Commercial Property Insurance

By: Thomas C. Pavlik, Jr.

Commercial Property Insurance

The recent fire on Adams Street downtown has raised some interesting questions about commercial property insurance coverage, especially from a tenant’s perspective.

When leasing a commercial space, tenants generally focus on the main terms of the lease – typically the rent and the question of which party bears the expense of maintenance and repairs.  Insurance clauses are often generally skimmed over, if read at all.  However, in light of recent events, one crucial aspect that should not be overlooked is commercial property insurance. This insurance is typically associated with the property owner, but understanding its implications from a tenant's perspective is vital for protecting your business and ensuring compliance with lease agreements.

What is Commercial Property Insurance?

Commercial property insurance provides coverage for physical assets such as buildings, equipment, and inventory.  It protects against various risks, including fire, theft, vandalism, and certain natural disasters.  While this insurance is primarily the responsibility of the property owner, tenants should be aware of how it impacts their operations and responsibilities as well as what coverage they should have for themselves.

Most commercial lease agreements will outline specific insurance requirements.  It’s common for landlords to require tenants to carry their own insurance policies to protect their business assets. This can include:

• General Liability Insurance: Covers bodily injury and property damage claims made against your business.
• Contents Insurance: Protects the tenant’s personal property within the leased space, such as furniture, equipment, and inventory.
• Business Interruption Insurance: Covers lost income if your business cannot operate due to a covered peril.
• Workers’ Compensation Insurance: This mandatory coverage provides benefits to employees who suffer work-related injuries or illnesses. It covers medical expenses and lost wages while protecting your business from employee lawsuits.

Likewise, most commercial leases require the owner to carry fire and extended coverage insurance on the structure for its “full replacement coverage.”  Generally speaking, this kind of insurance won’t cover anything that a tenant brought to the space or that it could take out at the end of the lease – hence the need for a tenant to have good contents coverage. 

From a tenant’s perspective, it’s very important to make sure that your landlord actually has insurance in an amount necessary to fully repair or replace the structure.  Otherwise, in the event of a major catastrophe, an underinsured landlord may not be in a position to actually make the necessary repairs – leaving you, as the tenant, out in the cold.  Underinsurance can be one of the most significant problems that landlords and tenants might face, but others include:

• Exclusions and Limitations: Policies often contain specific exclusions that can affect fire claims.  For instance, certain types of fire damage may not be covered if the fire is deemed to have resulted from negligence or failure to comply with safety regulations.
• Debris Removal and Cleanup Costs: While property damage is covered, policies may have specific clauses about debris removal.  If the cost of cleanup exceeds the coverage limits, business owners may have to bear these expenses.
• Proof of Loss: Insurers typically require a detailed proof of loss to process claims.  This includes documentation of damaged items, loss of income, and any additional expenses incurred due to the fire.  Collecting this information can be time-consuming and overwhelming in the aftermath of a disaster.
• Adjuster Disputes: Insurance adjusters evaluate claims on behalf of the insurance company, and their assessments can lead to disputes.  Similarly, there may be disputes between the carriers for both the tenant and landlord.

Choosing the Right Coverage

Selecting the appropriate coverage requires careful consideration. Here are some key steps to ensure you choose the right policy:

1. Assess Your Risks: Evaluate the specific risks associated with your business and the leased space.  This includes potential liabilities, the nature of your operations, and the value of your assets.  And, again, it means making sure your landlord is properly insured.
2. Consult with Professionals: Engaging with an insurance broker or agent who specializes in commercial insurance can provide valuable insights. They can help you navigate the complexities of policies and recommend coverage that aligns with your business needs. 
3. Understand Policy Exclusions: Every insurance policy has exclusions. Be sure to understand what is not covered and if you need additional riders or coverage.
4. Review Limits and Deductibles: Assess the policy limits and deductibles to ensure they meet your financial situation.  Higher deductibles often result in lower premiums, but they can also lead to higher out-of-pocket costs in the event of a claim.

Ryan Augustine, of Troxell Insurance, counsels that “When a tenant leases space and puts resources into making the space functional for its own business needs, it needs to make sure it has Tenants Improvements and Betterments (TIB) coverage.  The property owner’s insurance will only rebuild the building back to the function of its original use, which could be just a shell of a strip mall suite.  With TIB coverage the tenant will be able to rebuild the interior of the structure back to the necessary parameters it needs to run its business.”

Ryan adds that “Business income coverage is crucial – in a lot of claims the property damage amount and the business income loss are both large, especially in the hospitality and retail area.  There are some situations where a property may not be badly damaged, but the use of the property has stalled out.  In those situations, business income coverage is continuing to pay out, but the property damage claim may not be extensive.”

Conclusion

As a tenant in a commercial property, understanding the nuances of commercial property insurance is essential.  While the property owner typically holds the primary insurance, tenants have significant responsibilities and risks to consider.  By securing adequate insurance coverage, ensuring compliance with lease terms, and consulting with an insurance professional and attorney, tenants can protect their business and ensure long-term success. Ultimately, a well-informed tenant is a more resilient tenant and ready to face the uncertainties of the business world with confidence.