Safeguarding Your Commercial Real Estate: The Importance of Commercial Property Insurance

Introduction to Commercial Property Insurance: Protecting Your Investments

Commercial Property Insurance is a tough market right now.  You might be reading this because you’re starting to feel the pain in your bottom line from increased insurance costs.  If you own commercial properties and want to ensure they are safeguarded in the right way, this article is for you. Let’s dive in.

The Pitfalls of Insufficient Coverage: Relying on Purchase Price Alone

It’s not uncommon for commercial property insurance policies to be written based solely on the purchase price of the property. For instance, if you bought a building for $5 million, your agent might suggest insuring it for the same amount or according to the terms of your loan. While this approach may seem reasonable, it can have significant consequences in the event of a claim, even for minor damages.

Understanding Replacement Cost: Properly Assessing the Value of Your Property

To understand why this approach falls short, let’s first discuss the current state of the insurance marketplace for commercial real estate. Many carriers have been increasing their property insurance rates due to inflation, specifically the rising costs of building materials and labor. When determining insurance coverage for your building, we rely on a concept called replacement cost—the amount it would take to rebuild your property. It’s important to note that replacement cost is often different from the market value. For instance, while your $5 million building may have a market value of $200 per square foot, the reconstruction costs could easily reach $300 or $400 per square foot. If you’re insuring only a percentage of the total insurable value (e.g., 50-60%), you’re not adequately protecting your property.

Rising Costs and Insurance Premiums: Managing Budgetary Impact

Moreover, apart from inflation, natural disasters across the country have led to premium increases, affecting insurance companies even in areas not prone to high-risk incidents. Reinsurance rates, the insurance that insurance companies buy to mitigate risk, have risen, resulting in premium hikes for property owners nationwide. These factors highlight the importance of managing costs and considering the impact on your budget.

Coinsurance: Avoiding Financial Burdens Through Proper Coverage

Now, let’s delve into the details of coverage. I won’t go into specific coverage language here, but it’s important to understand some of these concepts.

Typically, commercial property policies include a clause known as coinsurance. This clause requires you to insure your property to a certain percentage of its total insurable value, often 80%. Failing to meet this requirement can result in unexpected financial burdens. Suppose you insured your $5 million building to only 50% of its value and incurred a $2 million loss due to a fire.

When the insurance company assesses the replacement cost at $10 million, they determine that you didn’t meet the 80% coinsurance requirement. Consequently, after your deductible, you’ll be responsible for paying a portion of the total loss, not just your deductible amount. In this example, the insurer would pay only $1 million, leaving you to cover the remaining $1 million.

Insurance to Value: Comprehensive Protection for Various Losses

Insurance to value is crucial not only for substantial losses but also for smaller ones. Many commercial property policies overlook an essential coverage called Building Ordinance and Law. This coverage is as important as insuring to value. Let’s say your $10 million building suffers a $2 million loss due to a fire, but the city mandates the demolition of 50% of the structurally unsound building. Without the appropriate Building Ordinance and Law coverage, the cost of demolishing and replacing the undamaged portion will fall entirely on you. To mitigate such risks, it’s essential to thoroughly review your policy and ensure it includes the necessary coverages.

Navigating the Complexities of Commercial Property Insurance

Understanding the complexities of property insurance is vital. It goes beyond what you see on the declarations page. The coverage language, how it is written in your favor versus the insurance company’s favor, and potential amendments play a significant role in protecting your assets.

Managing Costs: Strategies for Dealing with Rising Premiums

In light of rising costs, how can you manage additional premiums? One strategy is considering higher deductibles. With increasing premiums and rates, higher deductibles can be more reasonable. However, it’s crucial to have a retention strategy in place. Establish capital reserves, secure lines of credit, and maintain sufficient cash flow to handle potential risks. Projecting your losses and planning for the future will help you navigate the changing insurance landscape effectively.

Conclusion: Securing Your Financial Future with Comprehensive Commercial Property Insurance

Protecting your commercial real estate requires careful consideration and comprehensive coverage. By working with experienced professionals and understanding the intricacies of commercial property insurance, you can safeguard your investments and secure your financial future.

Expert Guidance from Stillwell Risk Partners: Taking Control of Risk Management

If you’re unsure about the coverage provided by your insurance policy, whether you have the right amount of coverage, or if you’re concerned about compliance with policy terms, our team at Stillwell Risk Partners is here to help. We offer expert advice and guidance to ensure you take control of your risk management.

Would You Like Us To Review Your Policies?

Request Your Proposal Here

Are you ready to save time, aggravation, and money? The team at Stillwell Risk Partners is here and ready to make the process as painless as possible. We look forward to meeting you!

Call Email Claims Payments