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Imagine finally opening up the book store of your dreams only to have someone vandalize it a few months later, breaking every window of the storefront and destroying or damaging a majority of your inventory.
Your small business’s ability to recover from such an event could depend almost entirely on whether or not you’ve purchased commercial property insurance.
If the physical property and assets of your business are an absolutely essential part of your services and your revenue stream, then buying commercial property coverage needs to be a priority.
And while your property insurance cost could be significant—depending on the size of your business and the scope of its property—leaving your property vulnerable could end up costing you significantly more in the event that something goes wrong and your property is significantly damaged or destroyed.
Commercial Property Policy Coverage
Commercial property insurance is coverage that’s designed to protect any and all business property. That means that it not only protects the buildings in which you conduct business, it also protects your equipment, inventory, even fencing and signage that may be vital to your operations.
There are essentially three different types of coverage that you can purchase to protect your commercial property:
- Basic Form: This policy covers property damage related to fires, vandalism, smoke, theft, and “common natural disasters.” The natural disasters that are covered by a basic policy usually include weather events such as wind, hail, lightning strikes, and wildfires, although there could be exclusions made by the insurer based on your business’s risk profile.
- Broad Form: In addition to covering everything that the basic form policy covers, a broad form policy will also protect against water damage, collapsing structures, falling objects, and the weight of snow or ice.
- Special Form: This policy will additionally protect your property from every other type of peril as long as that peril has not been intentionally excluded from your policy by the insurer.
Common Property Insurance Exclusions
Businesses can design their policies to be as extensive as needed, but there are still things that a commercial property policy will not cover.
Most will not cover personal assets or property damaged on your property that serve no business purposes. There are also things that property insurance won’t cover because they are issues that should be covered with other insurance policies.
For example, damages to your business vehicles, even though they are technically business property, should be covered by a commercial auto policy.
And while property insurance will enable you to replace or repair your damaged or destroyed property, it will not provide you with the financial help needed to keep your business afloat while repairs are being made. This type of aid is provided by a business interruption policy, which will cover business costs such as loss of revenue, employee wages, rent, and loan payments while you work on getting your business back up on its feet.
Other common exclusions for commercial property insurance policies include:
- War: A majority of policies will not cover property damage caused by war and terrorist attacks.
- Earthquakes: There are some insurers that will offer earthquake coverage as an endorsement, but most will not. If you live in a high-risk area and want to make sure that you have earthquake coverage, you need to talk to a surplus lines broker or an earthquake authority insurer, which many businesses that operate in areas prone to experiencing earthquakes, such as California, will do.
- Acts of God: As already mentioned, wind and hail damage are usually covered, but other damage related to the elements, such as snow, dust, and sand damage, are typically not covered by commercial property insurance. If your property is damaged on the outside by these types of natural elements, coverage might be included. However, damage inside the building will not be covered. Another property threat that is fairly common in some areas of the country but never covered by a basic property insurance policy is flooding.
- Specific Types of Fires: Fire coverage in a commercial property policy is usually very specific and essentially only covers fire damage caused by unusual events. That means that if the fire started at a stove or another place where fires are common within the building, your property damage claim would most likely be denied.
- Specific Smoke Damage: While a standard property policy will cover most smoke damage, it will not provide coverage when the smoke comes from a nearby factory, for example, since most property policies have pollution exclusions written into them.
Determining the Cost of Commercial Property Insurance
No matter what type of insurance you want to buy, how much you are going to pay is going to depend on a large variety of factors. No two businesses are exactly the same, which means that no two businesses are going to have the same insurance needs and pay the exact same premium to obtain coverage.
An average small business will probably pay in between $1,000-$3,000 for property coverage. But for example, a small business with a slightly higher risk profile, such as a construction company, would probably have to pay double that per year because of their significant equipment and storage space risks.
Let’s take a more detailed look at the specific characteristics of your company that insurers will evaluate when determining the cost of your commercial property insurance coverage:
The location of your property affects your insurance costs in a variety of ways. Obviously, if you are located in an area that’s known for experiencing environmental perils such as wildfires and sinkholes, your insurance costs will be higher. Even the micro-location of your business is very important. For example, if your building is tucked away in between other larger buildings and is protected from the elements as a result, your premium will usually be lower. And since commercial property insurance covers vandalism and theft, expect your premium to be higher if your business operates in an area that has a higher crime rate. Also, you will probably pay less for coverage if your business is located close to the fire or police department.
Obviously, manufacturing companies that work with expensive industrial equipment and restaurants that have open fires and dozens of people coming in and out of the building every hour are going to pay more for property insurance than a company that’s made up of people working on computers in an office building. The riskier your operation, the more expensive your equipment, and the more potential hazards there are to worry about at your place of work, the more you will pay for property insurance. Inventory is another very important aspect of your property that insurers consider, especially when defining premium prices for retail companies. A retail store that sells appliances and electronics will have to pay more to protect itself from theft than a store that sells second-hand and vintage clothing, for example.
Occupancy calculations take into consideration not only the number of employees that are present on your business property every day but also the customers and the general foot traffic that your property experiences. The more people moving through your property during the course of the day, the more you’ll pay for insurance. That obviously means that businesses that are open day and night will pay more for property insurance than companies with typical eight-hour workdays.
Type of Equipment
The more your business equipment costs and the more dangerous it is to operate, the more you’ll pay for property insurance.
The construction of your building is also very important. If your property is mostly made of bricks and stone, it’s going to be cheaper to insure than a property that is made entirely out of wood. Since wood is very flammable, insurers tend to consider wooden structures to be more of a liability.
Building and Equipment Age
The older your property is, the more it will cost to insure. If you do have an old building, one way to decrease insurance rates is by investing in maintenance and renovation. For example, getting rid of old electrical wiring and installing new wiring can help make your building safer and decrease your insurance premium. If you have done any maintenance work and renovation on your building and equipment since the last time you purchased property insurance, make sure that your insurer knows about it when the time comes to renew your policy.
Security and Safety Measures
Another good way to decrease property insurance premiums is to make sure that your building is as safe and secure as possible. That means installing sprinkler systems, security cameras, fire alarms, and any other technology that can make your property safer is going to help decrease your insurance rates.
Replacement Value vs. Actual Cash Value
One of the most important decisions you are going to make when buying property insurance is deciding whether you want to purchase a replacement value or actual cash value policy. Replacement cost means that your policy will pay the cost of what your damaged or stolen property was worth when it was brand new. Actual cash value means that you’ll get the depreciated property value. Naturally, replacement value policies are significantly more expensive than actual cash value policies.
Another decision you need to make is whether you want a named perils or an all-risk property insurance policy. An all-risk or “open perils” policy covers against all losses except ones that are specifically excluded from the policy, while named perils coverage only protects against perils that are specifically listed in the policy. Obviously, all-risk coverage will be more expensive.
Cutting Costs with a Business Owners Policy
One of the best ways that small businesses can save money on commercial property insurance coverage, especially if the business doesn’t tick any “high-risk” boxes, is by purchase a business owners policy (BOP).
A BOP is an insurance policy package that gives businesses access to three coverages—general liability, property, and business interruption—while paying significantly less than they would have to pay to buy all three policies separately.
Even if you’re a larger business with more complex needs, you can still find a way to package a property policy with various other coverages that you need while paying a lower premium. You can choose to buy what’s called a commercial policy package (CPP), which lets businesses bundle a large variety of insurance policy types in order to save money.
If you need to insure your business property and would like to find out what type of coverage you need and whether buying a BOP or a CPP could be the right move for you, be sure to reach out to an experienced broker for guidance.
In some cases, brokers will recommend that you bypass policy bundles and stick with purchasing an individual commercial property policy that’s tailored to your business’s specific risk profile and coverage needs.
To learn more about property insurance and gain a better understanding of your coverage needs, don’t hesitate to reach out to one of our expert brokers at any time.
For those that have experienced property damage recently, we’ve put together this quick review of the path to property damage recovery and preparing for the claims process.
It’s very important to clearly understand what each type of policy offers before deciding whether named perils or all-risk insurance is the right type of commercial property coverage for your business.