Understanding Commercial Property Insurance

Commercial property insurance helps businesses, including farms and ranches, pay to repair or replace buildings, structures, and contents that are damaged, destroyed, or lost because of fires, storms, thefts, or other events outlined in the policy.

Business owners can buy commercial property insurance whether they own, rent, or lease a building. If you rent or lease a building, the building owner’s policy probably won’t cover the contents of the building that belong to you. You will need to buy your own policy to insure your on-premises property, including machinery, furniture, and merchandise. The cost of tenant coverage is usually significantly less than building coverage because the policy will only cover contents, not the building itself.

Commercial property policies provide either “replacement cost” coverage, “actual cash value” coverage, or a combination of both. Replacement cost coverage will pay to replace your property with new property of like kind and quality, up to the policy’s dollar limit. An actual cash value policy will pay the replacement cost of the property minus depreciation due to age and normal wear and tear. Although replacement cost coverage is more expensive than actual cash value coverage, it might better ensure that your business fully recovers after a significant loss.

Note: Typically, business owners can buy a single policy to cover businesses operating at multiple locations. However, you might need separate policies if some locations serve different functions and have different risk profiles. This could be the case, for example, if your business has an administrative office and a separate factory.

Types of Commercial Property Policies  

Different types of commercial property policies protect against different risks, or “perils.” Some policies will cover only those risks specifically named in the policy. Other policies will cover all risks, unless the policy specifically excludes them. Be sure to read your policy carefully. You may need to buy additional coverages or specialized policies, such as flood, windstorm, or crime coverage, to fully protect your business.

Commercial property policies in Texas generally fall into one of three categories:

Basic form policies typically cover common risks or perils, such as damage from fire, lightning, windstorm, vehicles, aircraft, or civil commotion.

Broad form policies typically provide basic form coverage plus coverage for additional perils, such as water damage, structural collapse, sprinkler leakage, and losses caused by ice, sleet, or weight of snow.

Special form policies cover against all types of losses except those the policy specifically excludes. Common special form exclusions include losses from flood, earth movement, war, terrorism, nuclear disaster, wear and tear, and insects and vermin.

Most commercial property policies cover damage from windstorms, except in counties on the Texas coast. If your business is in one of Texas’ coastal counties, you’ll probably need a separate windstorm policy. (Refer to the section on windstorm coverage for more information.)

Commercial Property Coverages

In Texas, commercial property policies are not standardized. Insurers must comply with minimum requirements but have a great deal of flexibility to develop their own policies. As a result, coverages and policy terms may vary significantly by insurer and by policy.

Commercial multi-peril (CMP) policies combine multiple coverages, such as commercial property, liability, inland marine, and commercial auto, to ensure full protection within the convenience of a single policy. CMP policies typically have lower premiums than purchasing the coverages individually.

Business owner program (BOP) policiesare a common type of commercial multi-peril policy primarily for small businesses. BOP policies combine property and liability coverage in one policy.

Commercial property policies provide various types of coverage, either as part of the base policy or through policy “endorsements.” Endorsements expand or amend a policy’s coverages and usually increase your premium. You can buy certain coverages as separate stand-alone policies.

Following are some typical commercial property coverages:

Building occupied by the insured coverage insures a building that you regularly use but do not own. This coverage can be important if you lease or borrow a building that is critical for your operations.

Newly acquired or constructed buildings coverageinsures a new building if you add it to your policy within a specified amount of time. If you don’t notify your insurer within the time period – usually 30 days – your policy won’t cover the new building. Commercial property policies generally only cover buildings named in the policy.

Employees’ personal property coverage insures your employee’s personal property against covered losses if the property is on your premises. Generally, you must buy this coverage as an endorsement if you need more than a limited amount.

Off-premises property coverage covers your property located off site. Some policies might not cover off-premises property, or may provide only limited coverage. You can usually buy an endorsement to cover off-premises property. If you can’t buy an endorsement, you may have to buy a separate policy.

Business interruption coverage pays for actual or projected lost income if loss from a covered peril prevents normal business operations.

Extra expense coverage pays any additional costs to expedite resumption of your operations after a covered loss.

Valuable papers coverage provides limited coverage of your business records and other essential information. You may be able to buy an endorsement to increase this coverage.

Ordinance or law coverage pays any additional costs required to repair or rebuild a facility damaged by a covered peril in order to comply with current building codes. Many policies provide limited ordinance coverage, but you can increase it with an endorsement.

Boiler and machinery coverage covers boilers, air conditioning units, compressors, steam cookers, electric water heaters, and similar machinery. Coverage generally extends to machinery specifically listed in the policy and to any subsequent losses, such as when a boiler explosion or water heater leak causes damage to other property. You can usually purchase this coverage as either an endorsement or a separate policy.

Inland marine coverage insures goods in transit over land, by air, or by inland waterways. It also covers projects under construction and transportation and communications structures, such as bridges, tunnels, and communications towers.

Other Coverages to Consider

Crime Coverage

You can buy several types of coverage to protect your business from crime. Common crime coverages include:

Loss of glass and money due to theft pays for damage to glass and any loss of money resulting from a break-in.

Robbery and safe burglary, property other than money is a more limited form of coverage that does not include money or securities.

Forgery or alteration protects your business against forgery or alteration of checks, drafts, promissory notes, or other directions to pay.

 Theft, disappearance, and destruction coverage insures money, securities, and other property against losses, both on your premises or in the custody of an employee or messenger while off premises.

A policy may pay losses from crime on either a “loss sustained” or “discovery” basis. Loss sustained coverage pays for losses that occur during the policy period, while discovery coverage pays for losses that occur at any time. Both types of crime coverage require that losses be discovered during the policy period or extended reporting period.

Flood Insurance

Some insurers may include flood coverage in their commercial property policies for areas with a low flood risk. However, most flood insurance in the United States is available only through the National Flood Insurance Program (NFIP). Some insurer may provide flood coverage as excess over the NFIP coverage.

To qualify for NFIP coverage, your business must be located within an NFIP-participating community. These communities have adopted federal building and floodplain management programs to reduce the likelihood of flood damage. “Special Flood Hazard Areas” are areas within NFIP communities that are at high risk for flooding. NFIP requires all structures within these areas to have flood insurance.

Note: More than a quarter of all floods in the United States occur in areas designated as low-to-moderate risk. You should consider flood insurance even if your business is outside a hazard area.

You can buy flood insurance through licensed insurance agents. For a list of agents selling flood insurance in your area, call NFIP

1-800-427-4661

www.fema.gov/business/nfip/

Windstorm and Hail Insurance along the Texas Coast

Insurers usually exclude windstorm coverage from commercial property policies for businesses in one of Texas’ 14 coastal counties or within certain areas of Harris County. If your business is in one of these areas, you will have to buy windstorm coverage through the Texas Windstorm Insurance Association (TWIA).

TWIA is a “pool” of all property and casualty insurers authorized to write property coverage in Texas. The insurers share the claims risk for structures in areas with a high risk of windstorms. Buildings in these areas constructed, repaired, or remodeled prior to January 1, 1988, are automatically eligible for TWIA coverage. Those constructed, repaired, or remodeled after that date must pass a state inspection and receive a Certificate of Compliance (Form WPI-8) before TWIA can issue windstorm and hail coverage.

Texas Department of Insurance (TDI) inspectors will inspect your structure free of charge if you notify your local TDI Windstorm Inspection Office before beginning construction or repairs. The inspection will occur sometime during the course of the work. If you request a windstorm inspection after starting construction or repair work, you must hire a Texas-licensed professional engineer approved by the Commissioner of Insurance to inspect your building. You can get a list of approved professional engineers on the TDI website and at Windstorm Inspection Offices. For more information, call TDI’s Windstorm Inspection Division or visit our website

1-800-248-6032

322-2203 in Austin

www.tdi.state.tx.us

After your structure passes inspection, call TWIA for a list of agents in your area

1-800-788-8247

899-4900 in Austin

www.twia.org

Shopping for Commercial Property Insurance

Commercial property insurance rates and coverages can vary significantly from one insurer and policy to another. It pays to shop around. The following tips can help you save money or avoid other pitfalls when buying a commercial property policy:

Minimize all possible risks before applying for coverage. Examine your business premises and operations carefully for things that could contribute to the likelihood of an insurance claim. Improving employee safety, security, and inventory management can reduce the amount you pay for commercial property insurance and other types of coverage, such as workers’ compensation and general liability insurance. Most insurers also offer loss-control or risk-reduction services. Contact your agent or insurer for help identifying and eliminating potential risks.

Get quotes from several companies. When comparing prices, make sure you’re comparing policies with similar coverage. A cheaper policy might also provide less coverage.

Keep shopping if an insurer declines to cover your business. Insurers have different underwriting criteria. If one company turns you down or is too expensive, another may be willing to issue coverage or offer a lower premium.

Consider higher deductibles.Almost all commercial property policies have a “deductible,” which is the amount you must pay toward the cost of a claim before the insurer will pay. The higher your policy’s deductible, the lower your premium should be. Keep in mind, however, that you’ll have to pay more out of pocket if you have a claim. Your policy will also have a “policy limit,” which is the maximum amount the insurer will pay for any covered loss.

Verify your agent’s and insurer’s licenses. Agents and insurers must be licensed to sell commercial property insurance in Texas. An unlicensed insurer may not meet the state’s minimum financial and regulatory requirements, meaning the company may not have the financial resources to pay your claim. To learn an agent’s or insurer’s license status, call TDI’s toll-free Consumer Help Line or use the “Agent Lookup” or “Company Lookup” features on the TDI website

  1-800-252-3439

  463-6515 in Austin

  www.tdi.state.tx.us

Understanding Commercial Property Rates

Insurers use a process called “underwriting” to evaluate the likelihood that a business will file a claim. The greater the likelihood, the higher the premium will be. If an insurer determines that a business poses a high risk for a loss, it may decline to issue a policy entirely.

Fire risk is typically the primary factor that determines a business’ commercial property rates. State-licensed fire inspectors contract with insurers to perform inspections as part of the underwriting process. Inspectors use a standard rating system and weigh five factors to determine a structure’s “fire rating.” The five factors are:

Construction materials. Buildings made of potentially combustible materials will have higher premiums, while those made of fire-resistant materials could earn a discount. Additions to an existing structure might negatively affect a fire rating, so it’s a good idea to consult with your agent or insurer before remodeling. Internal structural elements can also affect a fire rating. Using wood partitions, floors, and stairways in an otherwise fire-resistant building will likely nullify any rate reduction. Fire-resistant interior walls, floors, and doors can help preserve a good fire rating.

Location. Buildings in cities or towns with good fire protection, as assessed by the Texas Commission on Fire Protection, typically cost less to insure than buildings outside a city where fire protection may be limited.

Occupancy. A building’s use also affects its fire rating. An office building will likely rate favorably. A restaurant – with grills and ovens – or an auto repair shop will likely rate less favorably. One relatively hazardous occupant will negatively affect the fire rating of an entire building. If your business is in a building with a more hazardous occupant, your premiums will be higher than they would be for your business alone.

Fire protection measures. Automatic sprinklers can reduce a building’s fire rating by as much as 50 percent. Buildings with fire extinguishers and automatic alarms and those within 500 feet of a standard fire hydrant will generally have lower ratings.

Exposure. Nearby hazards increase a building’s fire risk. Proximity to external fire hazards, such as a lumberyard or oil storage tank, will negatively affect a fire rating to an even greater degree. Internal exposure risks might include cluttered buildings and grounds, heavy mechanical or electrical equipment, or on-site storage of volatile materials.