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Commercial Property Insurance: Comprehensive Guide
Is your business ready to face a flood, fire, or vandalism? With commercial property insurance, you protect your business against threats. Building insurance covers your property against damage or loss.
Commercial property insurance may also provide coverage for business liabilities. As a lender, you may need property insurance as part of your loan agreement. When you lease property, your landlord probably requires it.
You should see property insurance as a way to protect your business. With insurance, you have a way to make sure you minimize your losses in the case of a disaster. From everyday issues to major catastrophes, insurance protects you and your business. Keep reading to learn everything you must know about building insurance:
The types of coverage under a commercial property insurance policy can vary. It will depend on the policy that you purchase. However, some of the most common types of damages that are typically covered include:
- Damage to the property caused by fire
- Water damage
- Wind damage
- Other natural disasters
- Damage caused by theft or vandalism
Read your policy carefully to see which damages your insurance will cover. Always check for disasters most common in your region.
You’ll want to use a special cause of loss form to communicate with your insurance company. You use this document to report and track any damages that are not covered under a standard commercial property insurance policy. This can include specific damages. For example, a fire someone started intentionally or other exceptional damages.
One of the most common types of damages excluded from a commercial property insurance policy is earthquake damage. A separate policy will usually cover this type of damage. Other types of damages include nuclear accidents, war, or terrorism.
When determining the value of your property for insurance purposes, consider a few factors. The first thing you will need to do is to assess the physical damage to the property. Include any repairs you need to make. Also, consider the current market value of the property. You may also want to add any business interruption losses you incurred from the damage.
Additionally, you will need to consider any improvements that you made to the property. Also, any types of personal property that you store on the premises. This can help increase your insurance coverage. It ensures you have covered all your assets should an issue arise.
When it comes to insurance, there are two main types of coverage. Replacement cost and actual cash value. Replacement cost coverage guarantees that you receive the full amount to replace your belongings. Actual cash value coverage reimburses you for the current market value of your belongings.
Many people choose to have actual cash value coverage because it is cheaper than replacement cost coverage. But if you ever need to file a claim, you will only receive the current market value of your belongings. You will not get back the full amount necessary to replace them. Even if you file an insurance claim, you may not receive enough money to pay for the replacement of your things.
For example, let’s say you have assets on your property worth $100,000. In this example, let’s say you chose actual cash value coverage. One day a flood destroys your belongings. Your insurance covers you for this claim.
You can call your agent and make a claim. The insurance company will reimburse you for the market value of your things. Not their full replacement cost.
Say everything you owned was older than 5 years at that point. You would likely receive only 10 percent of the market value. Until your belongings are at least 5 years old, they depreciate rapidly in value.
But now let’s say you had replacement cost coverage. Your insurance would reimburse you the full 100,000. That is the replacement cost coverage. In other words, that is the full amount it takes to replace all your assets.
For this reason, you cannot assume that actual cash value coverage is better than replacement cost coverage. Make sure to carefully do the math before deciding which policy option is best for you.
A commercial property policy generally covers different risk areas. These are:
- personal property,
- loss of rents, and
- additional living expenses.
A commercial property policy will usually have some exclusions. These will be unique to the type of business that is being insured.
Even if you insure your company against hazards, the policy probably has limits. For example, the policy will not cover your stock in trade. Say you lose all or part of your inventory. Money spent to replace it would come out of your pocket.
If you want coverage for lost inventory, you may need to buy extra commercial property insurance. You can do this through a business owner’s policy (BOP). If your concern is the cost of replacing inventory as it diminishes, you might want to purchase a scheduled-value policy.
A scheduled-value policy is an insurance policy that pays a predetermined lump sum amount to the insured in the event of a covered loss. Scheduled value policies are priced in much the same way as other forms of permanent or cash-value insurance.
The primary difference is that scheduled-value policies generally don’t build much in the way of cash values. Scheduled value policies, by definition, will pay the scheduled amounts. This remains true no matter what the investment market does.
Some exclusions apply to policies such as damage from nuclear hazards or war. But there are specific exclusions only found in commercial property insurance. You won’t find this in a homeowners policy. Be aware of these exclusions so that you do not buy unnecessary or duplicate coverage.
Many commercial policies will cover your business income for a specific period after a covered loss. If the roof blows off your shop in a storm, you might find it hard to continue doing business without heat or electricity. Most building insurance will provide some additional living expense (ALE) coverage. The ALE protects you against lost profits during the period of restoration.
Some cautions are necessary with ALE insurance. Your insurer may require proof from suppliers that you can’t obtain services elsewhere. They will verify this before they pay your additional expenses.
ALE coverage may not begin immediately after a loss has occurred. It may take some time to obtain proof of lost income.
The insurance company will probably offer two types of curtailment benefits. The first is business interruption coverage. This is for losses resulting from direct physical loss or damage to your premises. That includes equipment, inventory, and more.
Business interruption benefits may be subject to a waiting period before payout. The benefit will only cover the extra expenses you would have incurred had there been no loss or damage.
Business interruption coverage may include extra expense benefits. This is if they are not excluded under “business income” and “curtailment” exclusions.
If you can choose between buying a policy with or without business interruption coverage, you may want to buy one that does not exclude this benefit. That’s because it might give you more options for protection against losses resulting from direct physical damage to your property.
Keep an eye on the rules. Say you have a contract with a power company for a particular level of service. If your interruption in supply results from a covered peril, you might not receive additional payment.
Extra Expense Coverage
The second is extra expense coverage. This is for indirect losses resulting from a lack of power or water supply at your premises.
Extra expense benefits may also have capped dollar amounts and periods. These will vary according to the wording of your policy. Building insurance policies usually offer lower dollar limits on curtailment coverage compared to other commercial property policies.
This is because they protect against direct physical loss or damage to buildings and equipment. This is instead of indirect losses resulting from power outages.
Although curtailment benefits are typical in commercial property policies, study your policy carefully. You’ll want to know what you can expect if damages result in loss of use of the premises.
Be aware of the exclusions that may apply to your business. It is imperative to have comprehensive coverage in case of an unforeseen event. Understanding commercial property insurance, will help you make informed decisions.
Once you know the type and amount of insurance coverage you need for your business, you’ll are empowered through peace of mind. Protect your assets against damages and keep your business going strong regardless of unforeseen circumstances.
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