Posted on May 17, 2014
Business owners invest a large amount of money into the buildings that house their companies. Commercial building or property insurance provides real protection to those buildings and the equipment, inventory and furniture inside. This vital coverage insures both the real and personal property of a business.
Types of Property Insurance
Commercial property insurance policies are written in one of two ways - as either a named peril policy or an all risk. Named peril policies mainly cover specific perils or events such as fire, wind, hail, theft or explosion. These policies will only cover those hazards that are named in the policy. All risk policies protect again losses caused by perils that are not specifically excluded within the policy. All risk does not actually mean that all losses are covered. Instead, it refers to losses that will not be covered. Examples of excluded perils may be windstorm in coastal areas and earthquakes in states with heavy seismic activity. Usually the excluded perils can be covered by purchasing a separate policy.
Property Insurance Value Determinations
The value of insured property is determined when the business property policy is first written. The insurance may be purchased with a replacement cost or actual cash value basis.
For instance, when a property is damaged by a fire or explosion, replacement cost insurance would pay whatever amount is needed to rebuild the building with like materials without deducting anything for deprecation. Essentially, it would pay to rebuild the building at today's prices. Actual cash value, on the other hand, would pay an amount after deducting depreciation.
Keeping track of property value is essential for business owners. Each year review the policy to make sure there is enough coverage in force to pay for repairs or replacement. As inflation rises over time and values depreciate or decrease, the coverage may need adjustment to maintain full property protection.
How much Property Insurance is Enough?
Businesses should insure their properties at a minimum of 80 percent of value. This coinsurance value is the minimum insurance needed before an insurance company would reimburse of partial losses.
For example, if a company purchases replacement cost insurance for a building they value at $100,000. They may insure it for $80,000 allowing for 80 percent coinsurance. Let's say the building experiences hail storm damage of $40,000. When the insurance company reviews the claim, they determine that the building's actual replacement cost is $120,000. With the 80 percent coinsurance, the company is actually underinsured. They should have purchased building coverage for $96,000 not $80,000.
Other Property Insurance Types
Some companies need specialized property coverage due to their size or industry. Because property insurance policies may be customized to fit each individual company's needs, the following types of property insurance may be added to policies for more comprehensive coverage:
Builders Risk - covers buildings during the construction process.
Business Interruption - provides coverage for loss of income due to covered property damage or destruction. This coverage will reimburse owners for rent, salaries and other expense during the time business must be closed for repairs.
Inland Marine - covers property or equipment while in transit or when customer personal property is on business premises. Examples of companies needing this coverage include dry cleaners, contractors and equipment rental firms.
Glass Insurance - provides all risk coverage for properties with extensive use of glass on their buildings.
Crime - protects companies from theft of inventory, fixtures and money. It will also cover counterfeit currency passed to employees or dishonest employees.
Boiler & Machinery - protects companies from common exclusions on commercial property policies. This property insurance pays for damage caused by boiler explosion, equipment breakdowns and electrical arcing.
Fidelity Bonds - protects companies from dishonest employees.
Flood Insurance - is usually excluded from commercial property insurance. This additional insurance will pay for flood damage to buildings and business personal property.
Earthquake Insurance - is usually added as an endorsement to cover volcanic eruptions and earthquake damage.
Building Ordinance - this insurance covers the cost of repairing and replacing property in compliance with local building codes.