A Guide to Commercial Property Insurance
March 9, 2020
Whether you’re a new business owner or a veteran entrepreneur, the world of business insurance can seem complex and at times difficult to understand.
There is one easy rule to follow — if your business has assets, you need commercial property insurance. Without it, you risk leaving your business vulnerable to potentially catastrophic losses.
Want to understand commercial property insurance better? Our guide has got you covered.
What is commercial property insurance?
Commercial property insurance is generally considered the most essential layer of protection a business needs. A policy covers physical property such as real estate, laptops, desks, chairs, inventory, etc. and may also cover other non-physical assets like client data.
Let’s say you run a retail store and the building catches fire and damages a large portion of your inventory and property. Without commercial property insurance, you would be in real trouble.
Other losses you’ll be protected against are property theft, certain natural disasters, accidental damage, and more. Since no one is immune to these types of situations, it’s easy to see why every business needs to be covered by a policy.
Typically, commercial property insurance is paired with other types of insurance like general liability and business income insurance into what is known as a Business Owner’s Policy (BOP). The benefit to bundling policies is that it affords small and mid-sized businesses broad coverage at a more affordable premium.
What affects the cost of commercial property insurance?
There are multiple considerations the insurance company weighs when determining your premiums. Factors to consider:
Geographical location
Land value, risk of natural disasters, and local laws can all influence the cost of commercial property insurance.
Occupancy
Depending on what the building is used for, the fire rating can be affected. For example, a building used for a machine shop would be more expensive to insure than a building solely used for offices.
Equipment
The type and age of equipment are also factored into the cost of premiums. Industrial machinery would cost more to insure than office computers, as the replacement cost and hazards associated with machinery are far greater.
Property age
The age of a building can influence the cost of premiums. Older buildings could have issues like old wiring or inadequate plumbing that could potentially lead to costly losses. Newer buildings eliminate many of those risks.
Under typical circumstances, the average business will pay about $1,000 annually per million dollars in coverage.
ISO Fire Rating
The ISO Fire Ratings calculate how well fire departments are at putting out fires. The more well-equipped your fire department is to put out a fire, the less likely your building is to burn down. And that makes it less risky to insure.
Is there anything that is not covered by commercial property insurance?
While a commercial property insurance policy will protect you from plenty of potential losses, there are a few things that generally aren’t covered by standard policies.
- Employee theft
- Cash and currency theft
- Commercial vehicles
- Flood and earthquake damage
- Loss of income
- Defective products
- Worker’s compensation
- Terrorism
When getting quotes, ask the insurance company what is or isn’t included in your policy. Other types of policies are also available to cover these potential damages.
How much coverage do you need?
When determining the amount of coverage you should purchase, there are a few things to consider.
Coinsurance
Coinsurance is the amount of coverage the insured is required to have in order for the carrier to insure the property. So, if you have a building valued at $1MM, you would be required to carry $800,000 in coverage if your policy had an 80% coinsurance clause.
Replacement value
A policy that offers the replacement value of your property will cover the full replacement or restoration of the property to its original state. For example, if your laptop was stolen the policy would cover a brand new laptop of the same quality.
Actual cash value
With actual value policies, the depreciation amount is considered into the valuation of the property when it comes to replacement.
Take inventory of all the assets of your business. Consider the ramifications of choosing coverage by assessing a “what if” scenario. What would happen in a scenario of a catastrophic loss? This can help you decide what’s most appropriate for your business.
Commercial property insurance is not something you should shrug off. Every business needs some type of policy for protection of its assets. You don’t want to risk losing everything you’ve worked so hard for if a calamity were to strike.
