Acquiring proper insurance coverage is crucial for any commercial real estate owner or manager. There are many risks involved in owning and operating commercial property, so having adequate protection is essential. This article will explore the most common types of coverage offered under commercial real estate insurance policies. We'll also answer some frequently asked questions to help you better understand this important topic.

Types of Coverage in Commercial Real Estate Insurance

Overview of Commercial Property Insurance 

Commercial property insurance protects physical buildings, contents, loss of income or rents, and liability exposures. It is designed for businesses that own the structures where they operate, rather than leasing their space. Coverage applies to risks of direct physical loss or damage, with some exclusions.

The commercial property coverage part insures the physical buildings and structures themselves. This covers losses from common risks like fire, wind damage, vandalism, theft, equipment breakdowns, and more. The building coverage limit should equal the cost of replacing the structure.

Contents coverage applies to business personal property inside the building, such as furniture, inventory, supplies, machinery, and tenant improvements. A coinsurance clause typically requires insuring contents at 80% or more of their replacement value.

Business income coverage, also called business interruption, covers income lost due to suspended operations from a covered loss. There is often a waiting period before this coverage kicks in. Extra expense coverage pays for unavoidable costs above and beyond normal operating expenses.

Major Types of Coverage

There are several main types of coverage offered under standard commercial real estate insurance policies:

Property Damage Insurance

This covers the physical buildings, structures, and contents against losses from perils like fire, theft, vandalism, windstorms, hail, explosions, smoke damage, falling objects, volcanic eruptions, and more. There are exclusions for floods, earthquakes, war, and nuclear hazards.

General Liability Insurance

General liability insurance is essential coverage that protects against third-party bodily injury, personal injury, advertising injury, and property damage claims arising out of premises ownership or operations. It covers legal costs for defending against covered claims.

Loss of Rents Insurance

Loss of rent or rental value insurance provides coverage if a covered loss makes rented space uninhabitable. It covers lost rental income during repairs or rebuilding. Coverage limits should equal at least one year's worth of rent.

Equipment Breakdown Insurance

Also called boiler and machinery insurance, this covers damage to equipment like HVAC systems, electrical panels, and elevators when they break down. It pays for repairs or replacement and business income losses.

Crime Insurance

This insures against financial losses from employee dishonesty, robbery, burglary, theft, forgery, and computer fraud. It covers loss of money, securities, and other property.

Parts of the Commercial Package Policy

The standard commercial package policy (CPP) combines common lines of coverage that most businesses need into one policy. This covers property, general liability, and common endorsements. There are three main parts:

Commercial Property Insurance

As outlined above, this covers buildings, contents, loss of income/rents, and equipment breakdown perils. All physical assets should be insured to their replacement value.

Commercial General Liability Insurance

The general liability section provides essential protection for third-party bodily injury, property damage, personal injury, and advertising injury claims. Minimum limits are typically $1 million per occurrence.

Endorsements and Additional Coverages

Endorsements add supplemental coverages like employment practices liability, cyber/data breach protection, and more. Limits can be increased with umbrella or excess liability policies.

Typical Lines of Coverage in a CPP

Beyond the major sections outlined above, a commercial package policy often contains additional lines of coverage:

Business Personal Property
Building Coverage
Business Income and Extra Expenses
Equipment Breakdown
Liability Insurance (general, products, completed operations)
Medical Payments Coverage
Damage to Premises Rented to You
Personal and Advertising Injury Liability
Cyber/Data Breach Coverage
Employment Practices Liability
The policy can be customized with endorsements to meet the specific risk management needs of the commercial real estate venture.

Required Components of a CPP
There are certain components required in a standard ISO commercial package policy:

Declarations Page: Names the insured, address, policy period, covered premises, coverage lines, and limits of insurance.
Common Policy Conditions: Standard conditions apply to all lines of coverage like cancellation, premiums, inspections, and more.
Commercial Property Coverage Form: Ensures buildings, structures, contents, and business income.
Commercial General Liability Form: Covers third-party bodily injury, property damage, and personal/advertising injury.
Endorsements: Amendments that add or exclude coverage.
Schedule of Forms and Endorsements: Lists all forms and endorsements included in the policy.
Loss Payment Condition: Details how losses will be valued and claims settled.
Example of a Commercial Package Policy
Here is an example of a typical commercial package policy for a small retail business:

Declarations Page
Named Insured: ABC Company
Policy Period: 1/1/2023 to 1/1/2024
Description of Premises: 1234 Main Street, Anytown, USA
Coverages & Limits:
Building Coverage: $500,000
Contents: $250,000
Loss of Income: $100,000
Liability: $1 million per occurrence/$2 million aggregate
ISO Commercial Property Form
Covers building, contents, income, equipment breakdown
ISO Commercial General Liability Form
$1 million per occurrence/$2 million aggregate
Endorsements & Additional Coverages:
Employment Practices Liability
Cyber Liability
Equipment Breakdown
This example outlines the key components of a standard commercial package policy for a small business owning commercial real estate.

What is Package Coverage Insurance?

Package coverage insurance combines multiple lines of insurance coverage into one policy. It is also called a business owner policy (BOP) or commercial package policy (CPP). These package policies bundle:

Property insurance
General liability insurance
Business income insurance
Other common coverage options
Purchasing coverage together in a package can be more convenient and affordable than buying separate insurance policies. Package policies are commonly used by small- to mid-sized businesses.

What is the Package Insurance?

A package insurance policy bundles two or more coverage lines into one policy document. It is issued under one contract at a combined premium. The idea is to meet all the essential insurance needs of a business in one package.

Package policies provide coverage options like:

Business property insurance
General liability
Commercial auto
Workers Compensation
Cyber/data breach
Employment practices liability
Umbrella liability
These policies are commonly used by retail stores, offices, wholesalers, manufacturers, restaurants, apartments, and other small- to medium-sized enterprises.

What is a Combination Policy?

A combination policy is another term for a commercial package policy or business owner's policy. It combines standard lines of insurance including property, liability, business income, equipment breakdown, and crime coverage.

Combination policies are a convenient way for businesses to obtain broad, comprehensive coverage in one contract. They can save money compared to purchasing several separate policies.

These policies are commonly used by small retail shops, offices, wholesalers, distributors, apartments, restaurants, and other small commercial ventures that have straightforward insurance needs.

What is a Split Policy?

A split policy divides insurance coverage for a risk between two insurers. Part of the coverage is written by one company and the remainder by a second insurer. This allows high limits to be attained when needed.

For example, a business may secure a primary commercial property policy with a $500,000 limit from one insurer. They then get a secondary policy from another company that provides an additional $1 million in excess coverage. This is a split policy providing a total of $1.5 million in coverage.

Split insurance can also refer to dividing coverage between admitted and non-admitted insurers. An admitted market policy provides the primary layer, while excess coverage is written by a surplus lines insurer.

What is a Multi-Policy?

A multi-policy discount is applied when a client places several insurance policies with the same insurer. Purchasing multiple policies from one company can result in premium savings of up to 15%.

For example, a business may have the following policies with an insurer:

Commercial property
General liability
Commercial auto
Umbrella liability
Workers Compensation
Packaging these together qualifies the policyholder for a multi-policy discount. This provides an incentive for clients to consolidate coverage with fewer carriers.

Examples of Split Policies
Here are some examples of how a split insurance policy works:

Property Split: $500,000 limit primary property policy + $1 million excess property policy
Casualty Split: $1 million primary general liability policy + $5 million umbrella liability policy
Deductible Split: Primary policy covering losses over $10,000 + Secondary policy for losses under $10,000
Admitted/Non-admitted Split: $1 million primary admitted policy + $5 million excess non-admitted policy
Per Risk/Per Occurrence Split: Primary policy per risk limits + Excess per occurrence limits
These examples illustrate the various ways risks can be divided between two policies using a split structure.

Examples of Coverage Limits
Here are some examples of common coverage limits seen in commercial insurance policies:

Property Insurance
Building coverage limit: $500,000
Contents limit: $250,000
Loss of income limit: $100,000
General Liability
Per occurrence limit: $1 million
General aggregate: $2 million
Products aggregate: $2 million
Umbrella Liability
Per occurrence: $5 million
Aggregate limit: $5 million
Cyber/Data Breach
Response expenses: $500,000
Defense and damages: $1 million
Policy aggregate: $5 million
Setting appropriate limits is an important part of managing risks through insurance. Higher limits may be needed for larger, complex risks.

What is Single Limit Coverage?

Single-limit coverage provides an overall policy limit that applies per occurrence. It consolidates multiple coverage limits into one shared maximum limit. For example, a commercial auto policy may have:

$1 million single limit covering:
Bodily injury and property damage liability
Medical payments
Uninsured/underinsured motorist coverage
The single limit can be applied against any covered loss. Once the limit is exhausted, the insurer will no longer pay.

Single-limit policies are simpler compared to split-limit policies. However, they provide less flexibility in paying individual types of claims.

What is the 7 70 Method?

The 7 70 method sets liability insurance limits for smaller businesses as follows:

Primary General Liability Limits - $700,000
Umbrella Liability Limits - $7 million
This provides $7.7 million in total coverage. The primary layer covers routine small claims. The umbrella provides higher limits for severe losses.

This approach helps smaller entities obtain ample coverage at a reasonable cost. The bulk of the protection is provided through lower-cost umbrella coverage rather than expensive high primary limits.

The 7 70 method is a simple benchmark for setting liability limits. Actual needs may vary based on the size, sector, claims history, and risk profile of the business.

Conclusion
Choosing the right insurance coverage is key for commercial real estate ventures. Property, liability, loss of income, equipment breakdown, and crime policies all play an important role. Understanding the options provided under commercial package policies makes it easier to customize protection to meet your risk management objectives. We hope this overview gives you greater insight into the major types of commercial real estate insurance coverage available. Discuss your specific needs with an experienced agent to craft a program providing solid protection for your business.