Commercial property insurance explained
By Leana Schwartz, Independent Commercial Insurance Agent
Commercial property insurance is an insurance policy that protects an insured business against damage or loss of its place of business and/or the contents of that location. More simply, commercial property insurance helps businesses repair or replace buildings, structures, and/or their contents when they are destroyed, damaged, or lost due to circumstances outlined in the policy itself.
A loss has many potential consequences. These include a reduction in property value, out-of-pocket costs to repair or replace property to make it usable again, and/or loss of income due to the inoperability of damaged property. A commercial property insurance policy can compensate a business for all of these losses.
Losses that are not covered
It is important to understand that commercial property insurance provides coverage of a policyholder’s own property – sometimes called “first-party” coverage. This differs from liability insurance (also called casualty insurance), which covers the policyholder from the cost of potential losses the policyholder may cause another business or person – sometimes referred to as “third-party” coverage.
Types of commercial property which can be insured
Commercial property insurance is available to business owners whether they rent, lease, or own their place of business, such as an office suite, garage, warehouse, farm, ranch, or most any other business location.
Types of commercial property commonly insured include:
- Real property – also called real estate; land and the structures permanently attached to it.
- Business personal property which belongs to the business, such as furniture, equipment, and inventory.
- Personal property of others – for example, customers’ cars which are being repaired by the business at its location.
- Property situated off premises – some businesses store extra inventory offsite, or utilize expensive tools or machinery on job sites.
Causes of loss
Commercial property insurance does not necessarily protect against all causes of loss. It is important to carefully review the policy with a qualified insurance agent to ensure the coverage is appropriate for the business.
In particular, certain causes of loss will be specifically excluded from the policy. For example, damage resulting from earthquakes or floods will not be covered by commercial property insurance policies. Separate “peril-specific” policies must be purchased to obtain earthquake and/or flood coverage.
Commercial property insurance terms
Actual cash value (ACV)
The replacement cost of the damaged or destroyed property, minus the depreciation already incurred by the property owner, or alternatively, the fair market value of the property at the time it was damaged or destroyed.
The percentage of value the policyholder is required to insure. For example, if the policy terms require 80% coinsurance and the insured property has a value of $1 million, the policy holder must purchase insurance with a coverage limit of at least $800,000.
A business may only obtain insurance coverage on property in which it has an insurable interest – meaning, the business would experience a financial or other type of loss if that property was damaged or destroyed. For example, a business can insure its own offices, but not the offices of its competitor.