Lessons From Losses: Commercial Property Claims in Australia: Part 1
April 2, 2025
Commercial property insurance is a critical tool for business owners in Australia to protect their physical assets from risks like fire, theft, and natural disasters. However, bad claims – whether due to underinsurance, misrepresentation, or lack of proper documentation – can lead to financial losses and significant challenges for businesses. Below are some real-world examples of bad claims in the commercial property insurance space in Australia, along with key lessons learned from each case.
1. Underinsurance and the Consequences: The Case of a Sydney Warehouse
A Sydney-based warehouse owner learned the hard way about the dangers of underinsurance. The warehouse contained expensive machinery, high-value stock, and equipment vital to its operations. However, the owner had underinsured the property by around 40%, insuring only part of the full rebuild cost.
When a fire broke out, causing extensive damage to the building and its contents, the insurance payout fell far short of what was needed for a full rebuild. The insurance company argued that the warehouse was underinsured and applied the coinsurance clause, which meant that the payout was reduced in proportion to the level of underinsurance.
Key Lessons:
- Always insure your property for the full replacement cost, not just the market value.
- Reassess your sums insured regularly to account for inflation, increases in asset value, and any renovations or purchases.
- Work with professionals like valuers or property appraisers to ensure the accuracy of your insurance value.
2. Failure to Disclose Renovations: The Melbourne Office Building Saga
A commercial office building in Melbourne underwent a major renovation, at a significant cost, which included an expansion of the building’s floors, an altered electrical system, and a new tenancy schedule.
However, the business owner failed to inform their insurance company about the changes, assuming that the policy would automatically cover the changes.
When a major electrical fault caused a fire, the business owner filed a claim. However, the insurer rejected the claim, citing that the various alterations had not been disclosed. The insurer declined to pay the claim arguing that the building was a materially different risk to that disclosed at the time of placing the policy, and the failure to disclose the renovation was a breach of the policy terms.
Key Lessons:
- Always notify your insurer of any major changes to the property or structure. This includes changes in tenancies, renovations, expansions, or changes to the building’s electrical or mechanical systems.
- Regularly review your policy to ensure it covers new risks introduced by property changes.
3. The Flooding Incident: Insufficient Coverage for Natural Disasters in Queensland
In Queensland, a commercial property located in a high-risk flood zone was severely damaged when a massive rainstorm caused local rivers to overflow. Despite warnings and previous flood events in the area, the business owner had not purchased flood coverage which was excluded from the standard property policy.
When the floods occurred, the owner expected the insurance to cover the damage, but the claim was denied. The insurer pointed out that flood damage was explicitly excluded from the standard commercial property insurance policy. The business owner had neglected to ask for flood insurance to be included in the coverage.
Similar properties in the immediate area had flood cover included at an additional cost.
Key Lessons:
- Always review policy exclusions.
- Review Flood Maps such as those provided by your local council to determine if you are in a high-risk area and consider adding specialised endorsements to cover risks not included in standard commercial property policies.
- Proactively address natural disaster risks by consulting experts on what coverage is necessary for your location.
In Part 2 of this article, we will continue with more examples about why paperwork is important and why proper insurance management can impact your commercial property claim.
