Getting the right insurance coverage is crucial for any commercial real estate owner. Commercial policies are more complex than personal lines and protect against risks specific to investment properties and business operations. New commercial real estate investors need to understand the basics of risk management and work with an experienced agent to secure adequate protection. This guide provides an introductory overview of commercial real estate insurance fundamentals.

A Beginner's Guide to Commercial Real Estate Insurance

What is Commercial Real Estate Insurance?

Commercial real estate insurance protects owners against property damage and liability claims involving their holdings. It covers losses from perils like fire, theft, vandalism, water damage, and natural disasters. Policies also pay for repairs, legal defense costs, medical bills, and settlements resulting from bodily injury or property damage to third parties occurring on the insured premises. Unlike home insurance, commercial policies account for the higher risks and higher values associated with investment properties leased to businesses.

Why is it Important?

Adequate insurance allows property owners to transfer risk to the carrier. This ensures assets are rebuilt and income is restored following a covered loss. Commercial policies also prevent owners from paying costly legal fees and settlements out-of-pocket in the event someone gets injured on-site. For these reasons, carriers require minimum insurance levels as a condition of commercial mortgages. Lenders need to guarantee their collateral can be repaired or replaced. Insurance is also often mandated in commercial property leases.

Common Types of Commercial Real Estate Insurance

Several types of policies are available to tailor coverage for different kinds of commercial properties and operations:

• Property insurance reimburses repair and reconstruction costs if buildings suffer damage. It covers the structure and often permanently installed equipment like HVAC systems.
• General liability insurance pays for bodily injury and property damage to third parties occurring on-premises because of business operations. It covers legal defense expenses and settlements.
• Business income insurance reimburses lost income when damage shuts down business operations on site. It helps pay fixed costs during rebuilding.
• Equipment breakdown insurance repairs or replaces mechanical equipment like electrical systems, boilers, and air conditioning units after breakdowns.
• Builder’s risk insurance ensures properties under construction against damage during the building phase. It converts to permanent property coverage after completion.

Other common commercial policies include commercial auto, workers' compensation, cyber liability, and umbrella insurance. It's critical to work with an experienced agent to review all potential risks and build a tailored program.

Key Factors Impacting Cost

Multiple variables determine commercial real estate insurance pricing. Carriers evaluate the likelihood and severity of potential claims based on:

• Property type - Warehouses have lower risks than mercantile buildings. Properties undergoing renovations pose greater hazards.
• Construction - Masonry structures have lower fire risks than framed properties. Properties with updated electrical systems pose fewer hazards.
• Location - Coastal and urban areas face more expensive risks like floods or civil unrest. Properties in remote rural areas often cost less.
• Safety features - Buildings with ample exits, sprinklers, alarms, and 24/7 security monitoring qualify for discounts.
• Tenant mix - Properties leased to restaurants or industrial operations have higher liability and property risks.
• Claims history - Frequent past losses lead to higher premiums.
• Deductible level - Higher deductibles lower annual premiums but increase out-of-pocket costs per claim.

New commercial investors should discuss these variables with agents to determine optimal coverage solutions for their properties.

Key Coverages to Evaluate

Though commercial policies vary based on individual risks and local regulations, some of the most important coverages for real estate investors to review include:

Property

• Rebuilding costs for damaged structures
• Business income loss during shutdowns
• Equipment breakdown from electrical surges or mechanical issues
• Backup of sewers and drains
• Falling objects like facades or signage
• Collapse from structural failure
• Water damage from any source like floods, seepage, or burst pipes

General Liability

• Slip and falls
• Food poisoning or liquor liability
• Valet parking mishaps
• Negligent security like poor lighting or broken gates
• Sports and special events liability

Umbrella

• Higher liability limits above general liability and auto
• Additional excess coverage for catastrophes

It's important to consult local regulations as some states mandate specific coverages like terrorism or flood insurance beyond these common categories.

Top Insurance Carriers

The most prominent commercial real estate carriers include:

• AIG
• Travelers
• Chubb
• Liberty Mutual
• The Hartford
• Zurich
• Berkshire Hathaway

These national carriers have experience insuring all types of commercial real estate across an array of industries. Regional providers can also be a good option in some markets. Investors should compare quotes from several highly rated carriers when buying new policies or renewing coverage.

How Much Does it Cost?

Commercial insurance rates vary significantly based on the above risk characteristics. As a general guideline, owners can expect to invest around $1 per $1,000 in property value for property coverage. For a 50,000-square-foot office building valued at $5 million that equates to around $5,000 annually. General liability premiums often range from $.50 - $2.00 per $1,000 in revenue depending on tenant mix. Umbrella policies cost $500 - $2,000 per million in additional liability coverage. New investors should get quotes specific to their properties and operations.

Top Tips for Buying Coverage

Follow these best practices when purchasing commercial real estate policies:

• Involve an experienced broker or agent to help assess risks and negotiate optimal terms. DIY insurance often leads to gaps.
• Get quotes from several carriers to compare pricing. But also look closely at exclusions, sub-limits, and deductibles that can vary significantly between insurers.
• Consider a master policy to cover multiple properties under one contract vs individual policies. This simplifies renewals and can mean better rates for bundled risks.
• Don't focus only on premium prices. Ensure liability limits align with replacement costs and potential exposure. Higher limits mean more protection.
• Review exclusions like earth movement to see if critical risks require separate coverage.
• Make sure policies name mortgage lenders as additional interest or loss payees so their financial stake is protected.
• Disclose all potential risk concerns thoroughly rather than let carriers discover problems post-claim.
• Re-evaluate policies at least annually as properties age, tenant mix changes, or valuations increase.

By partnering with an experienced agent and taking time to understand risks, new commercial real estate investors can secure insurance protection that allows their holdings to deliver returns and equity over the long term. Comprehensive coverage provides essential peace of mind.

Frequently Asked Questions

Here are some common questions new commercial real estate investors have about insurance:

What risks are not covered by standard policies? Most carriers exclude floods, earthquakes, terrorist acts, asbestos, mold, and gradual pollution damage. Separate policies can provide coverage extensions. War is also commonly excluded. Review policy documents closely.

Can I get one policy to cover a portfolio of commercial properties? Yes, master policies covering multiple properties under the same ownership can provide efficiency and often discounted pricing. Make sure the insurer has a strong track record managing mixed commercial risks.

Does my homeowner’s insurance cover rental properties? No, home policies explicitly exclude commercial risks associated with leased properties. Separate landlord or commercial property policies tailored for rental dwellings are required.

What level of liability coverage is recommended? Limits of $1 million per occurrence and $2 million aggregate are usually recommended at a minimum. Higher limits are advisable for hospitality, habitational, and higher-risk properties. Discuss optimal limits with an experienced agent.

Who pays claims if both my policy and the tenant's policy have coverage? In shared losses, your policy would cover building/structural damage and the tenant's policy would cover their possessions like furniture or equipment. For liability claims, your policy generally acts as primary insurance.

Can I handle a claim directly with the insurer or do I need to involve my agent? While claims can be reported directly, it's highly advisable to involve the agent who placed your policy to act as an advocate with adjusters and maximize claim payouts.

How can I lower my insurance costs? Raising deductibles, installing safety features like security systems and sprinklers, improving electrical systems, and keeping properties well-maintained are some of the best ways to reduce premiums over time.

Conclusion

Structuring an optimal commercial real estate insurance program requires balancing premium costs with adequate protection for property assets and potential liability risks. While premiums are an operating expense, proper coverage provides financial security if the worst occurs. By partnering with an experienced broker, understanding factors that influence pricing, reviewing policy provisions closely, and re-evaluating coverage as portfolio needs evolve, investors can secure insurance protection that enables their commercial holdings to deliver lasting returns.