What commercial property insurance covers and what owners miss

Commercial property insurance pays to repair or rebuild your building, replace your business personal property, and, if you carry it, make up the rent or income you lose while repairs are made, when the damage comes from a covered cause. Most buildings are written on special form, which covers direct physical loss from any cause the policy doesn’t exclude.

The gaps owners miss sit in those exclusions (flood, earthquake, wear and tear, and sewer backup unless it’s added) and in the extra cost of rebuilding an older building to current code.

What are the three parts of a commercial property policy?

The building is the first. It covers the structure and what’s permanently part of it, like fixtures and built-in machinery and equipment, and on many forms it also covers things you own to maintain the building, such as fire extinguishers, hallway carpet, and the washers and dryers in a laundry room.

Business personal property is the second: your furniture, equipment, inventory, and the improvements you’ve paid for in a space you lease.

Income is the third part. It’s written on its own form, as rental value (often called loss of rents) for landlords, which replaces rent that stops while the building is repaired, or as business income for owners who run a business there. Business income replaces lost profit and pays continuing expenses like payroll. Extra expense pays what it costs to keep operating somewhere else in the meantime.

Say you own a 20,000-square-foot office building, use a quarter of it for your own company, and lease the rest to three tenants. You need building coverage for the whole structure, business personal property for your own furniture and equipment, rental value for the three tenants’ rent, and business income for your own operation. Owners in that spot often carry one of the last two and forget the other. Check for both.

Special form or named perils: which causes of loss are covered?

The causes of loss form decides what the policy responds to. Basic form lists specific causes: fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action. Broad form adds a few more, such as falling objects, the weight of snow or ice, and water damage from plumbing. Special form flips the approach. It covers direct physical loss from any cause unless the policy excludes or limits it, which is why people still call it all risk even though it isn’t.

Two practical differences follow. Under a named perils form, you have to show a listed cause did the damage, while under special form, the carrier has to point to an exclusion to deny it. Special form also picks up theft, which the named perils forms leave out. Older buildings, vacant buildings, and properties with a claims history sometimes get only basic or broad form, so check the causes of loss line on your dec page rather than assuming.

What does commercial property insurance not cover?

Most special form policies share the same big exclusions:

• Flood and surface water.
• Earthquake and other earth movement, though a fire that follows an earthquake is usually covered.
• Wear and tear, rust, rot, mold, settling, and other slow deterioration, because the policy pays for sudden damage, not upkeep.
• Water or sewage that backs up through drains, unless you add it back by endorsement.
• Leaks or seepage that went on for 14 days or more.
• Mechanical and electrical breakdown of equipment.
• Power failures that start away from your property.

Most of these can be bought back. Flood and earthquake come as separate policies or endorsements, sewer backup and utility service interruption come as endorsements with their own sublimits, and breakdown comes as equipment breakdown coverage. Wear and tear can’t. That one stays with the owner.

What is ordinance or law coverage, and why do older buildings need it?

Building codes change. A damaged building often has to be repaired to the code in force when it’s rebuilt, not the code it was built under. The standard building form adds only a small amount for code upgrades, $10,000 or 5% of the building’s limit, whichever is less. Ordinance or law coverage fills the rest in three parts: the value of the undamaged portion that the code forces you to tear down, the cost of tearing it down and hauling it away, and the added cost of building to current code.

Say a fire damages 40% of a 1970s office building insured for $2,000,000, and the building department won’t allow repairs to the rest without bringing the whole structure up to current code, which means tearing down the undamaged part. The policy pays for the burned 40%. Without ordinance or law coverage, the value of the 60% you had to demolish, the demolition bill, and most of the code upgrade cost land on you.

Two conditions that can shrink a claim

Coinsurance is the first. If the building’s limit is below the share of replacement cost your policy requires, usually 80% or 90%, a partial loss gets cut in proportion, and our article on the coinsurance penalty walks through the math.

Vacancy is the second. Once a building has been vacant for more than 60 days in a row, most forms stop paying for vandalism, theft, glass breakage, and water damage and cut other losses by 15%, and what changes after 60 days empty covers what counts as vacant and how to fix it.

Six questions to ask about your own property policy

1. Which causes of loss form applies to each building: basic, broad, or special?
2. Does it settle at replacement cost or actual cash value?
3. Is there a coinsurance percentage, and does your limit clear it, or does the dec page show agreed value?
4. Does it include ordinance or law coverage, and at what limit for each of its three parts?
5. Are sewer backup, equipment breakdown, and utility service interruption added, and at what sublimits?
6. How many months of rent or business income are covered, and are flood and earthquake insured somewhere else if the building needs them?

If you’d like those answered in writing, our free gap report reads your dec pages, loss runs, and schedule of values and returns a line-by-line review. When you’re ready to fix what it finds, start a building quote.