction materials, office areas, amenities, specialist finishes and significant installations.
For example, two warehouses of similar size may have different rebuilding requirements if one contains extensive offices, specialised services and mezzanine structures.
Demolition and Debris Removal
Reconstruction may require damaged structures to be demolished, materials removed and the site made safe.
Ask how the assessment treats these costs and whether the policy provides sufficient cover for them. Identify any known materials or site conditions that warrant specialist consideration.
Professional Fees and Approvals
Architectural, engineering and other professional services may be needed during reconstruction.
Ask which fees and approval-related costs have been allowed for, then check how the policy responds to those expenses.
Access and Site Constraints
A building adjoining other properties, positioned on a restricted site or located above occupied premises may present different reconstruction challenges from a freestanding building with clear access.
Tell the assessor about these circumstances rather than relying on a generic cost per square metre.
Rebuilding Requirements and Cost Changes
Ask how the assessment addresses applicable building requirements and changes in costs during the relevant period.
Allianz Commercial identifies reconstruction costs and accurate property values as important considerations in assessing insurance needs.
Does the Policy Include All Fixtures and Installed Equipment?
Before finalising the building value, identify substantial installations and clarify ownership.
These may include:
Air conditioning and ventilation systems.
Lifts and access equipment.
Solar installations.
Fire protection systems.
Mezzanine floors.
Fixed partitions and commercial fitouts.
Loading dock equipment.
External structures and signage.
The lease, asset records and policy definitions should be reviewed together.
A tenant may own some installations. Other improvements may belong to the landlord or transfer to the landlord under the lease. The fact that an item is fixed to the premises does not resolve every ownership and coverage question.
An asset schedule helps prevent property from being omitted or included under the wrong section.
How Can Underinsurance Affect a Partial Claim?
Some commercial property policies contain an average, co-insurance or underinsurance provision.
Where the provision applies, the insurer may reduce a claim payment because the insured value falls below the threshold specified in the wording.
This can affect partial damage. The repair cost being lower than the sum insured does not necessarily prevent the provision from operating.
An Australian QBE business policy wording, for example, contains a calculation linked to 80% of reinstatement or replacement cost. That is a feature of that wording, not a universal rule for commercial building insurance.
A Simplified Underinsurance Example
Assume a hypothetical policy applies an average calculation using an 80% threshold:
Relevant rebuilding value: $5 million.
Eighty per cent of that value: $4 million.
Building sum insured: $3 million.
Otherwise covered partial damage: $800,000.
Under that assumed formula:
$3 million ÷ $4 million × $800,000 = $600,000.
The illustrative payment would be $600,000 before the excess and any other adjustments, leaving a $200,000 difference against the damage amount.
Actual policies can have different thresholds, exceptions and calculations. Ask the broker to explain the provision in the proposed wording.
Does Replacement Cover Mean the Insurer Pays Any Rebuilding Cost?
No. Reinstatement or replacement cover remains subject to the policy’s limits and conditions.
Check what the wording requires concerning:
Repairing or rebuilding the property.
The timing of reinstatement.
Rebuilding at a different location.
Changes to the building’s specification.
Settlement if reinstatement does not proceed.
Additional costs arising from building requirements.
Do not assume a decision to sell the site, change its use or undertake a larger redevelopment will produce the same settlement as reinstating the damaged building.
Where future redevelopment is relevant, discuss the implications when arranging cover.
When Should Commercial Building Values Be Reviewed?
Review the insured values at renewal and whenever a material change could make the previous assessment unreliable.
Useful triggers include:
Completing an extension or substantial refurbishment.
Installing significant plant or building services.
Acquiring an adjoining building.
Changing responsibility for a tenant’s fitout.
Discovering that an earlier assessment omitted structures.
Receiving professional advice that rebuilding costs have changed materially.
QBE’s guidance on business underinsurance emphasises reviewing current replacement values and reassessing cover as premises and assets change.
Ask the valuation professional how frequently the assessment should be updated for the particular property. An annual percentage increase should not be assumed to correct an inaccurate starting value.
Building Value and Loss of Rent Need Separate Reviews
An adequate building sum insured does not automatically mean the landlord’s rental income is adequately protected.
Where loss-of-rent cover is included, review both the insured amount and the indemnity period.
Consider the practical sequence following substantial damage:
Investigation and site assessment.
Demolition and preparation.
Design and approvals.
Construction and reinstatement of services.
Inspection and readiness for occupation.
Then check what the policy actually covers during that process. Not every delay or rental loss will necessarily qualify.
Provide current rent details, relevant outgoings and scheduled increases. Ask how the benefit is calculated and when it ends.
What If You Own Several Commercial Buildings?
Review each location’s values and characteristics, even where several properties are insured together.
A portfolio review should identify:
The value assigned to each building.
Any shared or combined limits.
Site-specific excesses and conditions.
Different tenant activities.
Vacant areas and planned works.
Rental income associated with each location.
Do not assume an adequate total portfolio value compensates for an incorrectly declared value at an individual property. Ask how the policy applies its limits and underinsurance provisions across locations.
Commercial Building Insurance FAQs
Can I Use the Bank’s Valuation for Building Insurance?
Only if it contains an appropriate, current insurance reinstatement assessment that meets the policy’s needs. A lending valuation’s market value should not simply be copied into the insurance schedule.
Can I Use a Residential Rebuilding Calculator for a Commercial Property?
Do not assume a residential calculator is suitable for an office, warehouse, retail building or specialised commercial premises. Use an assessment appropriate to the property and the insurance purpose.
Does Land Value Need to Be Included?
Land value is generally distinct from the cost of reconstructing a building. Ask the assessor to identify the relevant insured structures, site works and associated costs rather than using the total property market value.
Can I Lower the Building Sum Insured to Reduce the Premium?
A reduction should be supported by an appropriate assessment. Lowering the value simply to reach a preferred premium can leave a reconstruction shortfall and may affect partial claims.
Does a New Valuation Automatically Change My Insurance?
No. Provide the assessment to the broker or insurer and obtain confirmation that any required changes have been made. Check the revised schedule and any resulting terms.
Review Your Commercial Building Insurance With Clarke Lyons
Clarke Lyons Insurance helps commercial landlords and property investors arrange insurance for offices, retail premises, warehouses, industrial buildings, medical suites and mixed-use properties. Clarke Lyons
Bring your current policy, latest reinstatement assessment, asset information and rental details together for a review of the building value, policy conditions and related cover.
General information only. Cover and claim payments depend on the selected policy and circumstances. The numerical example is illustrative and does not represent every insurer’s calculation.
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