What You Need to Know When Insuring Commercial Properties
esposito insurance group
insuring commercial properties
(973) 284-1083 www.espositoinsurance.com
Q: What kind of insurance do I need for a commercial real estate investment? A Businessowners Policy is usually the best value for a small to medium sized commercial investment property, providing coverage for a building, contents, loss of business income, and premises liability in a single policy.
Q: How does an investment property get valued for insurance? Good insurance policies require that a building be valued at reconstruction cost, which is based upon labor and material costs, debris removal, demolition, and other factors. Conversely, this is usually not the same value as the market price. The purchase price of a commercial property is heavily dependent upon the income it generates, as well as supply and demand factors in the local real estate market. On a commercial policy, there is a strict penalty called coinsurance that you might be subject to if you fail to insure for the reconstruction value.
Q: Does a commercial policy cover rent that can’t be collected? A good one should provide at least 12 months of lost income if your commercial property is damaged by a covered peril. More can be added to ensure that you have enough money to cover for the rent you can’t collect while the building is being repaired. We recommend that you review your policy to make sure that the lost rent coverage corresponds to your income appropriately.
Q: What is a “surplus lines” insurance company? If you have a commercial property that has had claims, has a tenant that is considered particularly risky to insurance companies, or has some other characteristics insurance companies feel make it a high risk, you may need to obtain a policy from a “surplus lines” company. This means that the policy does not have the state’s guaranty fund backing if the insurance company becomes insolvent – which means that you wouldn’t get paid if your company goes bankrupt while you have an open claim. Also, these policies are not vetted by the state department of banking and insurance, which means that there is a higher probability of unanticipated exclusions.
Q: What should I require from my tenants? We suggest that your tenants be required to carry their own insurance as part of their lease with at least $1 million per incident/$2 million per year in liability coverage required. We also suggest that the lease require you to be named as an additional insured. Your policy for the building provides no coverage for your tenant or their belongings, which means it is to your tenant’s benefit that they carry their own insurance policy, as well.
Q: What are some exclusions typically found on a commercial policy? Flood, earthquake, sinkhole collapse, animal bites, pollution (an oil tank that leaks for example), mold, and lead are commonly excluded from commercial policies.
Want to know more? Call us to get quotes, to review your current policies or to ask any insurance question.
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That’s interesting that most insurance policies will have the value be based on the reconstruction cost which is in turn based on the material and labor costs. It’d be especially important for a commercial property to have insurance because people are there less often than a residential one, so there are fewer chances to find a problem in its early stages. It’s a good idea to find the right coverage.