Tips on buying commercial property insurance

Tips on buying Commercial Property Insurance in Louisiana

Some tips for getting commercial property insurance include:

  • How much coverage do you need?
  • Don’t under insure or over insurance the property
  • How to determine the replacement cost of the building
  • Get a commercial insurance package proposal
  • Who buys the commercial policy..tenant or building owner?

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How much coverage do you need for your commercial property?

Most building owners try to lower their insurance costs by lowering the insurance value of the building

This is a mistake

In a commercial property insurance policy the insurance company will have a coinsurance penalty clause usually 80%, 90% or 100%

If the policy has an 80% coinsurance penalty you must insure the building at least 80% of the replacement cost of the building (The replacement cost is the cost of you to hire a contractor to rebuild your property minus the land value)

If not your claim check will be reduced by the % you underinsured the commercial property

example)  You own a building with 2,000 square feet and the cost to rebuild is 220,000 determined by the insurance company replacement cost estimator

Your insurance policy on the commercial building is only 154,000

The building is damaged by fire and the estimate is $55,000 to repair

80% of 220,000 is $176,000 and that is the lowest insured value you can have on your policy

But you have the building insurance value at 70% or $154,000

To determine how much to pay on the claim, the insurer divides the amount of insurance you purchased ($154,000) by the amount you should have purchased (80% of $220,000 or $176,000)

The result is (154,000 divided by 176,000 = .875)

The amount the insurance company would pay on the claim is (.875 x the amount of the estimate (55,000)

The claim check would be $48,125 instead of the total estimate of $55,000

You would lose $6,875 off of the claim check to rebuild your commercial property

Using .875 on larger losses can really add up

55,000 claim you get $48,125 ($6,875 loss)

110,000 claim you get $96,250 ($13,750 loss)

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Don’t under insure or over insure the property

It is important that you choose the correct coinsurance % value and determine the replacement cost of your building

The insurance company will only pay the replacement cost of the building (the cost to you to hire a contractor to rebuild)

If it cost $250,000 to rebuild your building and you have a policy for $400,000?

you are not going to get a check for $400,000

If it only cost $250,000 to rebuild you are only going to get $250,000 unless you can prove it will cost $400,000

How to determine the replacement cost of the building?

Get an estimate from a commercial builder or contractor

Ask for the copy of the insurance company’s replacement cost estimator

*Here is a free online commercial building estimator click here

*its just a guide or estimate and should not be used as exact replacement costs and cost of building materials fluctuates

Get a commercial insurance package proposal

Often commercial property insurance policies can be through surplus lines insurers and you each coverage you need has to be added to the policy if not you don’t have the coverage

The most common mistake we see is a commercial property policy will have building coverage but not include loss of rental income

You need to purchase a business owner policy (BOP) package policy for your commercial property

This policy includes over 30 additional coverage options such as

  • Loss of Rental Income
  • Equipment breakdown
  • Ordinance or Law including demolition costs
  • Liability up to 10,000,000 

Insurance companies in Louisiana offer a complete package business owner policy to protect your commercial building

Most common question is who buys the commercial property insurance policy in Louisiana?

A very common practice for building owners is a triple net lease

You can get your tenant to pay for the commercial property policy but you can’t get them to buy the commercial policy

You can’t purchase an insurance policy if you don’t own the building

As the owner you buy the commercial property insurance policy and you can invoice your tenant monthly for the insurance costs

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