What Is Commercial Property Insurance?
Commercial property insurance is used to cover any commercial property. Commercial property insurance protects commercial property from such perils as fire, theft, and natural disaster. A variety of businesses, including manufacturers, retailers, service-oriented businesses, and not-for-profit organizations carry commercial property insurance. It is generally bundled together with other forms of insurance, such as commercial general liability insurance.
Key Takeaways
- Commercial property insurance is insurance used to cover property and equipment from the risk of disasters.
- Different types of properties and equipment are considered for commercial property insurance.
- Several factors, such as location and occupancy, are considered while determining the cost of commercial property insurance.
Understanding Commercial Property Insurance
Commercial property insurance can be a major expense for businesses that use equipment worth millions or billions of dollars, such as railroads and manufacturers. This insurance essentially provides the same kind of protection as property insurance for consumers. However, businesses can usually deduct the cost of commercial property insurance premiums as expenses. Commercial property insurance generally does not cover losses arising from tenants using the building.
When determining how much a company should pay for commercial property insurance, the value of a business’ assets, including the building, is the primary factor. Before meeting with an agent to discuss coverage, a company should take an inventory of their physical assets located at their property. This information will help determine what exactly would be the replacement value and the level of coverage the business should get.
With an increase in the number of natural disasters, weather conditions in the area where the building is located have also become an important factor in determining the cost of commercial property insurance. Commercial insurance rates are generally higher for properties located in the vicinity or inside geographies with significant risk of weather-related catastrophes. For example, rates are higher for properties located near regions prone to wildfires in California.
Factors Considered in a Commercial Property Insurance
- Location: Buildings in cities or towns with excellent fire protection typically cost less to insure than buildings outside a city or in areas with limited fire protection.
- Construction: Buildings made of potentially combustible materials will have higher premiums, while those made of fire-resistant materials could earn a discount. Additions to an existing structure might affect a fire rating, so it’s a good idea to talk to an agent or insurance company before remodeling. Internal structural elements can also change a fire rating. Using wood partitions, floors, and stairways in an otherwise fire-resistant building will likely nullify any rate reduction. Fire-resistant interior walls, floors, and doors can help maintain a good fire rating.
- Occupancy: A building’s use also affects its fire rating. An office building will likely rate better than a restaurant or auto repair shop. In a building with multiple tenants, one hazardous occupant will negatively affect the fire rating of the entire building. If a business is in a building with a more hazardous tenant, premiums will be higher.
- Fire and theft protection: How far are the nearest fire hydrant and fire station? Does the business have a fire alarm and sprinkler system? How about a security system?
Property to Consider for Commercial Property Insurance
Some particular places on your property to consider insuring include:
- The building that houses your business, including if it is owned or rented
- All office equipment, including computers, phone systems, and furniture, whether they’re owned or leased
- Accounting records and essential company documents
- Manufacturing or processing equipment
- Inventory kept in stock
- Fence and landscaping
- Signs and satellite dishes
Examples of Commercial Property Insurance
Commercial property insurance can be used to cover a variety of situations. For example, it can be used to claim damages if a fire destroys your office equipment. Commercial property insurance is also useful in case of a theft. It can also be used to make claims in case of a natural disaster. For example, Insurance Journal reported that Hurricane Maria’s impact in Puerto Rico left insurers dealing with 279,000 claims.
Who Is It For?
Any business that leases or owns office space, manufactures products, manages inventory, leases equipment, maintains the property of others should consider commercial property insurance.
Typically, commercial property is first secured when a lease is signed. Property owners will want their tenants to own and maintain insurance with limits adequate to repair or restore the building in the event of damage.
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Why Do You Need It?
Commercial property insurance helps business owners protect all property vital to the daily operation of the business, extending not only to buildings, stores, and offices but also equipment, furniture, inventory and any other physical assets important to the company.
Commercial property insurance can cover a variety of losses including building, business personal property, property of others, business income, inland marine, and cargo.
For instance, faulty wiring or bad installations could cause a fire on your premises. Or the building may be struck by lighting, which can cause both fires and electrical damage to the business equipment. Your property may be vandalized or stolen.
Additionally, other natural perils such as earthquakes, tornadoes, or hurricanes, may cause thousands in damages. You may open your doors and find that your premises have been flooded. If you live in an area that commonly suffers hail storms, or you’re just unlucky to be hit by an unexpected storm, your vehicles and equipment can end up being beaten up.
In all these cases, the damage to your building, vehicles and equipment could be enormous. Commercial property insurance policy serves to provide business owners with the peace of mind that, even in the worst-case scenarios they won’t have to close their doors, or pay for property damage out of their pockets.
Many premiums are on the rise due to an increase in catastrophic events in 2017 and 2018. According to a recent report, global losses from disaster events in 2017 totaled $144 billion, with hurricanes Harvey, Irma, and Maria causing a combined $92 billion of property damage and the California wildfires accounting for a record $14 billion in losses.
In 2018, California wildfires continued to set new frightening standards in commercial property risks and fire insurance needs, accounting for an additional $845 million in insured losses.
What Does Commercial Property Insurance Cover?
Specific coverage varies from policy to policy. When you set up an insurance policy with your carrier or broker, you should tailor it to protect against the risks most prevalent in your geographic area. A Michigan-based company wouldn’t likely need the same coverage as a company headquartered in the middle of Tornado Alley. You should work with your broker to assess risk and put together a policy that makes sense for your business.
Commercial property insurance covers more than just the building where you conduct your business. Your policy should also insure the contents of your building, including any movable property that your business owns. In a warehouse, contents protection might cover essential tools, equipment, vehicles, and storage systems your business uses daily. In a retail environment, it might protect product inventory. In an office, it might cover furniture, computers, servers, or even the re-creation of documents and records.
Property insurance may extend to certain assets outside your building, to surrounding characteristics like your company sign, landscaping, fences, or external structures. All these assets can impact your ability to conduct business regularly. They are a part of your property and could be covered under the policy.
Your insurance policy may even extend coverage to critical business assets when they are used off-premises. For example, say an employee takes a company computer on a trip and the device gets lost or stolen. Depending on your coverage, you may be able to submit a claim to replace the device.
The most important aspect of a property policy is its protection against loss of income or revenue in the case of property loss. These provisions provide net income and continuing expenses during the period of restoration when a direct, physical loss is incurred for business income. If your business has to shut down for two weeks due to a fire, your policy might reimburse you for some of the lost earnings for those down weeks.
To summarize, commercial property insurance will cover:
- Your premises
- Equipment and tools used in the business
- Inventory
- Furniture
- Personal property (that you’re using for business purposes)
- Loss of income due to property damage
Are BOP and Commercial Property Insurance Related?
Business owners policy or BOP is a cost-effective package that includes three insurance policies: general liability, commercial property, and business interruption insurance. A BOP is a perfect solution for a small business with a low-risk profile and basic coverage needs. A stand-alone commercial property policy offers more robust protection, with higher limits and broader coverage, but at a higher price.
What’s The Difference Between Replacement Cost And Actual Cash Value
There are two methods that insurers will use to calculate how much you’ll receive as compensation for losses of business property: Actual Cash Value (ACV) and Replacement Cost (RC). ACV means that the insurer will consider the current market value of the property that is damaged. You will receive the amount of money that you would get if you tried to sell the property. This means that as the property depreciates due to use and age, you’ll receive less money. Replacement cost payment will compensate you for the full amount needed to replace your property.
The key differences between actual cash value and replacement cost for the policyholder are the amount you’ll receive in case of a claim and the cost of the coverage. Businesses purchasing replacement cost policies can expect to pay considerably higher premiums since they won’t have to deal with property depreciation.
What’s Not Covered?
When you are putting your commercial property insurance plan together, there is a range of perils that you can choose to include or exclude from the policy. This process should involve a detailed talk with your broker in order to determine what the most appropriate coverage is for your business.
You can make a decision in the end whether you want to be covered against “all perils” or only “named perils.” Naturally, you’re going to have to pay a higher premium to cover “all perils.”
When you have a “named perils” policy it’s just that, a list of every type of possible peril that your insurance will cover.
Does Commercial Property Insurance Have A Deductible?
Most commercial property coverage will have a deductible written into the policy. A deductible is a sum of money that the policyholder must pay towards the claim before the coverage kicks in.
Keep in mind that the deductible may vary depending on the peril that caused the claim. For instance, a policy may have one deductible amount for damage caused by fire and a different amount for claims caused by earthquakes.
It’s crucial to ensure that all deductibles are delineated when buying coverage – sometimes, specific deductibles are less obvious than others when reading a policy contract.
