Commercial Property Insurance provides coverage for your property in the case of an accident or natural disaster.
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Protecting your business from risk means safeguarding the property you own, from commercial office space to furniture and equipment. Accidents and disasters can be costly, and Commercial Property Insurance can help allay these costs, by providing funds to repair or replace damaged property.
What is Commercial Property Insurance?
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 Commercial Property Insurance?
Commercial Property Insurance is beneficial for any company that owns commercial buildings, inventory, equipment, tools, or any other business property. Consider securing property coverage if your business:
- Owns a commercial office or building
- Rents a commercial office or building, as many landlords require property coverage
- Has valuable property such as furniture, machinery, computers, equipment, or tools
- Keeps inventory or works-in-progress
- Handles property that belongs to others
What types of property does Commercial Property Insurance cover?
Commercial Property Insurance covers buildings, contents, and the property of others in your care.
It’s important to note that commercial vehicles are excluded from property insurance. If you want to cover your business vehicles, you should purchase commercial auto insurance.
Commercial 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 building’s coverage.
Commercial Property Insurance also covers the contents of a building, also known as business personal property, which can include furniture, equipment, machinery, 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. Commercial 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 can provide some coverage for the cost to recover or replace these records. For more comprehensive coverage, you can purchase valuable papers and records coverage.
Property of Others
If your business has property that belongs to others in your care, custody, or control, and that property is destroyed, Commercial Property Insurance can cover the loss.
For example, if you 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.
It’s important to note that 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 types of property are excluded from Commercial Property Insurance?
While Commercial Property Insurance can provide coverage for much of your business property, there are a number of exclusions that are included in standard policies. Some of the more notable exclusions include:
- Vehicles, including business vehicles and automobiles held for sale
- Bridges, roadways, walks, patios, or other paved surfaces
- Electronic data, including computer programs or information stored on hard drives, disks, CDs, and other electronic storage mediums
- Property not tied to a fixed location, including equipment or machinery transported to worksites
What risks are covered by Commercial Property Insurance?
Commercial 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 from sprinkler leakage or burst pipes
- Windstorm or hail
- Smoke from accidental fire
- Riots or civil commotion
- Sinkhole collapse or building collapse
Every insurance contract covers different perils, so it is important to read your contract closely and discuss what hazards are covered with your agent or insurance company.
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. Make sure you check the listed exclusions in your contract to understand what won’t be covered.
What risks are excluded from Commercial Property Insurance?
Common exclusions from named and open perils policies include:
- Ordinance or law. Any loss or damage sustained due to the compliance or enforcement of any ordinance or law is excluded from coverage.
- Earth movement. Natural disasters such as earthquakes, landslides, volcanic eruptions, or any movement of the earth or soil are excluded from coverage. Companies in areas prone to natural disasters can add an endorsement to their Commercial Property Insurance policy to cover those risks, or they can purchase a separate policy.
- Water. Damage or loss caused by water events, including flood, tsunami, mudslide, and sewer or drain overflow, is excluded from coverage.
- Fungus, mold, and rot. Damage resulting from the presence of fungus, wet or dry rot, or bacteria is excluded from coverage.
- Utility services. Any failure in utilities, including power surges, power failures, and water shortages, is excluded from coverage.
- Governmental action. Any property that must be seized or destroyed under governmental authority is excluded from coverage.
- Nuclear hazard. Damage caused by nuclear reaction, radiation, or radioactive contamination is excluded.
- War and military action.
Does Commercial Property Insurance have a deductible?
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.
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.
A higher deductible typically lowers your insurance premium, as it reduces the amount that the insurance company would potentially pay out if there is a loss.
Commercial Property Insurance Pricing
Insurance companies take the basic information that you provide to them and calculate the risk of loss for your business. Part of this calculation will involve assigning a Commercial Property Insurance rating, which is specific to the building or property you’re looking to insure. The higher risk your business is rated, the higher the premiums will be.
Some of the factors that can affect your premium pricing include:
- Claims history. A history of prior losses can increase your premiums.
- Neighbors. Neighbors engaged in risky activities, such as a dry cleaner using flammable solvents or chemicals may increase your premiums.
- Fire risk. 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.
- Business type. Depending on what type of business you run, your risks for property damage may be higher or lower. 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.
- Neighborhood. 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.
In order to get an accurate estimate on pricing, it’s best to get a quote from a reputable insurance company. Below we’ve highlighted a few of our trusted partners who offer property policies:
|Provider||Commercial Property||Business Interruption||Business Owner's Policy||Commercial Crime||Inland Marine|
Replacement Cost vs. Actual Cash Value
When insuring your property, you have a choice between replacement cost (RC) or actual cash value (ACV), which are two common methods for how insurers value your property.
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.
The premiums on RC coverage are typically higher than the premiums on ACV coverage, due to the higher potential payouts.
- You own a piece of manufacturing equipment that you purchased new for $5,000. You insure the equipment for $5,000, and two years later, a fire burns down your factory, destroying the equipment. The market value of the two-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.
Applying for Commercial 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 all 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
- 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.
Coinsurance and Underinsurance
In property insurance, many 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 it 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.
- A building with a value of $100,000 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.
Businesses that own or lease commercial property, from office space to office equipment, can benefit immensely from Commercial Property Insurance. Commercial Property Insurance can reimburse you for business property that is damaged or destroyed in an accident or disaster, saving you time and money in the event of the unexpected. Securing this coverage can give your business the financial lifeline it needs when a disaster strikes, allowing you to focus your resources and time on building and growing your business.