In addition to earthquakes and floods, fire is one of the biggest natural threats to the safety of your small business. Though you can take preventative measures to reduce the chances of a fire starting on your property, natural disasters are never completely under your control. Fire can spread wildly and unpredictably. A careless neighbor or unexpected electrical malfunction might unleash a spark that destroys everything you’ve worked so hard to build. If your business goes up in flames, you don’t want to be the one who is handed the bill.

What is a Commercial Fire Policy?

A Commercial Fire Policy reimburses you for the damage a fire causes to your business’s property. Depending on the strength of your policy, you might receive coverage for the incidental fire destruction from smoke, charring, lost income due to prolonged business closure, and even the damage caused by firefighters. In the event of a fire, you will receive a cash payment to cover your losses.

Commercial Fire Insurance vs. Commercial Property Insurance

Commercial Fire Insurance is generally sold as a component of commercial property insurance.

Additional added benefits of a commercial property insurance plan include coverage for theft, vandalism, riots, windstorms, hail, explosion, and certain categories of water damage. Covered property types include:

• Buildings you own
• Buildings you rent
• The contents of your buildings
• The exterior of your buildings
• Adjacent property such as fences, landscaping, and outdoor signs

These types of properties may all be included in your Commercial Fire Insurance Policy.

What does Commercial Fire Insurance Cover?

Commercial Fire Insurance, as part of your commercial property insurance policy, covers your building, the contents of your building, and the property of others in your care.

Buildings – coverage includes commercial buildings or offices that your business owns. If a building is rented or leased, and your rental or lease agreement requires fire insurance, coverage can be setup for your landlord’s building. In addition to the building itself, tenant improvements, outdoor signs, fences, and landscaping are also commonly included in the buildings coverage.

Contents – building contents, which include furniture, equipment, computers, tools, and inventory stored on or near the business premises. If your business leases equipment, many vendors require you to insure the leased equipment while it is in your possession, and this equipment can also be covered by Commercial Fire Insurance.

Often, the most important items destroyed in a fire are valuable records and papers. In the event these records are destroyed or damaged, Commercial Fire Insurance will provide some coverage for their replacement. For records and papers of significant value, you may consider additional protection through a separate valuable papers and records coverage policy.

Property of others – property that belongs to others that is in your care can also be covered by Commercial Fire Insurance (e.g., a fax machine you borrowed from a neighboring business). The limit of liability for property of others is separate from your contents coverage and usually has a very low limit by default. This limit can be increased by paying additional premiums.

This coverage is not sufficient for businesses that frequently have temporary possession of others’ property such as dry cleaners, valet parking, or computer repair businesses. If you have this kind of business, you should consider bailee’s customer insurance.

The coverage of your Commercial Fire Insurance will vary depending on the strength of your commercial property insurance plan. Though all plans will cover direct fire damage, some also offer coverage for perils incidentally related to the fire, such as fire departments fees or damage from falling objects.

Example:

• You own a store that sells porcelain plateware. A fire breaks out, seriously damaging the stores on your block, including your own store. Charred pieces of wood fall from a neighboring building and knock over the delicate cups and plates, destroying them. You are reimbursed for the damage the fire did to the walls and ceiling of your building, as well as the melted silverware, but not the ruined plateware. The insurance company tells you that your policy excludes coverage for falling objects.

Commercial Fire Insurance isn’t limited to direct damage by a fire. Though the actions of firefighters are much appreciated, the act of putting out a fire can destroy a building and whatever lies inside. Fire suppressant materials, foams, and sprinkler systems have the potential to wreak havoc on your property. For example, if you sell clothing or mattresses, a heavy liquid foam may destroy the fabrics and render your merchandise unsellable. Additionally, though some items may have been spared contact with flames, they can suffer damage from smoke or leftover ashes. A common example of smoke damage is ruined wallpaper or paintings. Covered costs under some Commercial Fire Policies may include:

• Damage from falling objects
• Damage from fire extinguisher foams
• Water damage from a sprinkler system
• Gas carbon dioxide damage
• Hydrocarbon halides damage
• Dry powder damage
• Fire department fees

Fire departments may also charge you a Fire Department Service Charge Coverage. This covers the cost of the resources and time that it takes for the city to put out your fire. The fee can typically run from five hundred to five thousand dollars. This cost is usually included in your property insurance.

What is not covered by Commercial Fire Insurance?

Exclusions to your Commercial Fire Policy depend primarily on the strength of your property insurance plan. A policy purchased on a named perils basis will generally have less coverage and more exclusions than an open perils policy.

Exclusions to all Commercial Fire Policies typically include war, nuclear risks, earthquakes, and floods. Note that fires caused by these perils (e.g., a fire caused by an earthquake) would generally not be covered by your Commercial Fire Policy.

Commercial Casualty

Commercial Fire Insurance, as part of a property insurance policy, also does not address liability claims stemming from damage to others’ property or bodily injury to others. If a fire that starts at your business ends spreading and destroying a neighboring business, your property insurance policy would not cover damage to your neighbor’s property. Look to a commercial general liability policy to deal with third-party damages and injury.

Another concern you may face if your business goes up in flames is the lost opportunity to do business. You will have landlords, loan officers, and employees who need to be paid, without the income to pay them. You should consider business interruption insurance to cover the cost of the lost income while you address the damage wreaked by the fire. Loss of revenue is not included in most commercial property insurance plans, so it’s unlikely that you will find a fire insurance plan that covers this.

Friendly vs. Hostile Fire

Fires can be considered “friendly” or “hostile.” “Friendly” fire is the type of fire that you invite into your business willingly, e.g. a lit candle or burning wood log in a fireplace. A “hostile” fire is a fire that you didn’t start intentionally, e.g. an electrical fire or an act of arson. Unless a “friendly” fire spreads beyond its original container, any damage it may cause is generally not covered by fire insurance.

Example:

• You own a hotel with an oversized fireplace in the central lobby. You stack a heap of laptop computers onto a push cart that you intend to move to the business center. Unfortunately, your intern decides to store the cart next to an open flame while they take an important business call. One of your guests from the nearby cocktail lounge stumbles backwards and accidentally pushes the stack of laptops into the flames. Because the fire never moved outside its original container (the fireplace), the loss is not covered by fire insurance.

Replacement Cost vs. Actual Cash Value

The payout for damaged property covered by Commercial Fire Insurance as part of a commercial property insurance policy varies depending on whether you are insured for the replacement cost (RC) of your property or the actual cash value (ACV). In an actual cash value payout plan, the value of your damaged property includes the depreciation of the property over time.

Example:

• You own a nightclub with a state-of-the-art surround sound music system. You paid $10,000 for this top-of-the-line technology five years ago. After a long night of drinking, a lone biker tosses his lit cigarette onto a vodka soaked barstool. Your surround sound music system is destroyed in the flames, but you plan to replace it with the money you will get from your Commercial Fire Policy. However, your policy’s payout is calculated based on the actual cash value of your property. Agents determine that the music system has depreciated over the five years you owned it, and it is now only worth $8,000.

Actual cash value plans do not reimburse you for the full cost of replacing your property or its contents. Conversely, in a replacement cost value plan, you will be reimbursed however much it will take to replace the property and its contents. Replacement cost value plans are preferable to actual cash value plans because they offer full coverage, but they usually have higher premiums.

How much does a Commercial Fire Policy cost?

Commercial Fire Policies are generally purchased through property insurance, which you may also buy as part of a bundle with a business owner’s policy. Rates for Commercial Fire Policies vary by insurer, but are generally estimated based on factors such as:

• Proximity to a fire department – buildings near a fire department or in a major city have lower premiums.
• Building’s fire preparedness – businesses equipped with fire alarms or sprinkler systems will get a discount.
• Flammability of building materials – a building made of a quick burning material will be charged higher premiums.
• Flammability of the building’s contents – a business that stores items like wood, newspapers, or gasoline will face steeper premiums.
• Nearby tenant risk – if you are located near a business that is deemed high risk, for example, a combination gas station and barbecue grill restaurant, you will be charged higher premiums.

Final Word

A Commercial Fire Policy is an integral part of protecting your business. Commercial Fire Policies are available through property insurance or a business owner’s policy. If you have a business that is especially vulnerable to fire, or you are in an area that is known for wildfire, you should make sure you have a strong fire policy in place and take preventative measures to reduce your risk. Rates for Commercial Fire Insurance vary by insurer, but by installing a sprinkler or fire alarm system, you can reduce your premiums.