What insuring risks in a commercial property entails

Mr Wafula Luasi Nabutola
Mr Wafula Luasi Nabutola

Real estate business contains hundreds of risks often referred to as loss exposures. Risks are scattered, from each tenant space to the common areas and the structure itself.

Risk can be static (pure) or dynamic (speculative). Speculative risks are the uncertainties involved in any business decision, results of which lead to either a financial gain or loss, commonly referred to as entrepreneurial risks.

The decision to buy or build a commercial property is a dynamic risk. However, as soon as a “buyer” becomes “owner”, dynamic risk becomes static risk.

Wherever people gather in one location, as they do in commercial properties, risk increases. For example, a shopper can suffer bodily injury for which the property ownership will be liable.

Similarly, an idler can cause liability to the shop owners, while vandals can deface the common areas of the shops.

As such, the underwriting inspector will evaluate materials used in constructing the property including what the structure consists of i.e. bricks, masonry and fire resisting materials.

The layout and design are also evaluated, as well as the interiors.

Susceptibility of materials to fire, whether or not the building has a fire sprinkler system, and other perils found on the property must be ascertained.

These are some of the several factors that will affect insurance rates and in turn affect the premium rates.

An insurance surveyor will also review the type of tenants in a building. Commercial property will have retail tenants on the ground floor, while upper floors attract service clients.

The insurer developing the rate would take into account the great exposure of one tenant (e.g. a restaurant) than another (e.g. a clothing store). The greater the risk the higher the premium.

Risk prevention activities must include fire drills, meeting with tenants to discuss fire safety and periodic inspections of the buildings including the services especially electrical wiring.

External hazards that increase the danger of the property may originate from nearby structures. A commercial property located near a chemical plant compounds risk of explosion.

Weather conditions can create additional hazards. Insurance also checks vulnerability to earthquakes, hurricanes or hail storms.

It is recommended that all insurance policies be reviewed by the property manager and the insurer at least annually.

Insurance records are some of the files in a property manager’s possession.

An qualified agent will handle records of policy exploitation, premium payments, inspection reports and loss history.

Some real estate practitioners believe that property managers should handle all insurance matters, including the decision-making process. It simplifies matters.

The manager is knowledgeable about what happens on the property and can usually maintain a more thorough and efficient insurance programme based on up to date data, and take ensure to control losses.

Mr Nabutola is Consultant-in-Chief, MyRita Consultants – a knowledge management, research and advisory firm, and President of Commission 8 at the International Federation of Surveyors (FIG).