Insurance may not seem sexy, but you better have it when building your real estate empire. If your property isn’t insured, it can disappear in one bad storm. Don’t be that person who sees their fortune washed away overnight simply because they never purchased insurance. When writing your company’s real estate business plan, remember that commercial property insurance is first-party coverage for your property. It is an important part of any real estate investor’s business. Don’t know what it is? Well, let me tell you…

What is Commercial Property Insurance?

Insurance agent explaining insurance policy to customer in office room.

So, what is commercial property insurance? To keep it simple: commercial property insurance is a small business policy that will repair or replace your damaged property in an emergency or unforeseen issue. Insurance is divided into third-party coverages (think liability) and first-party coverage. First-party coverage takes care of what your business owns when damaged in a loss or stolen. Commercial property insurance is a first-party coverage without liability protection for your business. 

If you are a typical real estate investor and own one or more commercial buildings–think a brick-and-mortar business or a strip mall where you rent out office space, then you’ll want commercial property insurance. Before purchasing a policy, you should understand a few terms. Insurance companies sometimes use “real property” when referencing a commercial building. Your investment property will come with a valuation. Valuation will be either actual cash value (ACV) or replacement cost value (RCV).

  • Actual cash value (ACV): ACV considers the property’s depreciation when calculating the total payout if a claim is filed. 
  • Replacement cost value (RCV): If your policy is written with RCV, the insurance company will pay the true cost to replace or repair your property.

Let’s say there is a significant wind storm, and your building has damage to its roof and siding. If your policy has RCV, the insurance company will pay whatever the cost is to restore your building to its pre-loss state. Alternatively, if it is an ACV policy, the insurance company will factor depreciation into the roof and siding cost, which will be removed from the payment issued to your company.

A big part of understanding commercial property comes down to its usage: is this property’s primary use for a business or as the personal residence of the owner? This means that commercial property can include residential property if you are renting out multiple units, such as a five-unit apartment. However, homeowners insurance is strictly a personal policy for a residence that is not being used for a business, whether that’s a home-based business or a rental unit, and the owner of the property resides there.

Business Owner’s Policy (BOP) 

While there are other types of commercial property insurance, the only one that matters for a real estate investor is a business owner’s policy or BOP. This policy gives your business several layers of protection by combining general liability insurance, property insurance, and lost business income into one policy. Any investor with an actual property management office should consider a BOP since it includes premises liability. 

What Does Commercial Rental Property Insurance Cover?

business office space with desk, computers and chairs

Commercial property insurance covers your property up to the agreed-upon limit. This property falls into two different categories.

  • Buildings: This can be an apartment complex, a commercial building, or a multifamily unit. If you own several homes that you rent out, some insurance companies will let you get one policy for all of them, and then each home is simply a listed location of coverage on the policy. In that scenario, you will want to look into getting a blanket policy for your properties.
  • Contents: Contents can be the furniture or equipment (like office equipment) that your business owns. Friendly reminder: there’s no need to insure anything owned by tenants of your property.

Keep in mind that commercial property insurance almost universally works on a named peril basis. Named peril means coverage is only provided for losses named in the policy. Some common types of commercial property named losses are fire, wind, and theft.

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Mobile interface (Source: Obie)

Real estate investors looking for quality commercial property insurance quickly should check out Obie. Obie is one of the only providers that lets you get a quote online in minutes. It has lots of great added protection built into its policies, like an inflation guard to help offset the rising cost of construction if you have to file a claim. Get a quote from Obie today.

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Commercial Property Insurance Cost

When it comes to what you’ll end up paying for insurance, there are so many factors that it is difficult to give anything other than an estimate. Insurance broker Insureon reports that real estate investors pay approximately $430 monthly for commercial property insurance. So, when estimating the costs of your real estate business, it is reasonable to assume you’ll pay over $100 monthly for property insurance. 

There are multiple data points insurers will focus on to determine your premium, but the more common ones are: 

  • Location: Location matters for several reasons. Living costs–including labor and materials, are higher in some zip codes than others. Since the insurance company has to handle that expense, the location will be factored into their determination. The location also matters because if your property is in an area that is prone to flooding, hurricanes, tornadoes, or wildfires, the insurance cost will be higher than if you are investing in property in a region that typically does not experience natural disasters. 
  • Property: the age and condition of the property matter to insurers. When was the last time the electric wiring was updated or the roof was replaced? Be prepared to answer specific questions like this and give an accurate figure for the property’s value. Some insurance companies have a property limit of $5 million, so you may have to shop around if you own multiple properties or an expensive building. 
  • Claims: If your business has filed a claim in the past, even if it was due to a natural disaster and beyond your control, the insurance company will consider that. 
  • Deductible: The deductible is the amount you agree to pay out of pocket whenever a loss occurs. The higher the deductible, the lower the premium, and vice versa. So, if your deductible is $1,000 and you have a loss of $15,000, the deductible amount is subtracted from what the company will pay. The insurance company will then pay you $14,000.

Insurance companies will inspect the property to ensure it is in the shape and condition you report. They may send someone out in person, or companies increasingly use drones. Regardless of the method, the company may not tell you anyone is coming to inspect the property.

At the end of the day, commercial rental property insurance coverage isn’t going to be cheap. But, it is a necessary expense because the cost of not being insured poses a greater risk to the viability of your business. 

Is Commercial Property Insurance Right for You? 

Real estate investors need insurance to protect their property, but what is the right type of commercial insurance for rental policy? The right policy for you may not be a standard commercial property insurance. It depends on the type of investment you have made.

Commercial property insurance is right for you if you: 

  • Own a commercial building (restaurant, strip mall, or a warehouse)
  • Own multiple homes that you rent out under a rental company
  • Own multiple properties in different zip codes

Commercial property isn’t the right choice if you:

  • Are a real estate agent and only list property. For that, you’ll need errors & omissions insurance.
  • If you are a homeowner looking to rent your old home, you’ll want a landlord insurance policy. 

Frequently Asked Questions (FAQs)

Bringing It All Together 

As a property investor, you’ve probably heard the phrase “protect your investment.” Typically, that means you diversify your portfolio. But, it is also crucial to protect your investments with commercial property insurance. Whether it is a building, a condo, a multiunit complex, or the contents inside of the property management office, commercial property insurance plays a critical role in a robust business model.

Have other questions about commercial insurance? Let us know in the comments below!