What commercial property insurance covers
Commercial property insurance pays to repair or replace the physical assets of a business after a covered loss. The Washington State Office of the Insurance Commissioner summarizes it as coverage for the buildings, inventory and equipment where you operate your business, and notes that business interruption coverage protects you if a covered loss forces you to close. The US Small Business Administration recommends it for businesses with significant physical assets. A typical policy can cover:
- Buildings you own, or improvements you made to a leased space.
- Business personal property: furniture, machinery, computers, inventory and supplies.
- Property of others in your care, such as customers' goods.
- Business income and extra expense, usually added to the same policy.
Causes-of-loss forms: what perils are covered
Most US commercial property policies use standard ISO forms with three levels of perils:
| Form | How it works |
|---|---|
| Basic | Covers a short list of named perils such as fire, lightning, explosion, windstorm, hail, smoke, vandalism and sprinkler leakage |
| Broad | Adds further named perils, such as falling objects, weight of snow or ice, and water damage from certain system failures |
| Special | Covers all direct physical loss unless specifically excluded; the most common choice for well-protected properties |
Key exclusions and gaps
- Flood. According to the Insurance Information Institute (Triple-I), flood damage typically is not covered under a standard commercial policy. The National Flood Insurance Program offers commercial coverage of up to $500,000 for the building and up to $500,000 for contents, with a 30-day waiting period from purchase. Private flood insurance can provide higher limits.
- Earthquake. Triple-I notes that earthquake protection must be purchased separately, with deductibles that range from 2 percent to as high as 20 percent of the building's value.
- Wear and tear, mechanical breakdown and maintenance problems. Equipment breakdown cover can be added for boilers, electrical and mechanical systems.
- Virus and contamination. See our guide on pandemics and business interruption.
- Property in transit or at other locations, which usually needs inland marine coverage.
Valuation: replacement cost or actual cash value
Replacement cost pays to rebuild or replace with new property of like kind and quality, without deducting depreciation. Actual cash value deducts depreciation, which can leave a large gap for older buildings and equipment. Some policies offer agreed value, which suspends the coinsurance clause. Check the valuation for buildings and contents separately.
The coinsurance clause
Many policies require you to insure property to a stated percentage of its value, often 80, 90 or 100 percent. If you underinsure, the claim payment is reduced in proportion. Example: a building worth $1,000,000 with an 80 percent coinsurance clause must be insured for at least $800,000. If it is insured for $600,000, you carry only 75 percent of the required amount, so a $200,000 loss would pay $150,000 minus the deductible. Regular valuations prevent this penalty.
Business income and extra expense
Business income coverage pays lost net income and continuing expenses while you rebuild after covered damage, and extra expense pays to keep operating. Triple-I notes a typical waiting period of 48 to 72 hours. Choose an indemnity period long enough to rebuild and win back customers, and consider contingent business income if you depend on a few suppliers or customers.
What drives the price
Underwriters often summarize property risk as COPE: construction (frame, masonry, fire-resistive), occupancy (what happens inside), protection (sprinklers, alarms, fire department) and exposure (neighboring risks and natural catastrophes). Values, deductibles, loss history and the causes-of-loss form also affect premium.
BOP or commercial package?
Triple-I describes a business owner's policy (BOP) as a package of property insurance for buildings and contents, business interruption and liability protection, designed for small to mid-size businesses; it does not include workers' compensation, health or disability insurance. Larger or more complex risks usually buy a commercial package policy that combines property with general liability and other coverages. Compare both on our business owner's policy and commercial property pages.
After a loss
Protect property from further damage, document everything with photos and invoices, notify your insurer promptly and keep records of lost income and extra costs. Polis Re helps businesses compare property programs and request quotes; policies are issued by licensed insurers and placed through licensed producers in your state.