Assisting your clients with commercial property purchases via their Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS) is, invariably, a protracted and complicated affair.
Liaising with solicitors acting for the vendor and purchaser, working with the SIPP or SSAS trustee(s) and administrator and ensuring that there is sufficient liquidity to fund the purchase (which may involve borrowing, and hence another party’s involvement in the matter) has the adviser spinning several plates simultaneously.
One vital part in the purchase process risks being forgotten about, or left to the last minute: namely, obtaining adequate insurance for the property prior to its acquisition.
To assist advisers in arranging this, a number of SIPP and SSAS providers – including ourselves – have set up block property insurance policies, often via reputable Chartered Insurance Brokers. Aside from the convenience this offers, it is potentially a good way to obtain both sufficient cover for the property and – as a result of the economies of scale of such a policy –a significantly reduced premium.
Using our own block insurance policy as an example, this article sets out the cover that might be available, some useful advice where a property becomes vacant or a claim needs to be made and why advisers should consider using such a policy for the benefit of their client and the property being purchased.
A block insurance policy should aim to provide competitive and broad insurance cover for SIPP and SSAS property assets, rental income, and legal liability as property owners.
Cover may be on an “All Risks” basis in respect of physical loss or damage including fire, theft, flooding, breakage of fixed glass, subsidence, landslip and heave.
The policy may provide cover in the event of damage following a terrorism incident, (often with the exception of properties located in Northern Ireland), or where damage to property leads to an interruption in the rental income. This latter aspect could be critical if the rental income is being utilised to pay pension income to a SIPP or SSAS member, or to fund borrowing repayments.
Public liability cover – often set at a multi-million pound level - is also put in place to protect the SIPP or SSAS trustees for their legal liability as the owner of the property.
No. The principal behind an “All Risks” policy is that everything is insured, unless specifically excluded. However, advisers should be aware of the following key exclusions, which are standard within the insurance industry:
- Faulty and defective design, materials and workmanship;
- Gradual deterioration, wear and tear, rust and corrosion, wet or dry rot, dampness dryness, shrinkage, evaporation, marring, scratching, vermin or insects;
- Change in temperature, colour, texture or finish;
- Collapse of buildings and other structures – which does not apply if the collapse is due to an insured cause, for example, fire or subsidence;
- Storm & flood from open-sided buildings; and
- War risks.
In addition, you
should expect that policy would not provide any cover for the business of the
tenant that is occupying the property, for any of their contents, or for
liabilities arising out of any activities they are engaged in. The tenant would need to arrange their own
insurance for these purposes.
It is also common for a lease to be on a ‘fully repairing and insuring’ basis, meaning that the SIPP or SSAS trustees – as landlord of the property – would pay the insurance premium and then recharge it to the tenant.
It is important that insurers are informed as soon as a property becomes vacant as this can usually lead to an increase in the policy excess amount and the exclusion of losses arising from escape of water, riot, civil commotion, malicious damage or theft.
Furthermore, in respect of buildings that become unoccupied, the property owner (that is, the trustees of the SIPP or SSAS) should always:
- Turn off electricity, gas and water supplies at the mains and drain down all water systems, except for those that are connected to automatic fire or intruder alarm installations, or connected to automatic sprinkler installations or other fire suppression systems;
- Maintain automatic sprinkler installations and other fire suppression systems, automatic fire alarm and intruder alarm installations, and keep them fully operational;
- Maintain a level of heating sufficient to prevent the freezing of automatic sprinkler installations;
- Secure the buildings and all points of access against entry by intruders, and put all protective and locking devices and any intruder alarm installations into full and effective operation. All letter boxes should be sealed to prevent the insertion of any materials or liquids;
- Remove all waste, unfixed combustible materials and gas bottles from the interior of the buildings - including any communal parts - and from any external areas;
- Carry out an internal and external inspection of the property at least once every 14 days, maintain a record of such inspections, and ensure that any defects in the condition or state of repair of the property, or defects in security, alarm or fire protection installations are rectified, remedied or repaired immediately; and
- Ensure that no refurbishment, renovation or alteration work is carried out, unless agreed by the insurers.
It is vital that the property owners report all claims or incidents to the insurers as quickly as possible as failure to do so could invalidate their claim.
Good insurers will provide useful information to those making a claim on the policy. The following are typically sensible actions to take:
- Malicious damage or theft claims must be reported to the police and a crime reference number provided;
- Mitigate losses by undertaking emergency works; for example, boarding up the property, and making it safe and water-tight;
- Refrain from undertaking reinstatement works until approval is granted by the underwriters;
- Retain damaged items for inspection by the underwriters, and take photos of damage where possible. Include witness statements and details of any party responsible for causing the damage; for example, impact damage by a vehicle;
- Retain any CCTV footage of any accident or incident, which could assist underwriters in defence of a third party claim; and
- Not to respond to any letters of claim from third parties, but forward them immediately to the insurers, and not to take any action which could be construed as an admission of liability, (for example, sending an apology, or repairing an accident location before prior discussion with the insurers).
A SIPP and SSAS provider can potentially add value for advisers by not only offering their clients a relevant insurance policy, with cover at an appropriate level, but putting the policy in place themselves, thereby taking one important job off an adviser’s lengthy to-do list.
The degree of the
economies of scale a block insurance policy can deliver should not be
underestimated. For example, one of the most recent additions to our own block
insurance policy was for a premium of £4,700 per annum, compared to the original
insurer’s quote of £16,000 per annum, saving the SIPP member over £11,000 every