What Does Commercial Property Insurance Cover?
Commercial property insurance helps protect the physical property your business owns and depends on. Depending on the policy, coverage can include the building, business equipment, furniture, computers, inventory, tools, signs, and other business personal property.
Coverage typically applies when property is damaged by a covered cause of loss, such as fire, wind, hail, theft, or vandalism. The exact causes of loss covered depend on the policy form, which is why it is important to understand whether your policy provides broad or more limited protection.
Commercial property coverage can also be combined with important protections such as Business Income, Extra Expense, Equipment Breakdown, and Ordinance or Law coverage.
Building Coverage vs. Business Personal Property
Commercial property insurance generally separates property into two major categories: the building and business personal property.
Building coverage protects the structure itself and can include permanently installed fixtures and equipment. If you own the building where your business operates, you should make sure the building limit reflects the cost to rebuild the structure—not simply its purchase price, tax value, or current market value.
Business Personal Property, often called BPP, covers property your business owns that is located in or around the building. This may include furniture, computers, machinery, equipment, inventory, supplies, and other property used to operate the business.
If you lease your location, you may not need to insure the building, but you can still have a significant need for Business Personal Property coverage.
Replacement Cost vs. Actual Cash Value
One of the most important things to understand about commercial property insurance is how your property will be valued after a covered loss.
Replacement Cost generally pays based on the cost to repair or replace damaged property with property of similar kind and quality, subject to the terms and limits of the policy.
Actual Cash Value (ACV) generally considers depreciation when determining the value of damaged property. This can result in a substantially lower claim payment, particularly for older buildings, roofs, equipment, and other property.
A lower-premium policy is not necessarily a better value if it provides significantly less coverage at the time of a loss. At MBG Insurance, we believe the valuation method should be clearly understood before you purchase the policy.
What Is Coinsurance on Commercial Property Insurance?
Coinsurance is one of the most misunderstood parts of commercial property insurance. Many policies contain an 80%, 90%, or 100% coinsurance requirement.
The requirement generally means that you must insure the property to at least the specified percentage of its value. If the building or property is significantly underinsured, a coinsurance penalty may reduce the amount the insurance company pays—even when the loss itself is less than your policy limit.
For example, simply choosing a $500,000 limit on a building that would cost $1 million to rebuild could create a serious coverage problem if the policy contains a coinsurance requirement.
Properly estimating replacement cost and reviewing property values regularly can help reduce the risk of being underinsured.
Business Income and Extra Expense Coverage
Replacing a damaged building is only part of recovering from a major property loss. Your business may also lose revenue while repairs are being completed.
Business Income coverage can help replace lost income when your operations are suspended because of direct physical loss or damage from a covered cause of loss, subject to the terms of the policy.
Extra Expense coverage can help pay certain additional costs incurred to continue operating or reduce the length of the interruption. For example, a business may need to temporarily rent another location, lease equipment, or incur other expenses while its primary location is being repaired.
For many businesses, the inability to operate after a loss can be just as financially damaging as the property damage itself.
Equipment Breakdown Coverage
Commercial property insurance does not automatically cover every type of equipment failure. Equipment Breakdown coverage can help fill an important gap involving certain sudden and accidental mechanical, electrical, or pressure-system breakdowns.
Depending on the business, this may include equipment such as HVAC systems, refrigeration equipment, electrical systems, boilers, production machinery, and other covered equipment.
Equipment Breakdown coverage can be especially important for restaurants, manufacturers, apartment buildings, retail businesses, offices, and businesses that depend heavily on specialized equipment.
Ordinance or Law Coverage
A building may have been completely compliant with building codes when it was constructed but fail to meet today's requirements.
After a significant covered loss, local building codes may require portions of the property to be demolished, upgraded, or rebuilt differently than they were before the loss. A standard commercial property policy may not automatically pay all of these additional expenses.
Ordinance or Law coverage can help address certain increased costs associated with enforcing current building codes after a covered loss.
This coverage can be particularly important for older commercial buildings where electrical, plumbing, roofing, accessibility, fire protection, or other building requirements have changed significantly over time.
Does Commercial Property Insurance Cover Wind and Hail?
Commercial property insurance can provide coverage for wind and hail, but business owners should pay close attention to the policy's specific terms.
Some policies may have a separate wind or hail deductible instead of using the standard property deductible. That deductible may be a flat dollar amount or a percentage of the insured value. Certain policies may also settle roof losses differently based on the roof's age, condition, or policy endorsements.
In Missouri and Arkansas, where severe thunderstorms, hail, tornadoes, and high winds can cause significant property damage, we believe the wind and hail provisions deserve careful review rather than simply comparing the total premium.
What Commercial Property Insurance Doesn't Cover
Commercial property insurance provides broad protection, but it does not cover every type of loss.
Depending on the policy, exclusions or limitations may apply to flooding, earthquakes, wear and tear, deterioration, maintenance issues, sewer or drain backup, certain types of water damage, intentional acts, and other causes of loss.
Some of these exposures can be insured through endorsements or separate policies. Others are considered normal business or maintenance risks.
This is one reason we recommend looking beyond the price of a commercial property policy and reviewing what is—and is not—actually covered.
Commercial Property Insurance for Buildings You Lease to Others
If you own a commercial building and lease it to another business, your insurance needs are different from those of a business occupying its own building.
Commercial landlords may need coverage for the building, landlord-owned property, loss of rental income, premises liability, equipment breakdown, ordinance or law, and other exposures associated with owning rental property.
These policies are commonly referred to as Lessor's Risk Only (LRO) insurance.
The tenant should generally maintain insurance for its own business personal property, liability exposures, and business operations. Commercial leases may also require specific insurance limits and additional insured status.
Own a commercial building that you lease to others? Learn more about Lessor's Risk Only (LRO) Insurance.
Commercial Property Insurance in Missouri & Arkansas
MBG Insurance helps business owners and commercial property investors throughout Missouri and Arkansas compare commercial property insurance from multiple insurance companies.
With offices in Springfield, Missouri; Oak Grove, Missouri; and Bentonville, Arkansas, we work with businesses ranging from contractors and restaurants to retail stores, offices, warehouses, property investors, and other small and midsize businesses.
As an independent insurance agency, we can compare multiple insurance companies rather than offering coverage from only one carrier. Our goal is to help you understand the differences in coverage, deductibles, valuation, exclusions, and pricing so you can make an informed decision about protecting your business property.
How Much Commercial Property Insurance Do I Need?
The amount of commercial property insurance you need should be based on what it would actually cost to recover from a significant loss—not simply what you paid for the property.
For a commercial building, that usually means estimating the cost to rebuild using current construction costs. Building materials, labor, debris removal, architectural expenses, code requirements, and other reconstruction costs can make replacement cost substantially different from the property's market value.
You should also calculate the value of your business personal property, including equipment, furniture, computers, inventory, supplies, and other property necessary to operate your business.
Property values should be reviewed periodically because construction costs, equipment prices, inventory levels, and business operations can change over time.