Commercial Real Estate Insurance: 6 Property Coverages You Need
Commercial real estate owners typically have significant capital tied up in their properties. In addition to the financial investment of purchasing the property, you might be operating your business from the location, making the building itself critical to your profitability.
A well-thought-out insurance policy can protect your professional and personal investment in the buildings that you own. Here are the most important things to know about insurance coverage for commercial real estate property owners.
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Most Recommended Coverages For Commercial Real Estate Owners
As a commercial real estate owner, you have to make choices on what coverages you need for your own peace of mind. That being said, there are some common property coverages we always recommend our clients include in their property insurance policy.
For a more comprehensive article explaining what commercial property insurance covers and our tips for getting the best policy, check out, "Commercial Property Insurance: The Ultimate Guide."
1) Building Coverage
The most basic and important coverage listed here is that for your buildings. This coverage insures your building against various types of damage, whether it be weather related or an incident such as vandalism.
Within your commercial property insurance policy, you will list what buildings you want to cover and the amount of coverage you want per building (e.g. $2 million limit to reconstruct Building ABC).
2) Business Income
If you are unable to collect rents or operate your business inside a covered property because it has been damaged, business income coverage will cover your net income, payroll, and expenses until you are able to operate fully again.
3) Ordinance & Law
In some instances, the local government will require that you rebuild a damaged structure with upgraded materials or equipment in order to comply with municipal building codes. While the fundamental purpose of property insurance is to repair stolen or damaged property that you own, insurance does not pay to upgrade your building after a claim; the damaged portion of your building is replaced with "similar kind and quality materials."
Ordinance and law coverage addresses this gap by paying for the necessary improvements to bring your damaged property up to code, if deemed necessary by the city inspector.
4) Equipment Breakdown
Every building contains equipment, whether it be computers, photocopiers, HVAC systems, alarm systems, CNC machines, or others. Damage to these expensive systems could result in significant financial and operational issues for your business.
This coverage pays to replace that equipment and, in many instances, will pay for lost income as a result of that equipment being inoperational.
5) Flood (In Certain Areas)
If your building is close to a river or body of water, or might be susceptible to flooding due to weather events, you can purchase flood coverage to help pay for that damage.
You might be able to purchase this coverage from a standard insurance company, unless you are in an exceptionally high-hazard area. In that case, you might need to purchase flood insurance from the NFIP (National Flood Insurance Program), which is the federal government-backed flood insurance program.
Water causes some of the most expensive types of damage to a property. If your property is located in an area where flooding is a possibility, this coverage should be a priority consideration.
6) Earthquake (In Certain Areas)
Similar to the flood coverage above, you should consider purchasing an earthquake policy if your property is in an area of the country where this natural disaster is common.
Depending on where you are located, the risks, and the size of the property you want to insure, you can either add earthquake coverage to your existing property policy, get a stand-alone policy, or purchase a DIC (Difference-In-Conditions) policy.
Additional Recommendations for Commercial Real Estate Owners
Make sure your building's limit is adequate.
With the recent price increases in building materials due to inflation, it is critical that you stay on top of what it would cost to rebuild your building. There are penalties on an insurance policy for underrepresenting your building value, aside from the fact that you will not be able to construct your building back to its original value if it’s underinsured.
We recommend that you speak with a construction expert about what your building would roughly cost per square foot; or you can run a construction cost estimator with the help of your insurance broker to make sure your building is fully insured.
Ask for replacement cost on the building and roofs.
Asking your insurance broker to add replacement cost to your policy means that if your roof receives significant hail damage, your insurance will pay to replace it with brand new material. The alternatives either account for depreciation of the material or replace the roof with inferior material than the existing roof. With any coverage other than replacement cost, you will not get a full replacement or repair of the roof with an insurance claim.
If you have a roof over 10 years old, you might not be able to get this, but it is always worth asking for.
Be careful of the business types you lease to in your building.
Commercial real estate owners often overlook the risks each tenant could pose to their building and how it affects insurance. If you are choosing a new tenant, it might be worth consulting with your insurance broker to find out what types of tenants won't affect your insurance rates.
For example, a common issue is when building owners lease space to a cannabis company. Insurance companies will almost always cancel the commercial property policy, leaving you with very few options (which are usually significantly higher in premium with worse coverage). Not a good situation!
Insuring your building with a quality commercial property policy that has all the right coverages is important to protect your investment. If you have any questions about this article or would like to speak with an expert, give us a call. You can also get an instant online quote for a quick premium indication.
About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.
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