Beyond the policy: Who pays when insurance doesn’t cover the damage?

A corroded pipe in the riser bursts, flooding the basement. External cladding cracks from long-term thermal movement. Structural concrete begins to spall due to poor installation decades ago. These are expensive issues and they are typically not covered by the building's insurance policy.

In mixed-use commercial buildings, damage that falls outside insured risks, and is not caused by a third party, can create real financial and legal challenges. While landlords are usually responsible for structural repairs, the lease and insurance position ultimately determine who pays.

What is an "insured risk"?

Most commercial leases require landlords to insure the building against specific “insured risks,” typically including:

• Fire and explosion. 
• Storm or flood. 
• Escape of water.
• Subsidence.
• Riot and civil commotion.
• (Often) terrorism.

In some circumstances, notwithstanding this obligation, if insurance against a particular risk is not available in the market or is prohibitively expensive, then the landlord may decide against insuring that particular risk. That risk is known as an "uninsured risk". A common example is terrorism. Many leases include terrorism as an insured risk, but in some locations, especially high-risk areas, terrorism cover is either unavailable on the open market or only available at very high premiums.

If damage results from one of these risks and the risk is insured, the landlord will carry out the repair. The insurer will pay for the costs of the repair (assuming the insurance policy has not been vitiated and less any excess, which may be recoverable via the service charge). 

If the risk is not actually insured, then the lease will likely allow the landlord to opt to terminate the lease or to repair the damage at the landlord's own cost. Recovery of the landlord's costs is unlikely to be recoverable via the service charge. 

What is not an “insured risk”?

Some types of damage do not fall within insured risks and are not caused by external parties. We will call them "uninsured events" for the purposes of this note. These uninsured events include:

• Corrosion and wear: A pipe corrodes over time and leaks into the basement. 
• Thermal movement: Cladding panels crack due to long-term expansion and contraction.
• Latent defects: Structural concrete spalls due to poor installation during original construction. 

These issues are typically uninsurable. They arise gradually, often from age, design, or material failure and when they do, they are not covered by the building's insurance policy.

Repair obligations: Who does what?

The Landlord

Landlords are generally responsible for repairing and maintaining the building’s structure, external and common parts, regardless of the cause of damage. If insurance does not cover the damage, the obligation to repair still remains.

The Tenant

Tenants are usually responsible for the parts of the building demised to them, including:

• Internal finishes. 
• Ceilings and flooring.
• M&E installations serving only their premises. 

They are not typically liable for structural or external elements, even if those cause damage to their unit. 

Can the landlord recover the cost?

Recovery of the landlord's costs in repairing the building's structure, external and common parts from an uninsured event, hinges on the lease’s service charge provisions.

Tenants in mixed-use buildings often negotiate fixed or capped service charges to limit exposure. If a major uninsured event occurs, the landlord may only recover a fraction of the cost, even if the lease otherwise permits recovery. 

Note, that if damage is caused by an insured risk, but the insurance policy has vitiated by a tenant’s act or default, leases typically provide that the tenant must indemnify the landlord for the resulting loss. 

In both cases, recovery of the landlord's costs in repairing the building depends on the tenant’s solvency and willingness to pay. Enforcement can be slow, costly, or unsuccessful, especially where multiple tenants are involved.

In buildings with residential elements, the Building Safety Act 2022 may introduce statutory limits on cost recovery but this is applicable to buildings over a certain height and only in limited circumstances.

Latent defects: Can the landlord claim elsewhere?

If damage stems from a latent defect in construction or design, landlords may pursue claims against:

• The original contractor or consultant team.
• A building warranty provider. 

Claims are generally limited to:

• 6 years from practical completion, or 
• 12 years if the contract was executed as a deed. 

Beyond that, recovery is more difficult.

Final thoughts

Damage that is not insured, whether because the risk was not covered, was not insurable, or falls outside the definition of insured risks, leaves landlords navigating a complex web of repair obligations and lease restrictions. Understanding and managing risk allocation is critical. Insurance will not always cover the cost, but someone will have to.