Picture this: a devastating fire wipes out your office equipment, or a natural disaster strikes, leaving you to pick up the pieces and get your business back up and running.
Do you have an emergency fund to cover that? Probably not, which is why commercial property insurance is a crucial lifeline for any business in crisis.
Today, we’re going to guide you through how commercial property insurance can help insulate your business from unforeseen catastrophes.
Topics Covered
What is Commercial Property Insurance?
In simple terms, commercial property insurance is a safety net for your business property and equipment. Like homeowners property insurance, It swoops in to save the day when disasters like fire, theft, or natural calamities strike. Commercial property insurance has your back whether you run a bustling manufacturing plant, a cozy retail store, a farm, or a not-for-profit organization.
Commercial property insurance covers three main areas: building, the business’s personal property, and the personal property of others. Let’s break it down.
Building
First up, we’ve got building coverage. This part of your policy ensures that the buildings listed on your insurance policy are protected. Whether it’s a structure you own outright or one you’re responsible for insuring under a triple-net lease, this coverage protects you.
It protects your walls and your roof and covers completed additions, fixtures (even the outdoor ones), and permanently installed machinery and equipment.
Business Personal Property
Business personal property (BPP) is next on the list. This section of your policy safeguards the assets inside your building that are essential to running your business. Items most commonly covered under this section of your policy typically include:
- Furniture
- Fixtures
- Machinery
- Equipment
- Permanent improvements
- Stock
- Other personal property owned by you and used in your business.
- Tenant’s improvements and betterments (upgrades made to a rented space)
- Leased personal property for which you have a contractual responsibility to insure.
Pro tip: This type of coverage usually applies to personal property inside or within 100 feet of the insured building.
If you want to differentiate between building and business personal property, imagine flipping your building upside-down and giving it a shake. Anything that falls out is generally considered your business personal property!
Personal Property of Others
This coverage applies to the property of others in your care, custody, and control, such as borrowed items or your customers’ belongings. Similar to business personal property coverage, this typically only applies within 100 feet of the insured building.
Pro tip: if you ever need to file a claim under this coverage, the payout goes straight to the property owner, not you.
Commercial Property Insurance: What’s Covered and What’s Not
To find out what’s covered and what’s not in your policy, you’ll need to reference your causes of loss form. This document holds the key to which events are covered and which aren’t. You’ll likely encounter three primary cause of loss forms: special, basic, and broad.
Special Cause of Loss Form
This coverage is widely considered the gold standard because it covers all direct physical damage unless specifically excluded. It’s sometimes referred to as an “all-risk” policy.
Instead of giving you a long list of covered events, it tells you what’s not covered, so it casts a wider net for potential claims. It protects against a wide range of perils, giving you peace of mind and an advantage when filing claims.
Special cause coverage also gives policyholders an advantage when filing a claim because it shifts the burden of proof onto your insurer. Now, they have to find a reason to deny your claim rather than having to prove it should be covered.
Pro tip: Insurance companies are slowly dropping the “all-risk” term because it may be misleading since there are often exclusions in these types of policies.
Basic Cause of Loss
This coverage offers a more limited scope of coverage. It’s not as comprehensive as the special form, but it typically covers perils such as:
- Fire
- Lightning
- Explosion
- Smoke
- Windstorm
- Hail
- Riot
- Civil commotion
- Damage caused by an aircraft or vehicle
- Vandalism
- Sprinkler leakage
- Sinkhole collapse
- Volcanic action
Broad Cause of Loss
The broad cause of loss falls somewhere between special and basic. It covers everything in the basic form plus a few additional perils such as:
- Falling objects
- Water damage from appliance
- Weight of snow, ice, or sleet
- Collapse from specified causes
What if your policy doesn’t fit into one of these categories? You might be dealing with a proprietary or manuscript form, which could complicate things. In these cases, it’s best to seek guidance from a local insurance expert to ensure you get the coverage you need.
That said, commercial property insurance typically covers physical assets such as:
- Building (rented or owned)
- Business records
- Computers
- Equipment
- Furniture
- Inventory
- Outdoor fixtures (such as fences and signs)
- Personal property
- Supplies
- Tools
Now, let’s talk about exclusions. No insurance policy is complete without them, and knowing what’s not covered is essential. Some standard exclusions include:
- Flood
- Earthquake
- Terrorism
- Intentional damage
While these risks may not be covered under your standard policy, you can usually purchase separate coverages if needed.
Valuing Your Property
Valuing your property is one of the most critical aspects of commercial property insurance. How much will you get if your property is destroyed or damaged?
The answer lies in what type of valuation you have in your policy. There are three common types: replacement cost, actual cash value, and functional replacement cost.
Replacement Cost
The gold standard for your property is replacement cost valuation. It replaces your property with new construction without considering depreciation. This means you’re covered for the total cost of rebuilding or replacing your property with new material, minus the deductible.
Actual Cash Value (ACV)
Actual cash value (ACV) is replacement cost minus depreciation; your payout is based on the replacement cost minus the depreciation percentage. It’s subject to the claims adjuster’s interpretation of depreciation, making it a less favorable option in many cases.
Functional Replacement Cost
Do you have a one-of-a-kind property with rare materials or construction techniques? Functional replacement cost coverage might be your saving grace. This unique solution allows you to replace rare materials with modern equivalents during repairs or rebuilding, saving on premiums while ensuring you get the coverage you need.
We recommend contacting a local insurance agent to determine the best policies for your needs. When it comes to insurance, it’s better to be over-prepared than underinsured, and our experts will take the time to help you understand your policy, explore your options, and ensure your property is valued correctly to safeguard your business against the unexpected.
Commercial Property Insurance Limits
Now that we’ve tackled the nitty-gritty of valuing commercial properties for insurance coverage let’s dive into another crucial aspect: property limits.
Choosing your limits boils down to your property portfolio and risk tolerance. If you own multiple properties or prefer added flexibility and protection, a blanket limit with a margin clause may be the way to go. On the other hand, if simplicity and cost-effectiveness are your priorities and you have a single building or a few properties, a scheduled building limit might be the better fit.
What does this mean? Read on.
A Blanket Limit
Imagine owning multiple buildings scattered across town – keeping track of individual insurance limits for each property sounds like a headache. That’s where the blanket limit comes in. This option consolidates the value of all your properties into a single limit that can be used to cover any property in your portfolio.
Plus, if you accidentally underestimate the value of one building, you may be able to tap into the combined limit from other properties to cover the shortfall.
It provides more flexibility and room for error in estimating replacement costs.
Pro tip: Some insurance companies include a “margin clause” in policies, capping the payout at a certain percentage (usually 110% or 125%) of the individual building’s reported value. While this limits the possibility of abuse, a blanket limit with a margin clause still offers more flexibility and protection than individually scheduled building limits.
A Per Occurrence Loss Limit
This coverage may be a good fit for your business if you have a diverse property portfolio across different locations. This option allows you to set a maximum payout for any single occurrence based on the collective value of your properties. It’s a smart way to save on premiums without compromising coverage, especially if your properties are unlikely to be affected by the same catastrophic event.
A Scheduled Building Limit
The scheduled building limit is a more straightforward, lower-cost option for property owners with only one building or a limited number of properties. With this approach, each building is individually listed with a separate insurance limit, representing the maximum payout per building.
Unlike the blanket limit, there’s no sharing of limits here. Each building has its coverage limit, so if you underestimate the value of one property, you’re on the hook for the shortfall without any backup from other buildings in your portfolio.
Commercial Property Insurance Deductibles
A topic that’s often overlooked but plays a crucial role in your insurance coverage is deductibles. These out-of-pocket expenses come into play when you file a claim. But did you know there are different types of deductibles, each with its own considerations?
Per Building Deductible
This is a common choice for many commercial property owners. This deductible kicks in on a per-building and per-loss basis, meaning it resets for each building and each damaging event. It’s straightforward and makes sense if you own one building or have multiple buildings far apart from each other.
Per Occurrence Deductible
This is a great choice if you’re looking for simplicity and ease. With “per occurrence” deductibles, you’re responsible for a total amount per event, regardless of how many buildings are damaged or the extent of the damage. It’s straightforward and saves you the hassle of juggling multiple deductibles for each building.
Other Deductibles
You may have options beyond per-building or occurrence deductibles.
For example, if your business is in a high-risk area like the coast or prone to severe weather, you might be offered a deductible on a percentage basis or a flat amount.
Flat deductibles are simple and mean you’re responsible for a specific dollar amount per claim, no questions asked. Conversely, percentage deductibles are based on a percentage of the building value, meaning your deductible increases as the building value increases.
Lastly, we have deductible buy-down policies – a game-changer if you’re stuck with a sky-high deductible. These policies allow you to lower your deductible by purchasing additional coverage to bridge the gap between your desired deductible and the insurer’s limit.
Wind and hail deductibles are common in areas prone to severe weather. Since wind and hail claims often account for a significant portion of property claims, insurers may carry separate higher deductibles specifically for these risks. This helps keep overall premiums manageable while ensuring coverage for high-frequency events.
Cost of Commercial Property Insurance
Commercial property insurance rates continue to rise because of the increasing frequency of natural disasters, severe weather, inflation, and construction costs.
The cost for this insurance coverage will be based on your business’ unique scenario, such as:
- Physical assets
- Building type
- Industry
- Fire & theft protection
- Location
- Construction materials
- Risks and perils
- Limits
- Deductibles
That said, commercial property insurance for small businesses has a median cost of $67 per month or about $800 a year.
Commercial property insurance stands as an indispensable shield for businesses of all sizes, safeguarding against unforeseen calamities that could otherwise cripple operations. From protecting buildings and business assets to covering liabilities for property in your care, custody, and control, this insurance provides a crucial safety net.
While the cost of commercial property insurance may vary based on numerous factors, its value in mitigating risks and ensuring business continuity is immeasurable. In the ever-changing business landscape, investing in commercial property insurance is not just prudent—it’s essential for long-term resilience and prosperity.
Need to learn more about commercial property insurance?
Our agents are ready to help you out, so contact us to learn how we can customize your insurance policies to meet your needs.
*Disclaimer: We offer content for informational purposes; Co-operative Insurance Companies may not provide all the services or products listed here. Please contact your local agent to learn how we can help with your insurance needs.
Sources
Atlas. Commercial Property Insurance: Three Methods for Valuing Your Property. https://www.atlasinsurance.com/commercial-property-insurance-three-methods-for-valuing-your-property
Forbes. Business Property Insurance: Coverage, Costs and Expert Tips. https://www.forbes.com/advisor/business-insurance/commercial-property-insurance/
Insureon. Commercial property insurance cost. https://www.insureon.com/small-business-insurance/commercial-property/cost
Landes Bosch. Commercial Property Insurance: The Ultimate Guide. https://www.landesblosch.com/blog/commercial-property-insurance-the-ultimate-guide