Do I have to buy building insurance?

If you own your building mortgage-free then there is not a legal requirement that you buy insurance. You could choose to self-insure. If there is no claims then you save a lot of money. You could take the money you are saving and put it into a savings account that gains some interest. If you do have a claim you will have some money to use to cover your losses.

The question is, will it be enough? How much would it cost to rebuild your building? You might consider doing a portion of the value as self-insurance and buy some insurance coverage for the balance. Will this be enough? Consider the claim we outline below.

A claim happened in 1986 that paid out over $20 million when fire gutted the top half of a 15 storey building. Unfortunately the building owner showed negligence in his performance of duties. So he needed to have an "umbrella" policy over top of his regular insurance because the insurance companies came back at him to repay the $20 million they paid out.

The errors that the owner had committed include:

  • Only one water outlet in the perimeter of the building was capable of pressurizing the fire hoses. It was mistakenly marked "sprinklers".
  • Employees could not give the firefighters attending the scene the location of the fire. This meant a time-consuming floor by floor search. Once the firefighters reached the fire the security people did not have the keys to open the locked area on the floor.
  • Employees also did not not understand how the standpipe system operated. This is the system used to feed water to hoses inside the building.
  • Firefighters thought that the building had a sophisticated detection system. It did not. The lawsuit states that no fire, heat or smoke detectors were functioning within the tower.

If this person did have an umbrella policy to go over and above the commercial general liability policy then at least there would be the legal funds to defend. Depending on the amount of the umbrella there is a chance that this building owner would have stayed solvent after the claim.

The lesson is clearly that you need to consider your risk management. You need to be sure that you have correctly advised your insurer of what fire protection and safety measures you have in place. You need to have a safety program in place with employees trained to respond in an emergency.

The insurance answer

Our insurance advice is that what you cannot control and cannot reduce is a risk you have to consider covering with insurance. Weigh the costs. Ask the questions. Buy what you need for what you cannot control.