What Is Commercial Property Insurance?

A business owner looks at a computer.
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DEFINITION

Commercial property insurance is a kind of insurance policy that covers the partial or full cost of repairing or replacing business-owned buildings, equipment, and other property that’s been damaged or destroyed by a fire, windstorm, or other covered peril.

Definition and Examples of Commercial Property Insurance

Commercial property insurance is a type of insurance policy that covers loss or damage to physical assets owned by a business, such as buildings, equipment, and office furniture. The insurance covers damage to insured property by a cause of loss covered by the policy. It helps protect the financial integrity of a business so it can continue to operate after a physical loss.

  • Alternate names: business property insurance, business hazard insurance

An example of commercial property insurance is a business owner’s policy (BOP), a package policy designed for small businesses. A BOP includes commercial property and general liability coverages. The property section covers buildings, machinery, and other business personal property located at the business’s premises described in the policy declarations.

Some commercial property policies limit coverage to losses caused by perils named in the policy (“named perils”). Others cover losses caused by any peril that’s not specifically excluded (“all-risk”).

How Commercial Property Insurance Works

Commercial property insurance covers property your business owns and uses in its operations. Most policies cover categories of property rather than specific items. For example, a business owner’s policy covers two broad classes of property: buildings and business personal property. Property your business owns is usually covered if it meets the policy’s definition of “buildings” or “business personal property.”

Most commercial property policies (including a BOP) are intended to cover property situated at your business premises. Accordingly, they generally afford little or no coverage for items at offsite locations, such a job site. Many policies automatically include replacement-cost coverage for most (but not all) insured property. When property insured for its replacement cost is lost, damaged, or stolen, the insurer typically pays the cost of repairing or replacing it. Property that isn’t eligible for replacement-cost coverage is usually valued according to its actual cash value.

Business property insurance can be beneficial whether you own or lease your business location. If you own the building, a property policy will likely protect you from financial losses that result from damage or destruction of the building or its contents. If you lease your business premises and your landlord has insured the building, a property policy will cover losses you incur due to physical damage to furniture, equipment, and other property your business owns or, in some cases, rents.

Commercial landlords are usually (but not always) responsible for purchasing property insurance on the building. If you lease your business premises, read your lease carefully so you understand your insurance obligations.

Types of Commercial Property Insurance

While commercial property insurance is a fairly broad category, most property policies fit one or more of the following four categories.

Direct Damage

Direct damage insurance is what most people think of when they hear the words “property insurance.” It covers the cost to repair or replace buildings, office furnishings, equipment, and other business-owned property that’s been physically damaged or destroyed by an insured peril. Direct damage insurance is typically included in BOPs and commercial package policies.

Time Element

Time element insurance covers the loss of use of physical property that’s been damaged by a fire or other covered peril. Two examples of time element insurance are business interruption (also called business income) and extra expense coverages.

Business interruption insurance covers income a business loses as a result of its operations being shut down due to damage. Extra expense insurance covers additional expenses (over and above normal expenses) a business incurs to keep its operations running or to minimize a shutdown after a physical loss.

Both business interruption and extra expense coverages apply during the “period of restoration,” which begins when physical loss occurs and ends when the damaged property is repaired or replaced.

Inland Marine

Inland marine insurance is designed to cover property that moves from place to place over land. It covers equipment, cargo, and other movable items wherever they’re located, including while they’re in transit. Inland marine insurance differs from ocean marine insurance, which covers goods transported over the water.

Inland marine policies are used to insure a wide range of property, including construction machinery, computer equipment, and cameras. Unless they remain on the business premises, such items aren’t typically covered by standard commercial property or business owners’ policies.

Crime Insurance

Crime insurance protects businesses from financial losses caused by the criminal acts of others. A variety of crime coverages are available. For instance, employee theft insurance covers the value of money or property stolen by a dishonest employee. Computer fraud and funds transfer fraud insurance covers financial losses you sustain, for example, when you or an employee transfer money in response to a fake email and other scam inflicted on you via a computer. Crime coverages are typically coverages you have to add to your commercial property policy.

Key Takeaways

  • Commercial property insurance covers the cost to repair or replace business-owned property such as buildings, equipment, and supplies that have been damaged or destroyed by a covered cause of loss.
  • Many small businesses obtain commercial property insurance by purchasing a BOP or commercial package policy. Such policies mainly cover property situated at the business premises.
  • Businesses need commercial property insurance whether they own or lease their business premises.
  • Most commercial property insurance falls into one of four categories: direct damage, time element, inland marine, and crime insurance.

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