If you’re a mesne landlord (an intermediate leaseholder) of a commercial property, you may assume the freeholder has building insurance covered.  After all, you pay your share of the premium through a service charge, and the paperwork says the structure is protected.

However, while this may appear to be a hands-off convenience, when it comes to insurance, lack of control is always a risk factor if you have a financial stake in the asset. Blindly assuming everything is fine with the coverage could expose you to hidden underinsurance risk.

In this guide, we explain how the complex hierarchy of property ownership affects your insurance obligations, the role of Contingent Buildings Insurance as a vital safety net, and why an independent Reinstatement Cost Assessment (RCA) is the only way to ensure your “middleman” position is fully protected.

The commercial property insurance hierarchy: who holds the power and who holds the risk?

As the owner of the building, the freeholder is technically responsible for organising and managing buildings insurance for the commercial property in question. They arrange the policy, choose the sum insured, select the insurer and handle the claims.

But that doesn’t mean that you, as the intermediate leaseholder, are financially protected.

You have a financial interest in the property and you are contractually responsible to the sub-tenant to ensure the building is usable. Yet you have very little control over the insurance coverage. 

While you may not be directly responsible for funding an underinsurance shortfall, you could still face:

• A reduction in claim payments due to the average clause
• Disruption to rental income during reinstatement
  
• Prolonged loss of rental income if reinstatement is delayed due to an underinsurance shortfall
  
• Pressure from lenders if the asset value is impaired
  
• Breach of covenant disputes with occupational tenants
  
• Delays or disagreements in how a claim is handled

Underinsurance and sum insured problems for mesne landlords explained

Buildings insurance is based on reinstatement cost. This is the amount required to completely rebuild the property, including demolition, debris removal, professional fees and compliance with current building regulations.

Reinstatement cost is influenced by a range of changeable factors, including but not limited to materials and labour costs, property extensions or upgrades (such as green renovations), regulatory developments, and property location.

This means valuations can become invalid quite quickly. So, if your freeholder isn’t aware how volatile the construction market can be, they may have unintentionally underinsured the building. Even index linked policies fail to cover the gap if the initial sum insured was incorrect.

This can lead to insurers invoking the average clause, resulting in an even bigger gap in coverage and longer reinstatement delays, increasing the impact of underinsurance on mesne landlords.

It’s crucial to note that underinsurance isn’t a rarity. Over 80% of the properties we assess are underinsured.

The role of contingent buildings insurance for mesne landlords

What is contingent buildings insurance?

Contingent buildings insurance is a policy type leaseholders can purchase in situations where the primary insurance provision controlled by the freeholder may not fully protect the property in question.

How contingent buildings insurance supports mesne landlord insurance responsibility

While your freeholder arranges the main buildings insurance, mesne landlords often have their own insurable interest in the property. This is where Contingent Buildings Insurance comes into play.

Contingent Buildings Insurance is designed to protect your interest if the freeholder’s policy fails due to, for example, their insurance lapsing or becoming invalid, the insurer refusing a claim due to policy issues, or a delay in the claim settlement. It also covers scenarios in which your tenant does something to invalidate the freeholder’s insurance policy without your knowledge.

In these situations, contingent cover acts as a safety net, ensuring you are not left entirely exposed. However, it’s important to understand what contingent cover does not do:

• It does not automatically correct an underinsured sum insured
  
• It cannot prevent delays or financial gaps caused by incorrect valuations
  
• It is reactive, only activating once the primary policy fails

In short, while contingent insurance can provide a layer of insurance gap cover, you cannot insure a gap you haven’t measured, which is why independent verification is essential

Why RCAs are essential for accurate contingent buildings insurance

A Reinstatement Cost Assessment (RCA) is the professional evaluation of a building’s full rebuilding cost, reflecting everything required to restore the property to its original condition after damage. You can learn more about RCAs in our dedicated guide.

For mesne landlords, commissioning an independent RCA is critical for several reasons:

1. Verification of the sum insured: Freeholders may rely on outdated valuations or estimates when declaring the sum insured. An RCA ensures the figure used for insurance — and for any contingent cover — is accurate and up to date.
   
2. Protection against underinsurance: With a verified reinstatement cost, you reduce the risk of insurers applying the average clause, which could otherwise reduce your claim payment proportionately in the event of a major loss.
   
3. Stronger negotiating position with the freeholder: An RCA gives you evidence to discuss adjustments to the declared sum insured. This ensures that both the primary and contingent policies fully reflect the building’s true reinstatement cost.
   
4. Support for lenders and tenants: Many lenders and tenants expect evidence that the property is properly insured. An RCA provides independent verification, demonstrating responsible risk management.
   
5. Peace of mind and financial control: Most importantly, an RCA shifts you from a passive position to one of control. Rather than relying solely on the freeholder’s numbers or contingent cover, you know the property is fully protected and that any gaps have been measured and addressed.

RCAs from Cardinus

As part of our property risk management services, we provide professional reinstatement cost assessments. Cardinus is a RICS-regulated organisation with a network of highly qualified assessors spanning the UK. No matter how complex your leased commercial property, we can match you with an assessor experienced in surveying your building type.

With an independent RCA from Cardinus, you can take control of your insurance, protect your rental income, and safeguard your asset value with confidence – no more relying solely on the freeholder’s policy! Fill out our quick contact form to get started.