The Investor's Guide to Insurance for Commercial Properties

Your commercial real estate portfolio represents years of hard work, strategic decisions, and capital investments. Buying the right commercial property insurance provides the backbone to protecting those hard-earned assets — don't leave them vulnerable after pouring so much into building your empire.

In this comprehensive guide, we'll dive into the core insurance for commercial properties and explore supplemental coverages you should consider. You'll gain insights to evaluate your unique situation and implement a customized protection plan for your properties and business needs.

With the right commercial building insurance strategy, you can safeguard the money, effort, and planning you've invested into constructing your real estate business. This article will equip you with the knowledge to choose the perfect policies and reduce risks so that your portfolio withstands any potential threats that may try to shake your foundation.

Understanding commercial property insurance

Commercial property insurance, also known as business property insurance, protects your real estate investments. This insurance shields your business from the financial burden of repair and replacement costs and business interruption due to unexpected property damage or destruction.

Rather than bearing the full cost yourself, the right commercial insurance policy covers these expenses, allowing you to recover and resume operations smoothly.

Why investors need commercial property insurance

Without adequate commercial property insurance, your real estate investments face significant risks. A single uninsured incident could lead to catastrophic financial losses.

Commercial property insurance protects you from catastrophic losses and financial burdens. Even minor issues like water damage from a burst pipe can result in substantial repair costs. This insurance covers such repair expenses, preventing out-of-pocket costs from impacting your finances.

In addition, this insurance coverage allows you to focus on your business without worrying about potential financial setbacks from property damage.

How commercial property insurance works

Buying commercial property insurance and getting coverage involves several key steps that guide you from initial consultation to eventual claim handling. Each step makes sure that your coverage meets your specific needs and provides adequate protection for your investments.

Engaging an insurance agent or broker

To purchase commercial property insurance, you'll start by connecting with an insurance agent or broker. This professional will assist you in evaluating your real estate investments to determine the appropriate coverage based on the property's value and the potential risks it faces. Their expertise verifies that the policy you choose is well-suited to your specific needs.

Determining coverage and deductible

Your agent will help you decide on a suitable deductible and the coverage limit for your policy. The deductible is the amount you pay out of pocket before the insurance coverage kicks in after a claim, and the coverage limit is the maximum amount the insurance company will pay for a covered incident.

Filing a claim

If an incident occurs that damages your property and is covered under your policy, you need to file a claim with your insurance provider. This is the formal request for payment based on the terms of your insurance policy.

Insurance company response

Once you pay your deductible, your insurance provider will cover the remaining costs to repair or replace the damaged property. Note that this payment will not exceed the coverage limits specified in your policy.

What commercial property insurance covers

Commercial property insurance covers different assets and incidents, giving your business comprehensive protection. It can come in two types:

1. Named perils: This type of coverage lists out the specific risks or dangers that the insurance will protect you against. The policy clearly names these risks and applies coverage only to those particular events.
2. Open perils: Open perils coverage, also called all-risk coverage, gives you broader protection than named perils coverage. Instead of listing specific risks that are covered, an open perils policy covers all risks or dangers except for those that are clearly not covered in the policy.

Types of covered incidents

The types of situations typically covered by commercial property insurance policies include:

• Fire: Damage to the property caused by fire, including smoke and related hazards.
• Hail: Structural damage or broken windows/exterior fixtures due to hailstorms.
• Lightning: Electrical damage or fires sparked by lightning strikes.
• Theft: Loss of property or assets due to burglary, robbery or unauthorized removal.
• Vandalism: Intentional damage to the property through acts like graffiti or destruction.
• Wind: Damage from high winds, tornadoes, hurricanes or other severe wind events.

Types of covered property

Commercial property insurance covers these physical assets:

• Building: The actual structure housing the business premises.
• Equipment: Machinery and equipment used for business operations.
• Tools: Hand tools or other implements utilized for the business's work.
• Inventory: Raw materials, finished products, or merchandise for sale.
• Furniture: Desks, chairs, fixtures, and other furnishings within the premises.
• Personal property: The belongings of the business owner on the premises.

What commercial property insurance does not cover

While commercial property insurance provides broad coverage for your real estate investments, it's important to understand its limitations and exclusions. Typically, commercial property policies do not cover:

• Flood damage: Most standard policies exclude damage caused by flooding, including overflowing rivers, heavy rains, or storm surges. You'll need to purchase separate flood insurance to protect against this risk.
• Earth movement: Damage from earthquakes, landslides, or sinkholes is generally not covered under a basic commercial property policy. Special endorsements or separate earthquake insurance may be required.
• War and terrorism: Acts of war, terrorism, or nuclear hazards are excluded from commercial property coverage.
• Wear and tear: Normal wear and tear, deterioration, or maintenance issues are not considered insured events. The policy covers sudden and accidental damage, not gradual degradation.
• Mold and insects: Damage caused by mold, fungi, insects, or vermin infestations isn't covered, unless it's from a covered peril, like a burst pipe.
• Vacant properties: If a property sits vacant for an extended period, usually over 60 days, coverage may be limited or excluded entirely.

How much does commercial property insurance cost?

On average, commercial property insurance costs about $67 each month or $800 per year. However, the actual price can change depending on factors like:

1. Location

Where your commercial property resides is a big factor in how much insurance costs. If it's in an area where natural disasters like hurricanes, earthquakes, or wildfires happen often, you'll probably have to pay more for insurance.

Insurance companies assess the probability of these events occurring and the potential extent of damage they could inflict on the property. They typically charge higher premiums for properties they perceive as more susceptible to such incidents due to their location in high-risk areas.

2. Construction

The construction of your commercial property also influences insurance costs. Insurers view older buildings or those made with materials that lack fire resistance or structural integrity as a greater risk. These properties may require higher premiums due to an increased likelihood of damage, potentially requiring costly repairs or rebuilding in the event of an incident.

Properties built with modern, fire-resistant materials and following current building codes are usually seen as safer by insurers, which means lower premiums. They consider things like the building's age, materials used, and strength when determining insurance rates.

3. Business operations

The nature of your business operations impacts insurance costs. If your property houses industrial tenants, manufacturing, or operations involving hazardous materials, premiums will likely be higher. An office or retail property typically carries lower premiums.

Insurers evaluate risks associated with tenants' business activities. They consider the potential for accidents, property damage, or liability claims, and these factors determine your insurance premium.

4. Fire and security protection

Insurance companies may offer discounts on premiums for commercial properties that have installed fire protection systems such as sprinklers and alarms or those located near a fire station. They may also lower insurance costs for properties with strong security measures like surveillance cameras, security guards, or access control systems in place.

Insurers view these fire and security measures as safeguards that reduce the chances of incidents occurring and subsequent claims payouts. When property owners demonstrate a commitment to prevention through such protective measures, insurers perceive the property as a lower risk, prompting them to extend more favorable insurance rates.

Other types of insurance coverage for commercial real estate investors

For real estate investors, the right combination of insurance coverage protects rental properties and business assets against a wide range of potential risks and liabilities. Besides commercial property insurance coverage, other types of insurance to consider include:

• Liability insurance: This covers claims of bodily injury or property damage that occur on your commercial property. For example, liability insurance can protect you from lawsuits and cover medical expenses if a tenant or visitor gets injured due to an unsafe condition.
• Landlord insurance: Designed specifically for rental property owners, this bundles commercial property insurance to cover the physical building, along with liability coverage and protection against loss of rental income if the property becomes uninhabitable after a covered peril.
• Flood insurance: Most commercial property policies exclude flood damage. If your property is in a high-risk flood zone, separate flood insurance helps cover losses from flooding events.
• Umbrella insurance: This provides supplemental liability coverage above and beyond the limits of your commercial property, landlord, or general liability policies. Umbrella insurance can protect your assets against catastrophic claims exceeding your other policy limits.

Do you need a business owner's policy?

A business owner's policy (BOP) is an insurance package that combines various insurance coverages into one bundle, making it simpler and often more cost-effective for small business owners to purchase. Typically, a BOP includes three primary types of coverage:

1. Property insurance: This covers the business's physical assets.
2. Liability protection: Provides general liability insurance for small businesses to cover lawsuits for things like bodily injury, property damage, or personal injury that occur as a result of business operations.
3. Business interruption insurance: Covers loss of income resulting from a fire or other catastrophe that disrupts the business's operations. It can also help pay for expenses like rent or payroll during periods when the business is not operational.

Our recommendation for investors

Assess the scope of your operations to determine whether you need a business owner's policy. If your property is more than just a passive investment, such as a venue that hosts active businesses like a hotel, it's wise to consider additional insurance coverage to mitigate potential risks.

If you decide you need business insurance, bundling can potentially reduce your overall insurance costs compared to purchasing each type of coverage individually. It also simplifies policy management by consolidating multiple coverages under one policy instead of dealing with separate policies.

Replacement cost vs. actual cash value

To purchase commercial insurance policy, you'll need to understand the difference between replacement cost and actual cash value:

Replacement cost coverage

This pays the entire cost of replacing or rebuilding your property without factoring in depreciation. It's pricier, but it guarantees you'll have enough money to completely restore your property if it gets damaged or destroyed.

Actual cash value (ACV)

This coverage pays you based on how much your property has depreciated over time. This means it considers things like age and condition. ACV policies are cheaper, but they might not give you enough money to fully replace your property if you need to file a commercial property insurance claim.

Finding the perfect commercial property insurance

You've invested substantial effort into acquiring your commercial real estate portfolio, so protecting these assets through appropriate insurance coverage is key for safeguarding your investments.

While understanding commercial property insurance may initially seem complex, knowing the risks you face as an investor can help you make informed decisions. The right insurance protects you from financial difficulties arising from property damage, liability claims, business interruptions, or environmental hazards.

Securing comprehensive insurance protection is a strategic investment, not merely an added expense. A solid policy provides security and peace of mind, preventing an unforeseen event from undermining the time, resources, and capital you've dedicated to building your commercial real estate business.

Insurance for commercial property owners FAQs

What is commercial P&C insurance?

Commercial P&C insurance refers to insurance policies that protect businesses from losses tied to their properties and operations. It covers damage to buildings, equipment, and inventory, and also covers liability claims from third parties.

Is commercial insurance the same as property insurance?

No, commercial insurance is broader than just property insurance. Property insurance covers damage to equipment and buildings. But commercial insurance goes beyond that, including coverage for things like injuries, negligence claims, and other risks businesses encounter.

What is the standard deductible in a commercial property policy?

Most commercial property insurance policies have deductibles ranging from $1,000 to $25,000. The deductible is the part of a claim that the business has to pay before the insurance starts covering the rest. If you choose a higher deductible, you'll pay less for your insurance each month.