Hazard Insurance for Small Businesses

As a small business owner, the building you rent or own and the equipment you use to operate your business are integral to keeping your doors open. You’ve invested time, money, and heart into ensuring your shop, storefront, or office is set up just right. However, your carefully laid plans could face a huge setback if a sudden storm or other disaster devastates the area.

Did you know that 25% of businesses never recover from a disaster like this? That’s where small business hazard insurance comes in.

What Is Hazard Insurance?

When a disaster impacts these assets, it could be difficult for a business to recover. Hazard insurance for small businesses can help cover the costs of repairing or replacing the physical structures and equipment your business relies upon, acting like a lifeline to get you back up and running. This coverage is crucial in providing the protection you need to safeguard your business against unforeseen natural disasters. Another name for this type of business protection coverage is commercial property insurance.

What Does Business Hazard Insurance Cover?

When it comes to safeguarding your small business, understanding the breadth of what hazard insurance covers is paramount. Business hazard insurance, also known as commercial property insurance coverage, helps protect the building your business owns or rents, as well as the equipment that keeps your business operational.

For example, if a burst pipe floods your storeroom or an overnight fire guts your office space, hazard insurance steps in like a trusted ally. Depending on your policy, it can cover the costs to repair or replace essential components, such as:

• Personal property
• Tools and equipment
• Inventory
• Furniture
• Computers
• Accounts receivable
• Documents
• Outdoor landscaping

Hazard insurance policies for small businesses generally protect you from losses due to unexpected events, such as:

• Fire and smoke damage
• Theft and vandalism
• Some weather-related events, such as hail, lightning, snow, sleet, or ice
• Explosions
• Damage caused by aircraft or vehicles
• Sprinkler leakage
• Building collapse
• Certain types of water damage
• Civil unrest or rioting

Items typically excluded from a hazard insurance policy are damages due to flooding, earthquakes, acts of terror, nuclear attacks, or damage from war. Protection from these events would require a separate insurance policy.

Why Do I Need Hazard Insurance for a Small Business?

While many states do not require business owners to carry hazard insurance, it's a good idea to have it to help cover the costs of damages you would otherwise have to pay out-of-pocket. You may also need a specific hazard insurance policy if you're planning to secure business funding from a lender. For example, loans from the U.S. Small Business Administration (SBA) may require proof of business hazard coverage (see below for more details).

Business owners who operate out of their homes may wonder if hazard insurance is the same as homeowners insurance. If you're looking to protect a business you operate out of your house, your homeowner's insurance policy might not provide adequate coverage for business property stored in your home. Hazard insurance may offer added coverage for your home-based business property that would otherwise not be covered by a homeowner’s policy or be covered at lower limits under a homeowner’s policy.

Hazard insurance provides peace of mind, allowing business owners to focus on growth rather than potential financial setbacks.

For example, if a small bakery experiences a sudden fire that damages its equipment and interior, its hazard insurance policy can kick in to swiftly replace the lost equipment and repair damages without depleting its financial reserves. This is just one of the many small business benefits hazard insurance brings.

Hazard insurance can also enhance your business’s creditability, reassuring clients and partners that you’re a resilient and trustworthy entity capable of weathering unexpected challenges. Such hazard insurance advantages are crucial as they enable businesses to maintain operational stability, ultimately contributing to long-term success.

How Much Does Business Hazard Insurance Cost?

The cost of a hazard insurance policy will differ for every business. Primary factors that can influence the cost of hazard insurance include:

• Property age and value: The more property you have, the more that coverage may cost.
• Replacement value vs. cash value coverage: Replacement value is the cost to purchase a new version of the damaged property, while actual cash value is based on how much the covered item cost before it was damaged. Given depreciation, cash value coverage is usually less expensive than replacement value coverage.
• Coverage limits: As with most insurance policies, your premiums will increase for more coverage.
• Lender requirements: Before granting a loan, a lender may stipulate that you have a specific amount of property coverage.

Hazard Insurance for an SBA Loan

As part of granting a loan, the SBA outlines that proceeds from insurance coverage, which may include hazard insurance, can be deducted from the eligible loan amount. Additional location-related coverage (such as policies that protect against floods or earthquakes) may also be required.

What Type of Hazard Insurance Does the SBA Require?

The SBA will require a business to obtain adequate insurance coverage to qualify for a loan. This may mean general liability coverage and/or commercial property insurance, including hazard coverage. Remember that the SBA may require other insurance coverage (e.g., workers' compensation), depending on the type of loan you're looking to secure.

Specifically, the SBA will be looking for hazard insurance that meets the following criteria:

• The amount of coverage must equal at least 80% of your loan amount
• The insurance must be listed under the name of the business
• If you operate under a doing business as (DBA), it must be listed on the policy
• If the business doesn't currently have the necessary insurance, it must provide proof of coverage within 12 months of receiving a loan

Is Hazard Insurance for Commercial Buildings Tax-Deductible?

When it comes to business insurance in general, the IRS stipulates that it's a part of the cost of doing business and, therefore, tax-deductible. In the case of whether hazard insurance is tax-deductible, there are some additional points to consider.

The IRS allows you to deduct home office expenses if you run a home-based business. While this includes items such as utility expenses and home office equipment, it can also include your insurance premiums. For instance, if 50% of your home is used solely to operate your business, you can deduct 50% of your yearly hazard insurance premiums.

You may also be able to claim deductions if your business experiences losses in federally declared disaster areas. For example, if you file a claim on your hazard insurance and your insurance company only pays a portion of the amount, you can deduct the remaining amount minus $500 per incident.

If you're unsure whether hazard insurance for small businesses is tax-deductible, it's a good idea to work with a professional who can help ensure that you're taking advantage of all the tax deductions your business is eligible to claim.

Protect Your Business With Ample Insurance Coverage

Adequately protecting your business is a crucial part of success. That means securing a business insurance policy that protects the business, its assets, your employees, and other important aspects that keep operations up and running. Protect your business, get insured, and join countless others who trust Paychex to keep their operations secure. Get the ultimate peace of mind with complete business coverage for your organization, or get in touch for help with policies that match your needs.

Insurance is sold and serviced by Paychex Insurance Agency, Inc., 225 Kenneth Drive, Rochester, NY 14623. CA license #0C28207