Commercial Property Insurance: Protecting Physical Assets

Why Commercial Property Insurance Exists

Your business owns or leases physical things — a building, equipment, inventory, furniture, computers, tools, signage. If a fire, storm, theft, or vandalism destroys those assets, commercial property insurance pays to repair or replace them.

Without this coverage, a single event can wipe out years of investment. Your general liability insurance does not cover your own property. GL covers damage you cause to someone else's property. Commercial property insurance covers your stuff.

What Commercial Property Insurance Covers

A standard commercial property policy covers damage to your business property caused by named perils or all perils (also called "open perils"):

Named perils policies only cover events specifically listed in the policy — fire, lightning, windstorm, hail, explosion, smoke, vandalism, theft, and a few others. If the cause of loss is not listed, you are not covered.

Open perils (all-risk) policies cover everything unless it is specifically excluded. These are more expensive but provide much broader protection. Exclusions typically include flood, earthquake, normal wear and tear, and government action.

Covered Property Types

• Buildings you own, including permanently attached fixtures
• Business personal property — Equipment, furniture, inventory, supplies, and machinery
• Tenant improvements — Build-outs and modifications you made to a leased space
• Outdoor property — Fences, signs, and landscaping (often with sub-limits)
• Property of others in your care, custody, or control

What Is NOT Covered

Standard commercial property policies exclude:

• Flood damage — Requires a separate National Flood Insurance Program (NFIP) policy or private flood insurance
• Earthquake damage — Requires a separate earthquake endorsement or policy
• Normal wear and tear — Gradual deterioration is maintenance, not a covered loss
• Employee theft — Covered by a separate crime or fidelity bond policy
• Vehicles — Covered by commercial auto insurance
• Data and software — Electronic data may need a separate endorsement

Replacement Cost vs. Actual Cash Value

This is one of the most important decisions in your policy:

Replacement Cost Value (RCV) — The insurer pays the full cost to replace damaged property with new property of similar kind and quality. No deduction for depreciation. This is the better option for most businesses.

Actual Cash Value (ACV) — The insurer pays replacement cost minus depreciation. A 5-year-old computer worth $2,000 new might only pay out $600 under ACV. You pocket the difference out of your own funds.

Always push for replacement cost coverage unless you are insuring property that depreciates very little.

Coinsurance: The Penalty Clause

Most commercial property policies include a coinsurance clause — typically 80%, 90%, or 100%. This requires you to insure your property for at least that percentage of its total value.

If you insure for less, you face a penalty at claim time. Here is how it works:

Suppose your building is worth $500,000 and your policy has an 80% coinsurance clause. You must insure it for at least $400,000 (80% of $500,000). If you only insured for $300,000 and suffer a $100,000 loss:

Payout = (Amount carried / Amount required) x Loss = ($300,000 / $400,000) x $100,000 = $75,000

You eat the $25,000 difference, plus your deductible. Underinsuring to save on premiums is a trap.

Business Income / Business Interruption Coverage

Commercial property insurance can include business income coverage (also called business interruption insurance). This covers lost revenue and ongoing expenses (like rent and payroll) when a covered event forces you to shut down temporarily.

This is not automatically included in every property policy. You may need to add it as an endorsement. Given that most businesses cannot survive months without revenue while repairing damage, this coverage is essential.

How to Determine Your Coverage Needs

1. Create a property inventory — List everything your business owns with current replacement costs
2. Get a building appraisal — Do not rely on your purchase price or tax assessment. Get a professional replacement cost estimate.
3. Review your lease — If you lease space, your landlord's policy covers the building structure, but you are responsible for your own business personal property and improvements
4. Account for seasonal fluctuations — If your inventory peaks during certain months, your coverage should reflect the maximum value
5. Update annually — Property values change. Equipment gets added. Inventory grows. Review your policy every year.

Cost Factors

Commercial property insurance premiums depend on:

• Building construction type — Fire-resistant materials cost less to insure
• Location — Proximity to fire stations, flood zones, and crime rates
• Property value — Higher values mean higher premiums
• Protective measures — Sprinklers, alarms, and security systems reduce premiums
• Deductible amount — Higher deductibles lower your premium
• Claims history — Frequent claims increase rates

The Bottom Line

Commercial property insurance is not glamorous, but it is the policy that puts you back in business after a disaster. Get replacement cost coverage, meet your coinsurance requirements, add business income coverage, and update your property values annually. The premium you pay today is a fraction of what you would lose without it.