Business Property Insurance
Business property insurance is coverage that can protect your company’s physical assets from unexpected events, including fires, explosions, burst pipes, windstorms, theft, and vandalism. Physical assets covered by commercial property coverage could include the business property you own or rent, office equipment, computers, furniture, fixtures, exterior signs, important documents, inventory, and other items you count on to support daily operations.
Business Property Insurance 101
Role Of Property Insurance
Insurers are in the unique position of having encyclopedic information about the many different ways your business property could be damaged or destroyed, from fire and flooding to embezzlement. Property is also vulnerable as a result of a variety of other events such as electrical surges, accidental activation of a chemical sprinkler system or a computer virus.
Because insurers know so much about what can go wrong, they can provide your business with the insurance coverages your particular type of enterprise requires. Without appropriate insurance, property losses can easily cause the entire enterprise to fail.
The purpose of property insurance for the small business is to provide critical financial assistance in the event of a loss, so that the enterprise can continue to operate with as little disruption as possible.
Property insurance alone is seldom enough, however. It should be but one part of an overall risk management and disaster recovery plan. On average, businesses that devote resources to risk reduction and risk control have fewer insurance claims. Firms with a good record on claims generally have more insurers competing for their business, so that they are able to find coverage more easily and often at a lower price than companies that have more losses.
We cover here, in a general way, many of the more common types of property coverage. You can obtain full information about your particular policy by reading the policy itself and discussing your coverage needs with your agent or insurance company.
Property Insurance Policies
Insurers offer small businessowners a huge variety of property insurance policies. There are policies that cover only a single peril, or cause of loss, such as a fire insurance policy, a crime policy or an electronic equipment policy. The particulars of the policies vary from insurer to insurer.
And there are policies that include several different coverages in a single “package.” The majority of small businessowners find it more convenient and economical to purchase a package policy, which provides protection against many types of loss in a single policy. Insurers may create their own insurance policies. Many rely in part on a package policy format from ISO. This policy is generally referred to in the insurance industry as the Businessowners Policy (BOP). The BOP is revised periodically. The discussion here is based on provisions of the 2004 revision to the BOP.
Property Coverage In The BOP
The BOP covers any buildings the business owns and much of the property needed to run the business.
Specifically, the policy covers:
Buildings as named in the policy "Declarations," generally the first pages of the policy. Structures are covered as well as permanently installed fixtures, machinery and equipment; outdoor fixtures; items you use to maintain or service the building, such as appliances; and additions under construction. You can choose to insure your buildings at their "actualy cash value"—what they are worth—or their "replacement cost"—what it would cost to replace them with new construction. To keep up with the increasing cost of rebuilding, the policy’s limit of insurance for covered buildings will automatically rise by a set percentage each year. Be sure to discuss with your agent whether you should purchase the standard building coverage or replacement cost coverage.
Building contents, although there are a few exceptions. The policy covers most property on or near the business premises that is used in the business. This would include such things as machinery, computers, raw materials or inventory. You also have coverage for any leased property, which you are contractually obligated to insure.
Property of others that is in your care, custody and control to the extent you are legally liable for that property. This coverage is particularly important to a business, such as a computer repair shop, that earns revenue from servicing the property of others.
What About A Business That Leases Or Rents Its Premises?
If your business rents or leases its premises, your lease should describe your obligations with respect to insurance. If you are the sole tenant, you may be responsible for insuring the building. You may be responsible for continuing to pay rent even if the building is destroyed. Should a fire destroy the building, will the landlord or the tenant be responsible for debris removal? You may want to review your lease with your insurance agent to be sure your property insurance covers your obligations.
For those who rent, the BOP provides coverage for tenants' improvements and betterments. These are fixtures, alterations, installations or additions that you have put into the space.
Covered Causes Of Loss
Insurance contracts always describe in some way the perils being insured against. One type of BOP names the covered causes of loss. Another uses what insurers may call the “special form,” which states that all causes of loss are covered except those that are excluded by name. Because the special form provides broader coverage, premiums for this type of BOP may be higher.
In the BOP format that names covered causes of loss, those included are fire, lightning, most explosions, windstorm or hail, smoke from accidental fire, aircraft or vehicles (not including those owned or operated by the business itself), riot or civil commotion, vandalism, automatic sprinkler leakage, sinkhole collapse, building collapse, volcanic action and certain types of damage from water or other liquids.
Causes Of Loss That Aren’t Covered
A number of events that can cause property loss are not covered by the basic BOP. Some, such as employee dishonesty or breakdown of a steam boiler, are excluded from the basic BOP, but you can add coverage to it by payment of an additional premium. Some events, such as wear and tear, aren’t covered because they don’t meet the basic criteria for insurance of being accidental and unpredictable. (Regular maintenance of property is your responsibility.) Coverage for other events, such as flood and earthquake, aren’t needed by all businesses. Separate policies are available. Nuclear reaction and war are considered to be uninsurable, since insurers cannot predict with any degree of accuracy the frequency of such events or amount of damage likely to occur.
The following are some of the other events that can cause damage that are usually excluded from the basic BOP: power failure (except when it causes loss or damage to computers and electronic data); failure of computer hardware or software; robbery and burglary; most instances of pollution; and changes in humidity or temperature. Also excluded is coverage for missing property where there is no physical evidence to show what happened to the property, such as with a shortage discovered after taking inventory.
Be sure you understand what causes of loss are and aren’t covered by your policy. Discuss with your agent the extent to which your business risks a loss from any of these excluded events and whether you should purchase coverage for these particular risks if it is available.
Property That Isn’t Covered
The basic BOP excludes some types of property from its coverage. For many of these items, such as money and securities or outdoor signs, insurance is available as an addition to the BOP for an additional premium. For items such as motor vehicles or boats, however, you will need to purchase a separate policy. Excluded property usually includes:
Any vehicles subject to motor vehicle registration, including aircraft, autos and trucks
Bullion, money or securities
Land, water, growing crops, lawns, trees, shrubs or plants
Outdoor fences and signs not attached to the building
You should discuss with your agent what property is and isn’t covered by your policy, as well as whether you may need to purchase additional coverage for some types of property excluded from the basic BOP coverage. Since most businesses, for example, own or use vehicles, they should consider business automobile insurance.
Is There Any Coverage For Pollution?
Coverage for pollution is limited to cleaning up pollution that was caused by a covered cause of loss occurring during the policy period. For example, if vandals opened drums of a toxic chemical and poured it on the ground, the insurer would cover the cost of the cleanup, up to the policy limit, since vandalism is a covered cause of loss. On the other hand, if the toxic chemical slowly leaked into the ground because the drum was defective and had a tiny hole in it, you would not have coverage under the BOP. A defect in the drum is not a covered cause of loss under your property policy. (For help with cleanup costs in this hypothetical situation, you might find compensation from the liability insurance of the drum manufacturer or seller of the chemical.)
Business Income And Extra Expense Coverage
If your main business premises are destroyed along with much of the property you used to operate, this loss, though devastating, may be only just one part of the total. You should consider purchasing Business Income and Extra Expense Insurance (also known as Business Interruption Insurance).
Every day you are unable to operate is a day of lost income, for you personally and for the business. If the property damage or loss prevents you from providing products or services to your customers or clients, they may go elsewhere and many of them may never return. If you are to keep your employees, you must continue to pay their wages, even when the business is generating much less than normal income. It is little wonder that many businesses that lack insurance to cover the potential ongoing economic effects of a serious destructive event are unable to survive. A survey by the National Association of Insurance Commissioners found that only 35 percent of small businesses, defined as firms with fewer than 100 employees, have business interruption insurance.
Prudent businesses have disaster recovery plans that include insurance to cover lost income and extra expenses that can result from getting back on track after a covered loss.
Because coverage for lost income and extra expenses is so important to continued business survival, it is part of the standard BOP. The policy covers actual loss of net business income that would have been earned had it not been necessary to suspend operations due to a covered cause of loss. The policy also covers continuing normal operating expenses such as utility payments and payroll.
The insurer will pay, as well, extra expenses that you incur to avoid or minimize the suspension of operations. Such extra expenses often include costs to relocate, and to equip and to operate replacement premises, as well as expenses to repair or to replace property and to restore lost information on damaged valuable papers and records.
Generally, these coverages are triggered only when you have a direct loss from a covered cause of loss. If the cause of loss is an earthquake, there will be no coverage under the BOP. If your business must be closed due to someone else’s loss, there is no coverage. For example, your business could be an accounting firm located on the third floor of a large building. If there is a fire on the ground floor of the building, which does no damage in your office but causes the building to be shut down for repairs for a month, your BOP would not provide coverage for lost business income and extra expenses, since you did not have a direct loss yourself.
Seasonal Variations In Value
Your business may be one of the many that experience seasonal variations in the value of inventory, raw materials and other items. A complete loss at the height of the summer if you sell ice cream or during the winter holiday season if you have a retail operation may be several times larger than during the rest of the year. To protect against a loss in the busy season, the BOP provides for an automatic 25 percent increase in your policy limit for business personal property. The seasonal escalator applies only if you have insured your business personal property to at least 100 percent of your average monthly values during either the 12 months preceding the loss or the period of time you have been in business as of the date of the loss, whichever is less.