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Understanding Commercial Property Insurance: A Comprehensive Guide

By Jeremey Chizek, Risk Advisor

Commercial property insurance is one of the most important policies you carry as part of your commercial insurance package. Your business is often your largest investment asset, and if you’re not properly covered, one storm could wipe out an entire lifetime of work.  

But not all commercial property insurance is created equal – and even the most in-depth policies still won’t cover specific scenarios. Let’s dive into the complexities of commercial property insurance, from what it is to what it covers, how much you need, common misconceptions and how to acquire a policy.

We want to provide you with the knowledge you need to protect your assets confidently. So, let's dive in and gain a comprehensive understanding of commercial property insurance. 

What is commercial property insurance? 

Commercial property insurance is a type of insurance policy that provides a business with coverage for physical assets associated with your property, and any liabilities that go along with those assets.  

It is designed to protect businesses from financial loss due to property damage, theft, natural disasters, and other unforeseen events. This insurance coverage typically includes buildings, equipment, inventory, furniture, fixtures, and other property owned by the business.  

However, base-level commercial property insurance doesn’t cover everything. Floods and earthquakes are often excluded from the policy, and depending on your location, you may want to add those provisions with the carrier.  

One common misconception about commercial property insurance is that it’s not legally required in nearly every state. However, if you rent or mortgage your property, you likely will be required to carry a policy through the property manager or mortgage lender. But unlike a personal auto policy, if you own your property outright, you aren’t legally required to carry commercial property insurance. However, as you’ll discover throughout this article, it still is an important piece of your overall risk management strategy – and one you will want to seriously consider.

Why is commercial property insurance important? 

Commercial property insurance is essential for several reasons.  

First, it protects your investment in commercial property. Whether you own or rent your space, your physical property represents a significant financial investment – often one of your largest. Without adequate insurance coverage, you risk losing everything in the event of a fire, storm, theft, or other covered perils. 

Additionally, many clients, contractors or government agencies will require commercial property insurance for you to work with them. They want to know you won’t go out of business if disaster strikes.  

While commercial property insurance can often be one of the largest expenses in your insurance portfolio, often businesses can deduct these premiums as business expenses.  

Common misconceptions about commercial property insurance 

Commercial property insurance can be complex, and there are several misconceptions that can lead to major gaps in coverage and potential risks. Here are some common facts about this coverage that are often overlooked by business owners.  

Commercial property insurance does not cover all types of property damage. 

While commercial property insurance provides coverage for a wide range of perils, it does not cover every possible type of property damage. Certain events, such as earthquakes or floods, are typically excluded from standard commercial property insurance policies. However, you can often get these provisions added to a policy.  

Commercial property insurance won't always include liability if an accident happens on your property.

Liability insurance covers your business if an accident happens on your property. It will help cover medical costs, legal fees and other expenses that stem from the accident. Technically, liability and commercial property policies are separate. However, in most cases, businesses will have a Business Owners Policy that packages property, liability and other essential insurance policies.  

Commercial property insurance doesn’t always cover lost revenue if you're unable to work in the event of property damage.

On some occasions, commercial property insurance does not include business interruption insurance, which is a crucial component of your risk management portfolio. Even if your business has never experienced a major disruption, unforeseen events such as fires, natural disasters, or equipment failures can occur at any time. Business interruption insurance provides financial support during the downtime, covering lost income and operating expenses, and ensuring your business can recover quickly. 

Business interruption insurance coverage can be located on the property coverage form. There are a few key terms to keep in mind. There is “actual loss sustained,” which is business income coverage where the actual loss sustained by the insured from a covered peril is paid. You may also see a capped or set limit, for example $1 million or $500,000, where that is the most the company will pay on a claim for a covered peril to a property loss. The payout of business interruption would be on top of the loss of property as part of the commercial property insurance.  

It’s important to talk to a risk advisor who understands commercial insurance packages to ensure you are covered from major disruptions. Signing up for commercial property insurance without a full understanding of what’s covered could leave you with major gaps in coverage.

How to lower your commercial property insurance premium  

Selecting the right commercial property insurance policy requires careful consideration of various factors, and the cost can be a major factor for business owners. Understanding how your premiums are determined can be a major factor when developing a long-term risk management strategy.  

Your insurance needs will depend on the nature of your business, the type of property you own or manage, and the specific risks associated with your industry. In addition, there are clear factors that insurance carriers look at when determine your potential risk level – and thus your premium.

  1. Property value and replacement cost: Obviously, if your property is worth $1 million, then you’ll need to be covered for that, plus the cost of equipment and other physical possessions. The higher your property value, the higher your premium. Evaluate the value of your property, including the buildings, contents, and equipment. Consider the cost to replace these assets in the event of a covered loss. It is essential to have adequate coverage to avoid being underinsured. 
  1. Location: The location of your property plays a significant role in determining the insurance premiums. Properties in areas prone to natural disasters or with higher crime rates may have higher insurance costs. For example, if your property falls in an area prone to wildfires, your premium will reflect that. Evaluate the risks associated with your location and ensure that your policy provides sufficient coverage for these specific risks. 
  1. Occupancy and usage: The type of business occupying the property and its specific usage will impact insurance premiums. For example, a manufacturing facility may have higher risks compared to an office building. Provide accurate information about your business operations to ensure you have the appropriate coverage.   
  1. Maintenace and updates: Properly maintaining your buildings and property and noting those changes can keep your premiums down. Regular inspections can help identify potential hazards, such as faulty wiring, leaky pipes, or structural issues. Addressing these issues promptly can prevent more significant damage and potential insurance claims. Be sure to keep records of all safety inspection and document all changes made.  
  1. Safeguarding the property: Does your building have a sprinkler system or fire suppression system? Security system and cameras? Gated entry and quality locks? The more you do to safeguard against risks like fires, theft, floods or other claims, the better chances you have at reducing your premium.
  1. Packaging policies: If you are taking on a business owners policy that packages multiple types of insurance, a carrier is likely to discount that package vs. writing an individual policy.  

Taking these factors into account will enable you to make an informed decision when choosing a commercial property insurance policy. It is recommended to consult with an insurance professional who can guide you through the process and help you find the most suitable coverage for your specific needs. 

Risk management and commercial property insurance 

Businesses often face unique challenges when it comes to securing commercial property insurance. Limited budgets and specific coverage needs require careful consideration, which is why you should look at insurance as just one component in your broader risk management strategy.

Let’s say you add a business owners policy that includes commercial property insurance. That isn’t going to prevent injuries or accidents like a certified safety program would. And that policy isn’t going to impact your employee retention like a safe work environment and a group benefits package would.  

The key to risk management is to understand which factors are most important to your business’ needs, and then addressing those needs through a variety of angles – not just insurance.  

We look at 10 impact areas of risk for every client, with the goal of creating a long-term strategy that impacts cost, protects the business owner, and protects the employees.  

On a smaller scale, commercial property insurance isn't enough to protect your business. If you don’t have an umbrella policy in place, one major accident could close your doors. If you’re ordering bulk materials and having them shipped around the country, an inland marine policy would protect those materials before they reach your facility. If you’re shipping or transporting anything that could be considered hazardous, you absolutely need an environmental policy in place.  

There are hundreds of risks that you face every day as a business owner. It’s our job to keep local businesses in business and protect their purpose – at work, at home and for the future. Get your free risk evaluation today and let’s get started on your long-term risk management strategy.  

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