For any business, the property they own plays an important role in the operations of the company. As a financial services firm, you likely own or rent an office to carry out your day-to-day operations and have purchased office equipment, furniture, computers, and other supplies for your employees. What happens when an unexpected accident or natural disaster damages your property? Will it delay your projects and lead to unhappy clients? Will it push your firm to the brink of bankruptcy? That’s where Commercial Property Insurance can step in to help you recover financially after an event that damages your property.

What is Commercial Property Insurance for financial services professionals?

Commercial Property Insurance helps protect the value of the physical assets your financial services firm owns. Like any insurance policy, you’ll enter into a contract with the insurance company and pay a premium. If your property is damaged or destroyed, the insurance company would pay you for its value.

What are some situations Property Insurance can cover?

• A hurricane damages the roof of the building that your financial planning firm owns
• A fire sweeps through the offices of your accounting firm and damages your computers and office equipment
• Vandals come into the office of your insurance brokerage and spray paint all the furniture

What does Commercial Property Insurance for financial services professionals cover?

Commercial Property Insurance covers buildings, contents, and the property of others in your care.

Commercial Property Insurance doesn’t cover commercial vehicles. You’ll need commercial auto insurance for that.

Buildings

Commercial Property Insurance offers financial protection for commercial buildings or offices owned by your business. If you rent or lease a building, your landlord may also require you to purchase a Commercial Property policy to insure it. Landscaping, fences, outdoor signs, tenant improvements, and other physical assets of the building (or surrounding it) are also generally covered by the policy.

Contents

Commercial Property Insurance also covers building contents. This could be computers, furniture, artwork, equipment, inventory, and other physical assets you own that are contained in or near the covered building.

Example:

• Someone breaks into your accounting firm’s office and makes away with ten laptops that cost $1,500 each. Your Commercial Property Insurance policy reimburses you $15,000 for the value of the laptops.

In the case that your business leases equipment, you may be required by the owner to insure the leased equipment while it’s in your possession. For financial services firms, this typically includes computers, IT equipment, and office furniture.

In addition to computer equipment and furniture, your financial services firm may also store valuable documents on your premises such as financial records. Commercial Property Insurance will usually provide some coverage for these types of papers and records if they are damaged or destroyed, but purchasing a separate valuable papers and records policy may be wise to get full coverage.

Example:

• A fire in the office of your financial advisory firm destroys the hard copies of the licenses that your financial advisors earned. Your Commercial Property Insurance policy covers the replacement of these licenses.

Property of Others

Does your financial services firm have property in your possession that belongs to others? Commercial Property Insurance can cover damages and losses to this type of property as well. If you have leased equipment but you have not been obligated to insure it by contract, this counts as property of others.

Example:

• Your forensic accounting firm has leased a large format photocopier and printer. When a pipe bursts in your office, the leased equipment is damaged beyond repair.

Typically very low, the limit of liability for property of others is separate from your contents coverage.

What risks are covered by Commercial Property Insurance for financial service professionals?

Commercial Property Insurance policies come as “named perils” or “open perils” policies. Only the risks specifically listed in the insurance contract will be covered by a named perils policy, while open perils will insure all risks that are not specifically excluded. Open perils will usually have higher premiums since it’s more comprehensive.

For both named and open perils policies, floods, earthquakes, and employee theft and dishonesty are usually excluded.

Named Perils

The most commonly covered named perils include:

• Fire or lightning
• Explosion
• 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

Since there’s variation in every policy, it’s a good idea to read your insurance contract closely and speak with your insurance company about what perils are covered and what is excluded.

Common exclusions from named perils policies include:

• Nuclear reaction or war
• Wear and tear
• Power failure or computer failure
• Robbery and burglary
• Pollution
• Changes in humidity and temperature
• Inventory shortages if there is no physical evidence to show what happened to the property
• Losses from intentional acts

Open Perils

Property damage for any reason will be covered by an open perils policy unless it’s specifically excluded. The same exclusions for a named perils policy also apply to open perils policies, and the following exclusions are also common:

• Animal or insect infestations
• Fungus and mold
• Losses due to governmental actions
• Rust or corrosion
• Sewer backups
• Mechanical breakdowns

Example:

• Your tax preparation firm has several large format printers in the supply room. When one of the printers has an electrical short and breaks down, you file a claim to recover its value, but your Commercial Property Insurance will not cover it because mechanical breakdown is an exclusion.

Replacement Cost vs. Actual Cash Value

Your Commercial Property Insurance policy will have the option to either pay the replacement cost (RC) or actual cash value (ACV) of your damaged or lost property. What’s the difference?

Replacement cost is the cost it takes to replace your property with a new item that’s of similar kind and quality as the damaged or lost item. These calculations don’t take depreciation into account.

Actual cash value, on the other hand, takes depreciation into account and only covers the value of the property at the time it was damaged or lost.

Example:

• Your insurance brokerage buys several new laptops for $2,500 each. You insure each laptop for $2,500. When a fire burns through the building three years later, one of the laptops is damaged beyond repair. The market value of the laptop is now $500, while a new model still costs $2,500. RC coverage would pay you $2,500 while ACV would only pay you $500.

Keep in mind that RC coverage will have higher premiums than AC coverage since there would be higher potential payouts.

Commercial Property Insurance Pricing

While pricing for Commercial Property Insurance varies from insurer to insurer, most insurance companies will take a look at the same risk factors when deciding how to provide coverage for your financial services firm. The riskier your firm is to cover, the higher your premiums will be.

Here are some factors that could affect your pricing for Commercial Property Insurance:

• History of prior property losses
• Neighboring businesses and properties
• Type of business you own: a restaurant would have a higher risk than an accounting firm if they were in the same location
• Characteristics of neighborhood: exposure to crime, natural disasters, fire risks
• Type of building or property: a more recently constructed building would cost less to insure than an older building
• Value of building contents: a company with hundreds of high-tech computers and servers will cost more to insure than a business with just a few low-tech computers

Coinsurance and Underinsurance

Many Commercial Property Insurance policies require the business owner to insure a minimum percentage of the property value in order to get the full value of a claim paid. Often set at 80%, this minimum percentage is called coinsurance. Since most property losses are not total losses, businesses sometimes report lower values for their property to save money on premiums. Coinsurance penalizes businesses who insure their property below the coinsurance percentage. In these cases, the insurance company can reduce the claim payment for a loss.

Example:

• A large financial planning firm owns an office building with a value of $1,000,000, but only insures it for $500,000. The insurance policy has a coinsurance percentage of 80%, so the building is underinsured. If the property suffers a partial loss of $500,000, 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 ($500,000 / $1,000,000 = 50%) times the amount of the loss (50% x $500,000 = $250,000).

Since the financial planning firm did not maintain the minimum coinsurance percentage on the building, the firm will only receive $250,000 on this $500,000 loss.

Final Word

A variety of natural disasters, accidents, and intentional acts can threaten the valuable commercial property that you own. For a financial services firm that conducts most of its business in a building or office that you may own or lease, with costly equipment such as computers and servers, protecting your investment is vital to keeping your business financially sound. Commercial Property Insurance will insure the building, contents, and the property of others in your custody from many risks. It’s a foundational insurance policy for any financial services firm to carry.