Embroker Team February 20, 2024 7 min read

Fire Insurance for Businesses: What Coverage Do You Need?

Two women in workplace discussing fire insurance policies to help protect their business

Did you know that 129 insurance companies operated in the city of Chicago prior to the Great Chicago Fire of 1871, and 81 of them offered fire insurance to their clients? Unfortunately, most of them were not ready for a catastrophe of such proportions, which eventually led to the bankruptcy of fifty-eight companies.

These insurance companies offered fire insurance for businesses and individuals, as fires were common in the city, where many buildings were made of wood. Those who had the financials to pay out their policyholders after the Great Chicago Fire helped the locals rebuild the city, but only half of the insureds actually received compensation.

In recent years, great wildfires are mostly contained outside densely populated areas, but climate change makes these severe calamities a common occurrence, especially in the summer season. People and businesses are looking to insure their property so that they would know their future is safe even if a fire destroys their possessions.

Luckily, the insurance market has always responded to people’s need for safety, providing coverage for the many risks individuals and businesses face. Fire insurance is no exception, as it is a common fact how disastrous the consequences of a fire can be for the victims.

Businesses are as vulnerable as individuals when it comes to the possibility of suffering a fire, even more so, depending on the industry in which you operate.

Fire Insurance for Business: What Policies Do You Need?

Person wondering what fire insurance for business policies they need

Fire is not only devastating for your business property. It can inflict damage so severe that you could be forced to put a halt to your operations. That can translate into hundreds of thousands of dollars in damage, even millions of dollars if the fire destroys extensive property and interrupts your business for too long.

Fire can also ruin your clients’ property if you, for example, own an underground garage or rent warehouse space. You would then be legally liable for the damage the third parties suffered, and if you don’t have adequate insurance, you’d have to reimburse their losses out of your own pocket.

That’s where insurance comes in handy. Comprehensive policies would provide financial support to help your business survive the disastrous event.

Historically, fire insurance was sold as a standalone policy, and people were reminded of its importance after every great fire the world suffered. It was in the 1960s that other coverages started replacing fire insurance, covering a wider array of perils to your commercial property.

Let’s look at the insurance policies experts recommend you should obtain to protect your business from the consequences of a fire.

Commercial Property Insurance

Commercial property insurance provides coverage for the building where you conduct your business operations. It also protects your tangible business assets, such as the inventory and movable property inside the building, like furniture and equipment. 

If you have outdoor signage, landscaping surfaces, fences, or any other structures, you can extend your coverage to protect those assets as well.

The risks your commercial property policy will cover depend on your company’s location and the exposures you add to the coverage when tailoring the policy with your broker. Not every policy offers extensive coverage for the risk of fire by default, so you should make sure to cover all your exposures if there is even a remote risk of suffering that kind of event.

Flames are not your only concern if a fire happens, even though they probably inflict the most damage on the property. Flames produce considerable heat that can also destroy your property, and smoke could remain in the property for days, causing substantial damage to walls and furniture.

A robust insurance policy would help you cover the costs of recovering from the consequences of a fire. It would cover your business property, and it might also reimburse you for the loss of income during the downtime.

Actual Cash Value vs. Replacement Cost Coverage: What to Get?

Imagine that you run a retail furniture business with a few production facilities. One of those facilities catches due to faulty wiring, and that fire destroys your machines, materials and equipment, and the building itself.

If you have bought commercial property insurance coverage for your business, your insurer will reimburse you for the damage your property suffered. However, the amount you will receive depends on the type of policy you previously chose: actual cash value or replacement cost

Let’s say that the value of your production facility and all the machines and equipment was estimated at $5 million at the moment when you purchased your insurance policy.

Suppose you have the actual cash value coverage. In that case, your insurance carrier will calculate the amount they will pay out like this: the amount your facility was worth when you first insured it, minus the depreciation value due to use and age. Your insurer will be paying for the current market value of your used equipment.

On the other hand, if you have purchased the replacement cost coverage, your insurer will pay the full price of replacing the destroyed property.

The main differences between the two types of policies are the amount you will receive upon filing a claim and the premium you will have to pay. You can expect to pay a considerably higher premium if you choose to buy a replacement value policy, but then you won’t need to worry about property depreciation in case of an unfortunate event.

General Liability

In the case of a fire damaging your property, a general liability insurance policy pays for any third-party damages, including bodily injury. It provides indemnity against legal actions third parties can take against your business if they think you are liable for the harm they suffered.

A third party could be your vendor, customer, partner, or supplier, to name a few. If their property gets destroyed in the fire, your general liability insurance policy will reimburse the related costs. The policy will also cover their medical expenses if anyone suffers a bodily injury.

Business Interruption

A business interruption policy kicks in when you have to temporarily seize your operations because of an unfortunate event, such as a flood or a fire. Business interruption insurance is tied to your commercial property insurance. They both include natural disasters as covered perils, so fires shouldn’t be an exception to the business interruption insurance coverage.

Here are some examples of what a business interruption policy pays for:

  • Loss of revenue during the shutdown
  • Staff wages if they cannot work until you put your operations back in order and your business isn’t generating enough revenue
  • Business loan installments you cannot afford to pay to the bank while your business is unoperational
  • Due taxes
  • The cost of relocating your business operations to another facility

Since this policy relates closely to commercial property insurance, companies usually purchase them together, ensuring they get the right coverage for their exposures.

Business Owners Policy (BOP)

If you are a small business owner, a business owners policy (BOP) could be the perfect solution for your company. This policy bundles three essential coverages into one package: general liability, commercial property, and business interruption insurance.

Insurance experts recommend buying a BOP for your business if you run a small or medium-sized business. It provides just the right amount of coverage for your company, typically at a discounted price

If you are considering this policy for your business, make sure to consult with your broker first. Not every company qualifies for a BOP, especially if it has a more complex risk profile that requires customized policies.

A BOP covers all the basic risks individual policies would cover. As such, it would also include fire insurance for businesses and protect your company from the consequences of that peril.

Big Risks for Small Businesses Report

Person with magnifying glass studying their protections against potential small business risk.

Is the Current Approach to Business Insurance a Match for Today’s Modern Risks?

Spoiler: It’s not.

Download the Report

How to Minimize the Risk of Fire for Your Business?

Woman mitigating risk by getting fire insurance for business

As with many other risks you face, prevention is the best strategy to protect your business from the dangers of fire. Here’s what you can do to minimize risk and keep your employees safe:

  • Identify fire hazards and take action to remove them. Outdated electrical equipment and bad wiring are some examples of such threats.
  • Install smoke alarms and sprinklers. Smoke alarms are the first line of protection for you and your employees, and sprinklers can help contain the fire until firefighters arrive.
  • Inspect fire extinguishers and sprinkler systems regularly to ensure they are working and that you comply with local and state regulations.
  • Educate your employees and have regular fire drills. Provide training for all your employees on preventing fires and what to do if one occurs. The best practice is to hire professionals to train your staff and organize fire drills.
  • Have an evacuation plan, and clearly mark all exits and escape routes.
  • If you operate with flammable materials, you should store them properly. Also, ensure that your staff uses appropriate protective gear when disposing of hazardous materials.
  • Conduct timely inspections and equipment maintenance. Whether you are using stoves, heavy machinery, or computers for your business, all this equipment needs adequate care. You can hire contractors to perform these tasks if you don’t have designated in-house personnel.

Your business insurance policies help carry the financial burden of suffering a fire, but implementing best practices to prevent it from happening at all is still the best option for your company.

If you still haven’t purchased the right fire insurance, now may be the perfect time to obtain that financial safety net for your business. You can always reach out to one of Embroker’s experienced brokers for more information about the coverage, or you can get your business insurance quotes online by signing up to our digital platform.

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