Written by: Nick Towns on Wednesday 31/05/2017
For many owners of commercial property, arranging Open Cover insurance can prove problematic. We take a look at the main points to watch out for.
There is always an element of risk involved with arranging insurance contracts. A methodical approach to the transfer of operational risks involves identification, assessment and quantification. The challenge, however, is not to rely on the comfort of ‘Day One’ cover, but to recognise how your needs can change and to ensure that your insurance is capable of responding accordingly.
Before you arrange cover, consider the pre-appointment policies involved. Due diligence is vital to ensure that the Insurer has access to all material facts before cover is issued, in case of a future dispute. A wise commercial investor will clarify the response position should a company enter administration. Try to arrange cover via an Insolvency Insurance facility which will be mindful of previous cover and costs.
Most Open Cover insurance facilities provide up to 30 days blanket cover. During this time, the IP establishes what cover is required and informs the broker, usually via a questionnaire. IPs should ask for clear recommendations on appropriate cover to avoid either over- or under-insuring.
Open Cover is often criticised for the cost of the premiums, particularly when estimated realisations are low. If this is the case, it’s important to establish whether cover has been arranged on the correct basis.
Ask questions such as: Would the building be reinstated in the event of a loss? Does the appointment include vehicles? Have premiums been market-tested? Can premiums be recovered from tenants in accordance with the terms of the lease?
While many insurance contracts and Open Cover facilities require the insured to adopt ‘reasonable precautions’ they also introduce warranties or conditions which risk the contract not responding in the event of a loss, particularly in relation to vacant properties. The advice, therefore, is to check the contract’s code of practice regarding vacant sites.
Commercial property owners run the risk of financial hardship if the insurance assessment is valued incorrectly. Make sure that your building is insured appropriately, either for reinstatement or at market value. A broker can provide further assessment valuations, if required, to ensure that claims do not fall short.
If you’re insuring a vacant building make sure that the market value is not significantly above the reinstatement value. Other considerations include whether the building is listed, if the lease has reinstatement obligations, whether the building would need to be reinstated to facilitate a sale and whether the value is in the land, not the building itself.
Checks and balances should always be in place when arranging insurances, and risk management must be at the forefront of your mind. A good working relationship between IPs and brokers is essential to avoid operational exposure. Here at Eddisons we pride ourselves on providing clear advice on appropriate cover, as well as a wide range of other services, including taking on the responsibility for vacant property compliance. If you need advice on any aspect of Open Cover insurance, speak to a member of our team.