What You Need to Know About Commercial Property Insurance

Small business owners must protect their assets. With so much effort invested in increasing the company’s profit, it would be devastating to lose it all in one fell swoop.

Alarm systems and security cameras can help you protect your business, but there’s one more thing you need:

Commercial property insurance

Let’s talk about what this is and why it’s so important.

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What Is Commercial Property Insurance?

Commercial property insurance is an insurance policy that protects your company’s physical assets.

Here are some examples of physical assets:

• Buildings
• Machinery
• Inventory
• Furniture

Any property used in your business can be protected under this type of insurance coverage.

You may have heard about it under a different name, like “business property insurance” or “business personal property” insurance.

What Does Commercial Property Insurance Cover?

What does commercial property insurance coverage protect your assets from?

This policy reimburses or replaces the loss of assets due to several different types of events:

• Vandalism
• Fire and smoke
• Lightning
• Windstorms
• Hail
• Damage due to snow or ice
• Explosions
• Cars or aircraft crashing into your building
• Water leaks
• Building collapse

What Does It Not Cover?

There are certain situations that commercial property insurance policies do not cover.

Here are some examples:

• Wear and tear
• Theft
• War and terrorism
• Employee dishonesty
• Business income loss due to business interruption while damages are being fixed.
• Workers compensation

Special Cause of Loss

Some of the above exclusions can be added to your commercial property coverage for an additional cost. This is called a “special cause of loss form.”

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Is Commercial Property Insurance Required?

In most situations where you own your property, there are no set legal requirements for purchasing a commercial property policy.

However, this type of insurance is often required when renting or leasing a property. Although your landlord would carry their property insurance, their policy won’t cover any damages caused by your company.

Commercial property insurance is also required for a commercial mortgage loan. It’s important to keep that in mind if you plan to purchase real estate for your business.

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Types of Commercial Property Insurance

There are three main types of commercial property insurance coverage:

1. Actual cash value coverage
2. Replacement cost coverage
3. Functional replacement cost coverage

Let’s discuss each type:

Actual Cash Value Coverage

This insurance policy covers the value of your business assets minus the depreciation of these assets.

As time passes, wear and tear on your equipment and inventory cause their value to decrease. This policy covers the value of the assets at the time of loss, not the cost of replacing them.

While these policies are cheaper, they aren’t always the best. The insurance premiums are never a set amount, and the limits are usually insufficient to make the necessary repairs, let alone buy brand new.

Replacement Cost Coverage

Replacement cost coverage does not account for the depreciation of your assets. This type of coverage covers the cost of your replacement, no matter the price. As expected, this is a more expensive policy.

Functional Replacement Cost

When neither ACV nor replacement cost coverage is viable for your business, you still have the option of functional replacement cost coverage. This type of policy is common for those who own buildings with ornate, custom, or antique qualities.

If the business owner doesn’t care about restoring those details to their original state if damaged, a functional replacement cost policy is the best option. This type of insurance covers the cost of any repairs needed to get the building back to a functional state.

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Commercial Property Insurance vs. General Liability Insurance

Although these two insurances may seem very similar on the surface, they have one very big distinction:

• Commercial property insurance protects your assets and possessions from the fault of others or the fault of no one.
• Liability insurance protects you from being sued by others due to harm done to them by you or your company.

Because you’re a business owner, your insurance agent will offer you a business owner’s policy, or BOP.

This type of policy bundles both general liability coverage and commercial property insurance at a great rate. A BOP often includes commercial auto insurance, as well.

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Why Is Commercial Property Insurance Important?

While it certainly isn’t necessary to have commercial property insurance for your business to run, it is not wise to run your business without it.

Why?

Ask yourself, “Do I have the money to buy everything my company needs all over again?”

If the answer is no, you could be out of business if an unexpected incident occurred without warning and the property damage is too great to replace.

It is difficult enough to start a business from scratch, but starting all over again may be impossible if the financial loss takes everything you had left.

Things to Consider

Ensure you include all buildings and equipment in the policy, even if you rent or lease any.

This will ensure that you aren’t liable to your landlord for any damage, and the insurance company cannot deny your claim because you weren’t specific in your listing of assets.

Speaking of assets, make sure you include all your inventory. It may fluctuate in value, so list an average dollar amount.

Don’t forget to include landscaping, fencing, signs, and any value item on your company grounds.

You may want to get commercial property insurance, even if you run a business out of your home. If your equipment is expensive, homeowners insurance won’t cover it.

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How Much Does Commercial Property Insurance Cost?

Several factors determine the pricing of your commercial property insurance policy.

• First, insurance companies use a formula to determine your exposures, or likelihood of property loss.

When you call around for an insurance quote, you’ll learn their pricing model by the questions they ask.

Here are a few of the factors that weigh big on the underwriting process:

Location

The location of your business can greatly increase or decrease your risk of exposure.

Some areas have a higher risk of fires, whether they are forest fires or other types. If your commercial building is located in these areas, you can expect a higher insurance quote.

Some areas are in close vicinity to fire stations. This can work in your favor.

Type of Material

You’ll get a cheaper rate if your commercial building is made from fire-resistant material.

For example, a steel or concrete building will cost less to insure than a wooden building since wood is a weaker material.

Fire and Theft Protection

Does your business have a sprinkler system in place?

How about an alarm and security system?

The installation of both of these systems can help reduce the cost of your insurance.

Occupancy and Industry

What the building is used for can also dramatically affect your policy cost.

Specifically, the type of business you run, whether it be an office, a repair shop, a lab, or a restaurant, will significantly impact the quote you receive.

The insurer bases the cost on the riskiest tenant if multiple tenants use one commercial building.

Value

The type of property will also affect the cost of insurance.

For example, a property with a higher value and more business assets will cost more to replace, so insurance companies charge more to cover them.

Business owners need to beware of coinsurance agreements. The value of your property can change as time goes by, and it can be tempting to lower your property value on paper to make your insurance cheaper.

This can backfire if an event does occur. You could end up paying a coinsurance penalty worth much more than what you save in monthly premiums.

Read more about coinsurance and what that entails here.

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How to Choose the Best Commercial Property Insurance Policy

Shopping for commercial property insurance can feel overwhelming, but you’ll find the right policy:

Policy Limit

Your policy limit will affect the cost of your insurance policy. The higher the limit, the higher the price.

The type of policy limit will also impact your premium.

There are two different types of limits to consider:

Blanket Property Limit

A blanket property limit provides one amount per claim for all buildings on your property.

Scheduled Building Limit

With a scheduled building limit, each building on your property has a different limit amount per claim.

Deductible

A lower deductible will raise the cost of your premium, just like any other type of coverage, but there are several types of deductibles to choose from:

Per Building Deductible

This type of deductible resets with each occurrence at each building. This is the most common and cheapest deductible to add to your policy.

Per Occurrence Deductible

With a per-occurrence deductible, you pay one deductible no matter how many buildings are damaged.

This choice may be more expensive, but it is best if you have multiple buildings close together that can all be damaged in one event.

Flat Deductibles

A flat deductible is a specific dollar amount, no matter the value of your property.

Percentage Deductibles

With this deductible rate, you pay a percentage of the building value, which means your deductible increases as the building’s value increases.

Wind and Hail Deductibles

Your insurance needs are different in areas prone to wind and hail damage.

Many policies have a separate deductible for these events to keep your coverage more affordable.

Additional Coverage

If you want to add additional endorsements to your policy, you can expect to pay more for your coverage.

Endorsements include business interruption insurance, which covers lost income, and equipment breakdown coverage, which pays for equipment repairs.

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The Best Commercial Property Insurance Companies

Small business owners want to search for providers specializing in commercial property insurance.

This is a complex insurance policy, and purchasing it requires you to consider many factors.

The three companies below are known to offer some of the best commercial property insurance with good rates and comprehensive coverage.

The Hartford

The Hartford has been in business for over two hundred years and has been named one of the world’s most ethical companies by Ethisphere thirteen times.

You may want to look into this insurance company if trust is important to you.

Next

While Next may be relatively new on the scene, they have a convenient online process that can get you insured in less than ten minutes.

They are quickly gaining popularity as the next (pun intended) big thing in insurance.

Chubb

Chubb takes pride in their ability to tailor an insurance policy to your specific insurance needs.

If your small business requires a special set of coverage, this company may be your best bet.

Commercial property insurance should not just be a consideration for your small business — it’s a necessity.

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Conclusion

You want to protect all the hard work and progress you’ve accomplished thus far.

For many of us, our business is like a baby that we’ve nourished and cherished at each stage of growth. We have to do what we can to protect it from any dangers, seen and unseen.

A comprehensive commercial property insurance policy is the best way to start.