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Commercial Property Insurance. Who needs it & what does it cover.

Priyanka Prakash, JD

What Is Commercial Property Insurance?

Commercial property insurance protects buildings, fixtures, equipment, and other business property from damage, loss, and theft. Property insurance is often coupled with liability insurance in a business owner’s policy (BOP), but can also be sold separately.

Your small business’s assets are everything. Real estate, equipment, inventory, customer data, and everything else that your business owns isn’t just important for your business—it is your business. Without this property, it would be impossible to operate your business.

This is why it’s important to have adequate small business insurance. Commercial property insurance, in particular, protects your company’s tangible and intangible assets from damage, theft, and loss. If the unexpected happens, this insurance helps you ensure that your business can stay open.

Shopping for insurance can be confusing, whether you’re a first-time or veteran business owner. Learn about how commercial property insurance works, what’s covered and what’s not, average costs, and where to obtain coverage.

How Commercial Property Insurance Works

If you’re a homeowner, you likely have a homeowners insurance policy to protect your personal belongings and home against damage. Commercial property insurance plays a similar function for business owners.

Commercial property insurance, also known as business property insurance, covers accidental damages, loss, and theft of business property. Mark Applegate, a Farmer’s Insurance agent, says that “Commercial property insurance can cover the building your business is located in if you own it. It also covers the property inside the building. Everything from your inventory to your desk, computers, counters, seating, shelving, and more.” Commercial property insurance will pay for the repair or restoration of damaged, lost, or stolen property.

Even more importantly, commercial property insurance is often the first layer of insurance that a business owner needs. Although you can purchase commercial property insurance on its own, it usually comes as part of a business owner’s policy (BOP). A BOP bundles general liability insurance and property insurance into a single, more economical policy. A standard commercial insurance policy also comes with several add-ons for specific types of property coverage.

Who Needs Commercial Property Insurance?

Every business owner should have commercial property insurance, even home-based and online businesses. Home-based business owners typically have some protection via their homeowners insurance policy, but that typically offers limited coverage for business property. If your homeowners insurance can’t accommodate your business needs, it’s time to consider a commercial property policy.

Online business owners might think that commercial property insurance is unnecessary because they don’t own copious amounts of physical property. However, commercial property insurance has evolved along with the business world. These policies typically cover electronic data that might be hacked into or lost. Plus, computers and other electronic equipment are covered as well.

What Does Commercial Property Insurance Cover?

Commercial property insurance protects your business’s property against a number of risks. Physical assets, such as buildings and equipment, are covered against losses. But, most policies also cover electronic data, so even online businesses should have commercial property coverage.

Most commercial property insurance policies cover the following losses:

  • Theft of business property (but employee theft is usually not covered)
  • Accidental damage to business property from external incidents, such as fire
  • Some natural disasters, particularly fire and storms
  • Disrupted computer operations and data hacks
  • Personal items left on business premises (most policies offer limited personal effects coverage)

Although this might seem like a short list, accidental damage covers a wide range of scenarios. For example, commercial property insurance would cover you if a fire burned down a warehouse housing your supplies and inventory. You would also be covered if a storage rack collapses and damages computers and other equipment stored below. If a customer steals a product from your shelf or vandalizes your shop, that would be also be covered by commercial property insurance.

What’s Not Covered by Commercial Property Insurance?

Commercial property insurance covers a wide range of losses to your business property, but there are also quite a few things that aren’t covered in a standard policy. Fortunately, it’s usually easy to buy add-on coverage when you need expanded protection.

These are some areas which standard commercial property insurance doesn’t typically cover:

  • Flood and earthquake damage
  • Theft by employees or business partners
  • Damage or loss of commercial vehicles: If you have company vehicles, you should purchase a separate commercial auto insurance policy.
  • Theft of cash and currency: Separate crime insurance is available in these instances of theft.
  • Movable property: The standard commercial property policy covers stationary property that’s inside your business or within 100 to 1,000 feet of your business. If you regularly ship property, then you should consider adding inland marine coverage.
  • Environmental damage (e.g. pollution liability, oil spills, etc.)
  • Equipment breakdown: Commercial property insurance covers damages to your equipment from external causes, such as fire. However, equipment damage due to a power surge, operator error, or other internal forces require separate equipment breakdown insurance.
  • Loss of income: Commercial property  insurance pays for the repair or restoration of damaged property. However, if you’re out of essential property for a period of time, you’ll need business interruption insurance to cover any lost income during that time.
  • Product defects: Manufacturing, defects, design defects, and marketing defects in business property fall under the umbrella of product liability insurance.

The best way to get comprehensive coverage is to talk to your insurance broker or insurance company about the specifics of your business and what types of property you need to protect. In many cases, you can supplement a standard commercial insurance policy with additional coverage.

How Much Does Commercial Property Insurance Cost?

Commercial property insurance costs most small business owners less than $1,000 per year. Your insurance premiums will depend on the structure of your insurance policy, the value of your business property, and the level of risk that your industry faces to damage, loss, and theft.

These are some of the factors that affect the cost of commercial property insurance:

  • Business model: As you might expect, businesses with brick-and-mortar locations usually will pay more for property insurance than online businesses. The exception is online businesses with very unique or expensive data.
  • Industry: Some industries are inherently riskier than others and more prone to property damage. For instance, restaurants have the biggest exposure to fires.
  • Location: A business’s specific location, such as an address in a high-crime area, can also impact the cost of commercial property  insurance.
  • Type of property: A business with fire sprinklers and high-quality, modern construction will get a discount on premiums.
  • Neighboring businesses: What other businesses do can affect your own cost. For instance, if a neighboring business works with flammable materials, that will increase the cost of your own property insurance.

The structure of your commercial property insurance policy will also impact cost. Similar to small business health insurance, the more coverage you have, the higher your premiums will be. Deductibles also matter. The deductible is the amount of money you pay out of pocket for each covered incident before the insurance company starts paying benefits. The higher your deductible, the more affordable your premiums will be.

Amount of Coverage

Another big determinant of cost is the amount of property insurance coverage you purchase. Small business owners should have coverage that’s at least equal to the value of their property.

According to Applegate, “You always want to have enough insurance to protect yourself in case of a total loss. But some insurance policies may have an 80% or 90% coinsurance [requirement].  Coinsurance will impose a penalty on the insured if they fail to insure their contents to value.”

For example, if an insurance policy requires 80% coinsurance, and your business property is valued at $500,000, you need to purchase at least $400,000 in coverage. If you don’t, the insurance company might not pay out your claims.

The problem is that property value can be measured in different ways. You should read the fine print of your policy to see if it uses replacement or actual cash value. Here’s how replacement and actual cash value differ:

  1. Replacement value: Replacement value policies cover the cost of repairing or restoring property to its original state (or as similar to original as possible). The policy will pay for labor and/or materials to fix or replace damaged, lost, or stolen property.
  2. Actual value: Actual value policies also pay to repair or restore damaged property, but deduct some of the payout to account for depreciation.

Let’s say a small business owner’s computer is stolen, which the owner spent $1,000 to buy three years ago. Today, the computer is worth $700 after accounting for depreciation. Under a replacement value insurance policy, the business owner would receive up to $1,000 to buy the same or a very similar computer. An actual value policy would only reimburse the business owner $700, which is today’s market value of the computer.

Replacement value commercial property insurance costs more, but also provides more coverage. Ultimately, you’ll have to decide whether you want 100% coverage or whether you’re willing to make up some coverage gaps in the event of a claim by paying out of pocket.

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