Commercial Property Insurance

Who Is It For?

Any business that leases or owns office space, manufactures products, manages inventory, leases equipment, maintains the property of others should consider commercial property insurance.

Typically, commercial property is first secured when a lease is signed. Property owners will want their tenants to own and maintain insurance with limits adequate to repair or restore the building in the event of damage.

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Why Do You Need It?

Commercial property insurance helps business owners protect all property vital to the daily operation of the business, extending not only to buildings, stores, and offices but also equipment, furniture, inventory and any other physical assets important to the company.

Commercial property insurance can cover a variety of losses including building, business personal property, property of others, business income, inland marine, and cargo.

For instance, faulty wiring or bad installations could cause a fire on your premises. Or the building may be struck by lighting, which can cause both fires and electrical damage to the business equipment. Your property may be vandalized or stolen.

Additionally, other natural perils such as earthquakes, tornadoes, or hurricanes, may cause thousands in damages. You may open your doors and find that your premises have been flooded. If you live in an area that commonly suffers hail storms, or you’re just unlucky to be hit by an unexpected storm, your vehicles and equipment can end up being beaten up.

In all these cases, the damage to your building, vehicles and equipment could be enormous. Commercial property insurance policy serves to provide business owners with the peace of mind that, even in the worst-case scenarios they won’t have to close their doors, or pay for property damage out of their pockets.

Many premiums are on the rise due to an increase in catastrophic events in 2017 and 2018. According to a recent report, global losses from disaster events in 2017 totaled $144 billion, with hurricanes Harvey, Irma, and Maria causing a combined $92 billion of property damage and the California wildfires accounting for a record $14 billion in losses.

In 2018, California wildfires continued to set new frightening standards in commercial property risks and fire insurance needs, accounting for an additional $845 million in insured losses.

What Does Commercial Property Insurance Cover?

Specific coverage varies from policy to policy. When you set up an insurance policy with your carrier or broker, you should tailor it to protect against the risks most prevalent in your geographic area. A Michigan-based company wouldn’t likely need the same coverage as a company headquartered in the middle of Tornado Alley. You should work with your broker to assess risk and put together a policy that makes sense for your business.

Commercial property insurance covers more than just the building where you conduct your business. Your policy should also insure the contents of your building, including any movable property that your business owns. In a warehouse, contents protection might cover essential tools, equipment, vehicles, and storage systems your business uses daily. In a retail environment, it might protect product inventory. In an office, it might cover furniture, computers, servers, or even the re-creation of documents and records.

Property insurance may extend to certain assets outside your building, to surrounding characteristics like your company sign, landscaping, fences, or external structures. All these assets can impact your ability to conduct business regularly. They are a part of your property and could be covered under the policy.

Your insurance policy may even extend coverage to critical business assets when they are used off-premises. For example, say an employee takes a company computer on a trip and the device gets lost or stolen. Depending on your coverage, you may be able to submit a claim to replace the device.

The most important aspect of a property policy is its protection against loss of income or revenue in the case of property loss. These provisions provide net income and continuing expenses during the period of restoration when a direct, physical loss is incurred for business income. If your business has to shut down for two weeks due to a fire, your policy might reimburse you for some of the lost earnings for those down weeks.

To summarize, commercial property insurance will cover:

• Your premises
• Equipment and tools used in the business
• Inventory
• Furniture
• Personal property (that you’re using for business purposes)
• Loss of income due to property damage 

Are BOP and Commercial Property Insurance Related?

Business owners policy or BOP is a cost-effective package that includes three insurance policies: general liability, commercial property, and business interruption insurance. A BOP is a perfect solution for a small business with a low-risk profile and basic coverage needs. A stand-alone commercial property policy offers more robust protection, with higher limits and broader coverage, but at a higher price.

What’s The Difference Between Replacement Cost And Actual Cash Value

There are two methods that insurers will use to calculate how much you’ll receive as compensation for losses of business property: Actual Cash Value (ACV) and Replacement Cost (RC). ACV means that the insurer will consider the current market value of the property that is damaged. You will receive the amount of money that you would get if you tried to sell the property. This means that as the property depreciates due to use and age, you’ll receive less money. Replacement cost payment will compensate you for the full amount needed to replace your property.

The key differences between actual cash value and replacement cost for the policyholder are the amount you’ll receive in case of a claim and the cost of the coverage. Businesses purchasing replacement cost policies can expect to pay considerably higher premiums since they won’t have to deal with property depreciation.

What’s Not Covered?

When you are putting your commercial property insurance plan together, there is a range of perils that you can choose to include or exclude from the policy. This process should involve a detailed talk with your broker in order to determine what the most appropriate coverage is for your business.

You can make a decision in the end whether you want to be covered against “all perils” or only “named perils.” Naturally, you’re going to have to pay a higher premium to cover “all perils.”

When you have a “named perils” policy it’s just that, a list of every type of possible peril that your insurance will cover.

Does Commercial Property Insurance Have A Deductible?

Most commercial property coverage will have a deductible written into the policy. A deductible is a sum of money that the policyholder must pay towards the claim before the coverage kicks in.

Keep in mind that the deductible may vary depending on the peril that caused the claim. For instance, a policy may have one deductible amount for damage caused by fire and a different amount for claims caused by earthquakes.

It’s crucial to ensure that all deductibles are delineated when buying coverage – sometimes, specific deductibles are less obvious than others when reading a policy contract.

What Does Commercial Property Insurance Cost?

How much can you expect to pay in rates? Frankly, there is no easy one-size-fits-all answer to that question. The cost varies dramatically depending on the characteristics of the property to be insured (COPE), the protective safeguards of the building, and the level of coverage you want.

Other factors can come into play as well, depending on how they increase or decrease your risk level. For instance, if your building was constructed using high-quality, fire-resistant materials, you’d pay less. If your building was equipped with the latest sprinkler systems, alarm systems, and other protections, those elements would also lower your risk, thus decreasing your rates.

Of course, some risk factors are harder to control. If you’re based in a high-crime area, you pay higher rates. Similarly, what your neighbouring businesses do might also affect your commercial property insurance rates. If you’re located right next door to a business that works with flammable materials, it amplifies your level of risk, which in turn spikes your rates.

Your most significant risk factor, though, is usually the business itself. What your business does, the amount of property you need to insure, and the dollar value of that property are the factors that are going to dictate the ballpark cost of your rates. For example, a factory is going to cost a lot more to insure than a run-of-the-mill office, since there’s a lot more expensive equipment to cover.

To recap, generally, these are the main factors that are going to impact the cost of your commercial property insurance policy:

Geography

Where your business is located, what the land value is, how high or low the local crime rates are, and whether natural disasters are common in your area.

Safety

Does your business or a business located close to it use hazardous or flammable materials? How much have you invested in protecting it?

COPE Data

Looking at the state of your building and equipment – how old and in what condition are they? When was the last time the electrical wiring was checked or changed in your building? In the case of an accident, how much money would it take to rebuild your building to code? How old is your equipment and how hard is it to repair the equipment? Is it easy to find parts for your equipment?

For more, read our full guide on commercial property insurance cost.

According to a recent report on property insurance, the impact of recent natural disasters will greatly affect commercial property rates in the coming years, particularly when it comes to property and assets located in areas at risk for wildfires, floods, and hurricanes, especially when for multifamily properties.