Commercial Property Insurance 101
12/22/2011 2:34 PM
Submitted by S. Leonhard
Commercial property insurance, also known as business property insurance, offers protection against accidents, damages due to fire, theft, vandalism, storms or many other specific events that may be outlined in the policy. Policies generally cover the cost of replacement or repairs of the property, inventory, equipment, important papers and even lost income.
Frequently businesses buy commercial property insurance as a part of their business owner’s policy commonly referred to as a BOP. This allows companies to combine two of the most important types of policies, property insurance and general liability, to be combined in a single package that is usually cheaper than buying them separately.
Commercial property insurance can be purchased whether a business owns rents or leases a building. In cases where a building is leased or rented, the building owner’s policy usually does not cover the goods or machinery that is inside the building. In this situation the tenant is responsible for providing coverage for the contents of the building such as furniture, office equipment, merchandise, and machinery. The cost of this type of tenant coverage is very reasonable compared to the value of the contents of the average business operation.
Businesses that are operating at a number of different locations can be covered in a single policy, but pricing may be different based on whether they have different functions and risk profiles. For example, the type of coverage and pricing to cover the administrative office will differ from the coverage and pricing of the factory where production takes place.
There are various types of commercial property policies and they cover different risks or perils. Some policies will only cover the perils explicitly stated in the policy, while other policies will cover all risks except those purposely excluded. Depending on the location of the business, the business owner many have to buy extra coverage. For example, if a business is located in a coastal location and the business owner will have to buy additional wind coverage to protect against hurricane damage.
Generally, commercial property policies fall into one of these three basic categories:
1. Basic form policies simply cover the common risks like damage resulting from a fire, lightning, windstorm, vehicle, aircraft or civil disruption.
2. Broad form policies normally provide the basic coverage along with coverage for any added risks. This would include things like water damage, structural collapse, and loss due to ice, sleet or weight from snow.
3. Special form policies offer the most complete coverage, as they cover everything except that which is specifically excluded. Such policies normally exclude loss due to floods; movement of the earth, damage incurred as a result of a nuclear disaster or terrorism, general wear and tear, etc.
Commercial property policies give the option of either having replacement cost coverage, actual cash value coverage or use a combination. Replacement cost coverage pays for the replacement of the lost property with new property of similar quality and type up to the dollar value of the policy. The actual cash value policy pays for the replacement minus the depreciation. Replacement cost coverage policies tend to be more expensive than actual cash value policies.
Once the type of coverage required has been decided, it is good idea to shop around and get quotes from several different agents representing several different insurance companies to get the best coverage and pricing. It is quite common for different insurers to give different quotes for exactly the same policy, so shopping around is essential to make sure one gets the lowest possible quote.
Choosing an insurance company is as crucial as choosing an insurance plan. There are a number of things that should be considered when choosing an insurer.
• Price – The cost of a policy can differ greatly from one insurer to the next without any significant change in policies. That is why it is important to compare quotes from several different companies.
• Stability – It is not uncommon for insurance companies to fail and that can be a major setback for a business. Different services like A.M. Best or Standard & Poors rate insurers according to their stability. Never consider buying insurance from a company with a rating below B+.
• Service – Obviously, one wants a company that provides service when it is needed. Be sure to research the reputation and references of each company to be sure they have a history of providing their customers with excellent service.
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• It is better to have a company that is not only registered in the state in which the business is situated, but has a physical presence there. Many companies will sell policies through other companies’ it is better to avoid these and stick to one that is physically present in the state. Searching the state insurance department website will help one to figure if an insurance company is registered in the state.
There are some insurance companies to avoid. On occasion some insurance companies will aggressively lower their premiums to gain market share. Often this proves unprofitable and they decide to exit that particular market at the end of the first policy yea. This leaves their customers searching for replacement coverage. Be careful of any company offer a “deal” simply because they are new to the market. A good rule of thumb is to limit quotes to companies that have been in the market for at least ten years.