In-Depth: Fear No Evil

Practically all shopping centers in Moscow are insured. The situation in the provinces is hardly any worse. Most modern shopping centers operating in the province are insured. As a rule, insurance agreements are signed before construction works are completed, i.e. at first the investor takes out an insurance policy on construction and assembly works, so as to protect himself against possible unforeseen losses.

After the project is finalized and commissioned the owner enters into a property insurance agreement on the mall. Such agreements usually cover insurance on structural elements of the building, internal and external fittings, built-in equipment (air conditioning systems, elevators, escalators, etc) and property items situated inside the building. It is highly recommended to take out a third party liability insurance which is designed to cover the owner against the cost of damage to health or property of a third person (shoppers, tenants or neighbors).

All the above-mentioned insurance policies are voluntary, mandatory insurance plans are applicable, too. The law obliges mall owners to take out insurance on sources of increased danger, i.e. lifts and escalators.

Tenants should also have their liability to the landlord and other third parties insured. That is why more and more often mall tenancy agreements contain a clause obliging the tenant to take out a third party liability insurance. This is done to avoid disputes that may arise if the tenant inflicts damage to the property of their neighbors, for example, in the event of fire or water leaks. All the disputes will be settled by the insurance company. Tenants decide for themselves whether to insure their own property or not but major chain operators always take out property insurance.

The value of insured property is usually set by the insured – the client. But that value should correspond to the company’s financial documents. Otherwise, if the insured value is different from book value, in the event of insured accident the client will only receive compensation at the amount insured.

That is why companies usually hire valuation experts to assess the value of property to be insured. They inspect the property and come up with their conclusions, which serve as a basis for setting the insured amount and the size of compensation.

Usually, the insurer asks the client to fill in a questionnaire where he is to provide information on the property and its condition. Upon examining that data the insurer decides on whether an additional inspection of the property is necessary.

If the building is newly built, with all necessary security and fire alarm systems in place, and papers confirming the value of the property are in good order, a survey is not necessary. But if the insurance company detects discrepancies in data or the property is an old development or a historic monument, a survey is obligatory. Some insurers always inspect the property before signing an agreement.

The cost of insurance depends on several key factors:

- size of the shopping center;

- location;

- date of construction and date of the latest capital repairs;

- assessed value of property;

- availability and size of franchise.

Insurers apply a number of factors to determine the size of premium, depending on availability of fire safety and alarm systems, security systems, presence or absence of water features in proximity to the property. On the basis of that data (most of which are included in the questionnaire) and depending on the risks the size of premium and compensation is set.

The main risks mall owners insure their properties against are fires, floods, burst in heat supply and sewage systems, natural disasters (hail, hurricane, earthquake, a lightning stroke, etc), blasts of various origin, as well as unlawful actions of a third party and theft. Insurance against terrorist acts is becoming increasingly popular. Practically all foreign companies who launch their stores in Russia include that risk in their insurance package.

As a rule, the property insurance agreement also provides for insurance against what is called disruption of operations. That means that if as a result of a fire a mall is idle for a certain period of time and its owner receives no revenues from leased space his losses will be covered by the insurer.

Water leaks and window glass breakage are the risks to which mall owners should pay special attention. Such accidents may occur up to 10 times per year. But while leaks are most often to blame on tenants, glass doors, which are broken most often, are the property of the mall owner. For example, we have many times received claims from the malls where doors were closed and washed so conscientiously that visitors simply failed to notice them and literally walked through the glass.

We recommend our clients to secure protection against all risks – an insurance package popular in the West – so as to rule out all possible risks. The mall owner should not forget to inform the insurer on all repairs and building works carried out on the premises while the insurance agreement is in effect.

If those works affect over 10 to 15% of the area of the mall (or 10 to 15% of the value of insured property), additional insurance may be required against risks arising during such works, or the insured will have to pay an increased premium pending those works. The mall owner is required to inform the insurer of any other circumstances, which may increase the risk, such as replacement of video surveillance systems.

If the insured accident occurs the insured is to inform the insurer of what has happened as soon as possible. Then, the insured is to file a claim and follow the insurer’s instructions.

But it would be erroneous to think that insurance protection guarantees an unclouded future. By checking all papers the insurance company may reject a claim. Such a situation may emerge due a number of reasons. Firstly, a claim may be rejected if the damage to the property was inflicted as a result of an event that was not an insured accident. For example, the building insured against a fire was damaged in the flood.

Secondly, the claim may be rejected if the mall owner or the operator hired by the mall failed to take necessary measures to save the property and minimize the damage. For example, if they did not try to put out the fire.

Insurance of shopping malls has its specifics. The insured should include the risk of loss of rental payments resulting from disruption of operations as a result of damage. Also the owner is to insure his liability to a third party, for a tenant to receive compensation if for example his property is damaged by a water leak that occurred as a result of the owner’s negligence.

At the same time, malls enjoy certain privileges, too. In particular, rates are not high. As a rule, such buildings are equipped with security and fire safety systems and a serviced by professional security services.

Alexei Galakhov, deputy general director at Rossiya Insurance Company, contributed this article to the supplement Buidling Blocks of Business, Vedomosti. The point of view of the author does not necessarily reflect the position of the editors.