Should I Have Commercial Property Insurance?

As a business owner, your livelihood and that of your employees depend on how prepared you are to handle life's inevitable and uninvited events.

Commercial property coverage can often stand in between a business making a quick recovery or being forced to shutter its doors. Just like hiring and retaining top talent, marketing, and sales, commercial property insurance should be a key part of your business and financial strategies.

What is commercial property insurance?

Insurance for commercial property provides protection from most perils to a property owned by a business. Property, in this case, means physical assets, including equipment, manufacturing devices, stock and inventory, equipment and buildings. Peril examples include fire, theft, vandalism, weather (note that flooding is not a covered peril), and natural disasters.

For many small and medium-sized businesses, the financial blow that accompanies a loss of assets comes from both replacement costs and loss of revenue. Would you be able to continue to make payroll if your inventory was suddenly destroyed? Safeguarding your team, your assets, and ultimately your business is property insurance's true role.

Who needs commercial property insurance?

In general terms, if your business relies on any physical property to operate, you need coverage. For example:

• Any business that leases office space. Your business may not own the physical structure of where it operates, but more than likely you have physical assets inside. Think of the interior design studio that rents a space in a professional building and outfits with new carpeting and flooring, computer systems, lighting, furniture, bookshelves, and stacks of material samples.
• Any business that manages inventory. Whether a business leases or owns a warehouse, what would happen if inventory was suddenly wiped out due to flooding (depending on what caused the damage), wind damage, or a fire? Risks can be mitigated (e.g., using a generator as a back-up power source), but even safeguards can fail. Inventory can also be in the form of refrigerated food for a restaurant, chocolate for a candy store, or raw goods that a business stores and uses to create its products.
• Any business that uses leased equipment. In your equipment lease, you are probably liable for damages that may occur to equipment while it's under your care. Consider a construction company that leases heavy equipment for specialized projects, or a manufacturing plant that leases certain machinery for production. Think carefully about your business operations. Are you leasing any equipment — vehicles, computer or phone systems, furniture, appliances, or more?
• Any business that maintains others' property. These are businesses that provide services on their clients' property for any period of time. A few examples would include:
  • Dry cleaners who take care of clients' clothing;
  • Auto repair shops whose customers leave their cars for service; and
  • A frame shop working with customers' artwork.

How much can you expect to pay for commercial property insurance?

Cost can depend on many factors, including the quality and type of policy, the type of business, where it's located, and other factors (see below). When shopping for insurance options, an insurance representative should take all of these factors into account to create a customized quote specifically for your business.

Other location-dependent situations may affect your rates such as if your business is in a high crime area or adjacent to a toxic waste site.

Other contributing factors include:

• Size of the business premises: Larger spaces typically translate into more physical assets that require coverage.
• Age and condition of your building: For example, an old wooden structure will be more vulnerable to damage than a newer build made with fire-retardant materials.
• Age and condition of your equipment: Hard-to-replace parts on heavy machinery are going to be costlier to replace than a sewing machine or industrial stove. Older equipment may be more likely to break down, which will drive up your premiums.
• Daily occupancy: Occupancy refers to the type of operations being conducted within a building. Manufacturing with heavy machinery, a lab that works with volatile chemicals, or an office building that hosts administrative positions will all have different risk levels associated with them.
• Fire protection: Businesses with proximity to a fire station have a decreased fire risk. Even if you are located far from a fire station, safety features such as a sprinkler system can lower your rates.
• Choice of coverage: Commercial property coverage is divided into two primary categories: "open perils" and "named perils." Open perils generally mean your insurer will cover you for anything that happens unless it's specifically excluded. The more perils a policy covers, the more expensive it's going to be. But while it may be tempting to reduce your policy costs by minimizing coverage, leaving your business exposed to chance and fate could be far more expensive. Consider working with a knowledgeable insurance professional to help you identify all your risks, then choose a cost-effective property insurance solution that works for your needs.

What does commercial property insurance cover?

What's covered depends on the policy. Here's a list of items that a policy usually includes:

• Buildings
• Furniture and equipment
• Inventory
• Computers
• Records and papers
• Exterior signage
• Fencing
• Landscaping
• Other's property

What’s not covered?

There are perils whose damage is so potentially extensive that they are excluded from standard commercial property insurance policies. Some of the biggest exclusions include:

1. Earth movement: Earthquake and sink-hole damage can render an entire building, along with its contents condemned.
2. War: An act of war would present thousands if not millions of claims within a short period of time and an insurance company would not be able to remain solvent, let alone profitable, if it were covered.
3. Floods, including storm surge from hurricanes: Things like floods, tsunami, standing water, and even sewage backups (depending on the cause) are not covered. The rationale is because these types of flooding events are more prone to happen in specific areas.

Commercial property recovery costs: replacement cost vs. actual cash value

The recovery cost to replace an item is not the same as its actual cash value. Actual cash value depreciates from new to when the damage happens. If you suffer a loss to older equipment in good working condition, how much will you want for it? If you need to buy new equipment, an actual cash value settlement can leave an owner with a considerable out-of-pocket expense.

Commercial property vs. liability insurance

If general liability insurance covers property damage, then what is the purpose of commercial property insurance?

Commercial property insurance covers your company's physical assets, whereas liability insurance covers property damage and bodily harm that occurs as a result as something your company did — faulty products, untended or unsafe grounds maintenance, or incorrect information that causes property damage.

Fire damage offers a good example to explain the difference between commercial property coverage and standard liability. If your business assets are damaged in a fire, your commercial property insurance should cover it. However, if your business manufactures wires and a customer suffers fire damage to their property due to the faulty wires your company produced, your customer will look to you to replace their fire-damaged property. In this instance, your liability insurance is what will cover you.

What other types of business insurance are recommended?

In addition to property insurance and liability, there are other business insurance policies that you should know about. Some are mandatory, while others may make good business sense, depending on your company, risks, and gaps in coverage.

1. Workers' compensation insurance: With the exception of Texas, every state in the union requires businesses to carry workers' compensation insurance. This insurance covers lost wages and medical expenses for employees who become injured or ill on the job.
2. Commercial auto insurance: If your business uses vehicles, whether a single car or a fleet of trucks, you cannot rely on your personal auto policy to cover damage or loss. It's important and required to carry commercial auto insurance. This coverage extends to vehicles you or your employees use or own for business purposes.
3. Umbrella insurance: Umbrella insurance covers you for losses when your current policies fall short of your financial needs. It's a way of extending your coverage once limits on your existing policies have been met. Umbrella coverage is not a policy replacement; rather, it enhances your current risk management policies to give you additional peace of mind. Umbrella insurance is not mandatory, but its simplicity and ability to protect you from unexpected risk makes it a best practice for your company's approach to financial security.

Explore your options

If you're a business owner who is exploring property insurance options or need more information about how property business insurance works, start by speaking to a reputable insurance representative.

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