Commercial property insurance, a necessity for any real estate owner, covers your buildings and its contents, external signage and other unattached fixtures such as a fence or small storage shed. Whether you face a burst pipe causing water damage or a theft or vandalism, the type of insurance you buy and which insurer you choose can mean the difference between speedy claims service and a claim denial.
Choosing the best property insurance for your real estate investment is not always a clear-cut decision. To help you get the most protective coverage at the best price, ask these eight questions as you shop your insurance. These apply whether you’re buying property insurance when you purchase an investment or when your property insurance renewal approaches.
1. How Much Should My Insurance Cost?
The four main aspects to underwriting and pricing a commercial office building are construction, occupancy, protection and exposure. Construction involves the construction process used in your building. Obviously, frame is less fire-resistive than masonry so rates would be higher for a frame building. For occupancy, underwriters want to know the primary use of the building. Is it a restaurant or a computer repair shop? What you do in the building creates fewer or higher levels of risk. Protection describes how well protected the building is against fire. The location of the nearest fire department, for example, is one important protection factor. Exposure involves what’s around your commercial property. Are you located in an urban-wildland interface with a higher likelihood of fire or in a high-crime area? These factors involve your building’s exposure.
2. What Exclusions Should I Watch For in Commercial Property Insurance?
Your insurance coverage will vary according to which insurance form you choose. The Special Form provides the broadest coverage but costs more than the Basic Form or the Broad Form. Your agent should review the available coverage choices with you. Flood and earthquake coverage are not included in the standard commercial property insurance policy. The Difference in Conditions endorsement broadens your coverage and can provide additional coverages usually excluded on commercial property forms.
3. How Do I Know Which Carrier to Choose?
While most business owners consider price when buying their commercial insurance, price should not be the only consideration when you choose insurance. It’s too important a decision because “going cheap” may mean inadequate or no coverage. Look at the insurer’s financial reputation by checking their Best or Standard & Poor’s ratings. Most insurance brokers recommend you choose an “A” rated insurer, which means they are fiscally sound and creditworthy. You want the company you choose to be in business years down the road if you have a claim, because some claims take a long while to settle.
4. What is the Coinsurance Provision?
Insurers designed coinsurance clauses in commercial property insurance to help ensure that policyholders purchase enough insurance to rebuild their structures after a loss. For example, if you have an 80% coinsurance clause in your policy and you insure your building that is worth $500,000 for only $300,000, you failed to meet the coinsurance clause. Failing to meet that threshold means the insurer will reduce your loss payment by the percentage you underinsure. The formula, Actual Amount of Insurance divided by Required Amount of Insurance, times the Amount of the Loss, is the formula the carrier applies to reduce your loss payment. If you face a coinsurance penalty of 40%, for example, you’d pay $40,000 out of pocket after a $100,000 loss, plus your deductible. That’s why it’s critical that you purchase enough insurance when choosing your property limits.
5. How Much Liability Insurance Do I Need to be Sure I’m Protected?
After an injury, people often consider business owners as a “target defendant.” Despite your balance sheet, others see you as a thriving business owner and assume you may have significant assets and loads of insurance coverage. In today’s world, $1 million may not be enough to settle a serious injury claim. You must consider the legal structure of your business and the protection offered by incorporation or other legal strategies you’ve undertaken. A frank discussion regarding the industry you’re in with your agent or broker can help you decide the limits of liability insurance you may need. That decision is your “sleep at night” assurance. A single claim can blow through high limits of coverage, so an umbrella liability policy may be money well spent.
6. What If I Rent? Do I Still Need Coverage?
Most landlords will not enter into a lease agreement with you until you provide proof of insurance. This protects the landlord if someone trips and falls in the portion of the building you rent or if you cause a fire or flood the building. Depending on your landlord, you will need to show proof that you purchased liability insurance as well as property insurance that would protect the landlord’s investment if damage occurs to your location. If you have significant auto traffic from a fleet of owned vehicles, for example you run a service business from your location, the landlord may insist on proof of your commercial auto insurance, as well. The building owner may also request status as an additional insured under your policy. Not an unusual request, commercial insurance underwriters usually have no problem adding this confirmation.
7. How Can I Lower My Commercial Insurance Premiums?
Sure, you should run a price comparison for commercial property insurance. However, when comparing carriers and prices, be sure your broker provides a breakdown of the coverage differences between the carriers. Don’t compare apples to oranges in pricing because lower prices often come with less coverage. When valuing your commercial property, don’t use the market value. Use the cost to rebuild your building after a total loss. Increasing your deductibles is another way to lower costs. A higher deductible also has value if you don’t want to file claims for small losses and risk the carrier’s non-renewal. In today’s insurance market with underwriters closely scrutinizing loss runs prior to renewal, a blank loss run beats one with repeated losses any day.
8. What Happens If I Have a Claim?
If you have a claim, you can proceed in two ways. You can first notify your agent or broker, but most carriers provide a toll-free number you can call to report the claim. Within 24 hours you should hear from an adjuster who will walk you through the claims process. Your policy has certain “conditions” you must comply with for coverage to apply. This includes the prompt reporting of the claim, protecting the property from further damage, for example boarding up after a loss, and cooperating with the insurer to conclude the loss. Your claims process should go smoothly if you provide the information the adjuster requires to handle your loss. Your adjuster will obtain your statement, but don’t provide statements to anyone other than your insurer unless your adjuster approves the contact.
Your commercial property insurance and liability insurance are critical to the effective management of your business. Feel free to contact us with any questions or if you’d like a quote on your commercial real estate.