Property Insurance (also known as Commercial Property Insurance) helps protect the value of the physical assets your business owns. If an unforeseen accident or natural disaster hits your business, having property insurance can help your business recover. In exchange for the premium you pay, the insurance company will pay you for the value of the lost or damaged property when a loss occurs.
A few examples of situations that property insurance can cover include:
- A fire in your restaurant kitchen destroys your kitchen equipment.
- Your business owns a building and a windstorm damages the roof.
- In your warehouse, the fire sprinkler system leaks, damaging your inventory.
- Vandals damage the custom sign outside your business.
Who needs property insurance?
Property insurance is appropriate for companies that:
- Own a commercial office or building.
- Rent a commercial office or building, as many landlords require commercial property coverage.
- Have valuable property such as furniture, machinery, computers, equipment, or tools.
- Keep inventory or work-in-progress.
- Handle property that belongs to others.
What does property insurance cover?
Property insurance covers buildings, contents, and the property of others in your care.
Commercial vehicles are excluded from property insurance. If you want to cover your vehicles, you should buy Commercial Auto Insurance.
Property Insurance covers commercial buildings or offices that your business owns. If you lease or rent your building, and your lease requires that you insure the building you’re using, you can set up your property insurance to cover your landlord’s building as well.
In addition to the building itself, tenant improvements, outdoor signs, fences, and landscaping are also commonly included in the Buildings coverage.
Property Insurance also covers 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. Property insurance can also cover this leased property.
Many businesses also store valuable documents or billing records in paper form on site. In the event these records are destroyed or damaged, property insurance will cover the cost to recover or replace these records.
Property of Others
If your business has property that belongs to others in your care and that property is destroyed, Property Insurance can cover the loss.
For example, if your borrow your neighbor’s copy machine and it is destroyed by a fire, it would be covered. Also, leased equipment that your business does not have a contractual obligation to insure is also considered property of others.
The limit of liability for property of others is separate from your Contents coverage. It also 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 buy Bailee’s Insurance.
What risks are covered by property insurance?
Property Insurance can be purchased on either a named perils or open perils basis. Named perils means that only the risks specifically listed in the insurance contract are covered. Open perils covers any risk that is not specifically excluded from the insurance policy. Open perils premiums are higher than named perils because the coverage is more comprehensive.
Both flood and earthquakes are commonly excluded from property insurance policies including open perils policies. Also, dishonesty and theft by employees are usually excluded as well.
The most commonly covered named perils include:
- Fire or lightning
- Theft or vandalism
- Damage from vehicles or airplanes (excluding those owned by the business)
- Water damage, sprinkler leakage, or burst pipes (but water damage from flood is excluded)
- Windstorm or hail
- Smoke from accidental fire
- Riots or civil commotion
- Sinkhole collapse or building collapse
However, every insurance contract covers different perils, so it is important to read your contract and discuss with your agent or insurance company.
Common exclusions from named perils policies include:
- Nuclear reaction or war
- Wear and tear
- Power failure or computer failure
- Robbery & burglary
- Changes in humidity and temperature
- Inventory shortages when taking an inventory accounting if there is no physical evidence to show what happened to the property
- Losses from intentional acts
Under open perils coverage, your property will be covered if it is damaged or lost for any reason, unless the reason is specifically excluded in the insurance contract. Open perils policies have the same exclusions listed in the named perils section above. In addition, other common exclusions to open perils policies include:
- Animal or insect infestations
- Fungus and mold
- Losses due to governmental actions
- Rust or corrosion
- Sewer backups
- Mechanical breakdowns
Replacement Cost vs Actual Cash Value
When insuring your property, you have a choice between Replacement Cost (RC) or Actual Cash Value (ACV).
Replacement Cost coverage covers the cost to repair or replace your property with a new item of a similar kind and quality, without any deduction for depreciation.
Actual Cash Value covers the value of the property at the time of loss in an “as-is” condition which considers depreciation and obsolescence of the property.
For example, you have a piece of manufacturing equipment that you buy new for $5,000. You insure the equipment for $5000, and 2 years later, a fire burns down your factory, destroying the equipment. The market value of the 2 year old equipment is $2,000, while a new model still costs $5,000. If you have RC coverage, the insurance company would pay you $5,000. If you have ACV coverage, the insurance company would only pay you $2,000.
The premiums on RC coverage are higher than the premiums on ACV coverage, due to the higher potential payouts.
A deductible applies to most property insurance policies. The deductible is the amount of the loss that your business is responsible for before the insurance company’s coverage begins.
For example, if you have a loss of $1,200, and a deductible of $250, the insurance company will only pay your company $950, which is the amount of the loss minus the deductible. Having a deductible gives your company a financial incentive to take care of the property that is insured rather than transferring the full amount of risk to the insurance company. The deductible usually applies to each loss separately, meaning the insurer will subtract the deductible from each loss that you experience.
Having a higher deductible lowers your insurance premium as it reduces the amount that the insurance company would potentially pay out if there is a loss.
Applying for property insurance
In order to apply for property insurance, you’ll need to gather some key information about your business. You’ll want to compile a list of the property your business owns.
Important information the insurer will need include:
- Building basics
- Construction type (brick or wood frame)
- Number of floors and windows
- Fire alarms, sprinkler systems, fire extinguishers
- Age of electrical and heating systems, and age of roof
- Fences, landscaping, signs, or other outdoor equipment
- Fixtures or improvements to the building
- Office equipment including tools, computers or furniture, including leased equipment
- Equipment such as appliances or manufacturing equipment
You’ll also want to gather key papers such as a lease for those who rent their space, and a copy of the mortgage for owners. Insurers will also ask for personal information such as a social security number or Federal Tax ID. If you already have insurance, you’ll also want to provide a copy of the declaration page of your current policy. The insurance company will also ask you whether you’ve had insurance losses in the past.
The insurer will ask you about neighbors that you share the building with. If you have neighbors that have high risk activities, it may affect your insurance risk.
Property insurance pricing
Insurance companies take the basic information that you provide to them and calculate the risk of loss for your business. The higher risk your business is rated, the higher the premiums will be.
Some of the factors that can affect your premium pricing include:
- A history of prior losses can increase your premiums.
- Neighbors engaged in risky activities, such as a dry cleaner using flammable solvents or chemicals may increase your premium.
- Having a fire station nearby may lower your premium. Fireproof (brick or stone) construction or fire resistant interior floors, walls, and doors cost less to insure. Fire alarms or sprinkler systems may also reduce your rates.
- Your business use also affects the rate. For example, in the same location, a restaurant or auto repair shop would have higher risk and higher premiums than a flower shop due to increased risks of fire.
- The surrounding neighborhood characteristics can also affect your rate. If the immediate area has high levels of criminal activity, or is exposed to frequent accidents or natural disasters, your rates may be higher. Also if you have neighboring businesses with high fire risks such as an oil refinery, you may also face higher rates.
Your insurer may also provide resources to help evaluate and reduce risks in your business. They can make suggestions that increase safety and help you to avoid accidents. This helps your business become more resilient and also reduces the chance that you’ll have a loss and have to make a claim.
Coinsurance and Underinsurance
In property insurance, many insurance policies require the policyholder to insure a minimum percentage of the property value in order to get the full value of a claim paid. This minimum percentage is called coinsurance, and is often set at 80%. The reason for coinsurance is that partial insurance losses are more common than total losses, so businesses may be tempted to report lower values for their property than the actual value in order to save on premiums.
When a loss occurs, if the amount insured is below the coinsurance percentage, the insurance company can reduce the claim payment. For example, consider a building with a value of $100,000 that is insured for $60,000. The insurance policy has a coinsurance percentage of 80%, so the building is underinsured. If the property suffers a partial loss of $50,000, the insurance company will adjust the claim down, even though the loss is less than the amount insured. The claim paid will be the insured percentage ($60,000 / $100,000 = 60%) times the amount of the loss (60% x $50,000 = $30,000).
Due to the coinsurance clause, the building owner will only receive $30,000 on this $50,000 loss since they did not maintain enough insurance on the building.