Business & Commercial Insurance

This publication provides general information about the kinds of commercial property coverage that are available in Texas. It can help you evaluate different commercial property policies, understand how rates are determined, and ask the right questions when shopping for insurance. However, keep in mind that it´s not a substitute for the policy itself. You should review your policy carefully to know your specific coverage.

Overview

Commercial property policies may be purchased by businesses that own or lease their buildings. While it is common for property landlords to maintain some type of property insurance coverage, it´s important for a tenant business to understand that such a policy usually covers only the building owner´s property, such as damage to the building or structure. Loss or damage to the tenant´s property, even though it´s located in a covered building, generally will not be covered. Therefore, businesses operating on leased property will need to purchase their own policies to cover their property.

The rules and procedures for tenant commercial property policies are essentially the same as those for owned commercial property. An insurance company will still evaluate the same factors, such as a structure´s location and construction materials, to determine the likelihood of a property loss. The cost of tenant coverage will generally be significantly less than for owned property coverage, however, as the policy will only extend to the leaseholder´s on-premises property and not the actual structure.

Typically, businesses operating on multiple premises are covered by a single policy. In certain instances, such as when two business locations serve widely different functions and have different risk profiles, separate policies may be needed. This may sometimes be the case when a business insures both an office location and a factory, for example.

A commercial property policy may pay based on either the "actual cash value" or "replacement value" of a loss. An actual cash value policy will pay only the amount of the property´s worth at the time of the loss – in other words, the value of the property after depreciation due to such factors as age and normal wear and tear are subtracted. A replacement value policy will pay the amount needed to purchase new property of like kind and quality after a loss. In general, a replacement value policy better ensures that a business can recover fully after a significant loss. Replacement value policies are typically more expensive than actual cash value coverage, however, because the policy limits should reflect the cost to replaced damaged property with new property.

Almost all policies have a "deductible," which is an amount the business must pay out of pocket toward the cost of a claim before the insurance company will pay. Generally, the higher a policy´s deductible, the lower its premium will be, as the policyholder is accepting a greater share of the cost of any eventual claims. Most policies will also include a "policy limit," which is a maximum amount the insurer will pay toward any covered loss.

Insurers use a process called "underwriting" to evaluate the likelihood that a given policyholder will file a claim for a loss. The greater the likelihood, the higher the premium will be. If an insurer determines that a business poses too great a risk of a loss, it may decline to issue a policy entirely. If your business is declined for coverage, keep shopping; companies have their own criteria for determining whether to issue coverage and the rate to charge. If one company turns you down or is too expensive, another may be willing to issue coverage or offer a lower premium. There may also be certain steps your business can take to lower its risk and either qualify for coverage or get a lower rate.

Different types of commercial property policies protect against different risks, or "perils." It´s important to understand which types of losses a policy does and does not cover. A commercial property policy will almost never cover any loss that is either not specifically included in the policy language or is specifically excluded. Therefore, be sure you read a policy carefully before you purchase it. You may need to buy certain specialized policies, such as flood, windstorm, or crime coverage to be protected from those particular losses.

Commercial property insurance is not standardized in Texas. This means that, beyond certain minimum requirements, insurance companies have a great deal of flexibility to develop their own policies. As a result, the coverage provided by one insurer´s policy may differ substantially from that of another. When shopping for commercial property insurance, be sure to evaluate the costs and coverages of the policies you´re considering carefully.

Common commercial property coverages

Commercial property policies in Texas generally fall into one of three categories:

• Basic form policies typically cover common risks or perils, such as damage caused by fire, lightning, vehicles, aircraft, or civil commotion. Most basic form policies also cover damage from windstorms, except in counties on the Texas coast, where businesses will likely need to purchase a separate policy for windstorm protection.
• Broad form policies typically provide basic form coverage plus coverage for additional perils, such as water damage, structural collapse, sprinkler leakage, and losses resulting from ice, sleet, or weight of snow.
• Special form policies cover against all types of losses except those specifically excluded by the policy. Common special form exclusions include losses resulting from flood, earth movement, war, terrorism, nuclear disaster, wear and tear, and insects and vermin.

Additional coverages

Many business owners buy additional coverages. Some are available as separate policies, and others are available as endorsements, or "riders," that enhance or amend a policy´s base coverage. Generally, adding endorsements to a policy will increase your premium. Ask your agent about these additional coverages:

• Liability insurance. Protects against the cost of lawsuits and possible court judgments.
• Business interruption coverage. Pays for actual or projected income lost when a covered peril prevents normal business operations. Coverage forms can be added to a commercial property policy that provide only business income coverage, only extra expense coverage, or a combination of both in the same form.
• Extra expense coverage. Pays any added costs a business may incur resulting from the need to expedite the return to operations after a covered loss.
• Building occupied by the insured. Covers a building that is regularly used by the insured but not owned. This endorsement can be important if a business leases or borrows a building that´s critical for operations.
• Newly acquired or constructed buildings. Most commercial property policies provide a specific benefit for newly acquired property, usually for 30 days. This allows for any newly obtained property to be insured before it is added to the existing policy. Generally, a commercial property policy insures only the buildings specifically named in the policy. The newly acquired property coverage extension stipulates an amount of time during which the insurance company must be notified of the acquisition, after which the coverage will not apply.
• Property off premises. Property located within a covered structure is generally covered by a base policy. However, damage to property located off premises may not be covered, or may only be covered to a limited extent. Coverage for off-premises property can often be purchased as an endorsement to the base policy or as a stand-alone policy.
• Personal property of employees while at insured premises. Generally only property owned by the insured entity is covered, unless this endorsement is added. A coverage extension in the base policy might provide a limited amount of coverage for personal effects and property of others.
• Valuable papers coverage. Assigns a value to records or other essential information that could be lost. Papers are typically covered only to a limited extent by the base policy.
• Ordinance or law coverage. Provides an additional amount to cover the increased cost of construction necessary to comply with building codes that might be triggered after a covered loss damages the insured property. This coverage can be added by endorsement, but the base policy might contain a limited benefit.
• Boiler and machinery coverage. Boilers, air conditioning units, compressors, steam cookers, and electric water heaters are examples of machinery typically covered by this endorsement. Coverage generally extends to specifically listed machinery and any subsequent losses that result, such as when a boiler explosion or water heater leak causes damage to other property. This coverage may also often be purchased as a separate stand-alone policy.

Coverage against crime

There are several types of policies that can protect a business from losses resulting from crime. Policies may be issued on a "discovery" or "loss sustained" basis. Discovery coverage pays for losses occurring at any time and discovered during the policy period or the extended reporting period. Loss sustained coverage, on the other hand, pays for losses sustained during the policy period and discovered during the policy period or extended reporting period. Common crime coverages include:

• Loss of glass and money due to theft pays for damage to glass and any loss of money resulting from a break-in.
• Robbery and safe burglary, property other than money is a more limited form of coverage that does not include money or securities.
• Forgery or alteration protects a business against forgery or alteration of checks, drafts, promissory notes, or other directions to pay.
• Theft, disappearance, and destruction coverage insures money, securities, and other property against loss, both on premises or in the custody of an employee or messenger while off premises.

Commercial multi-peril policies

Commercial multi-peril (CMP) policies include several different coverage forms in a single contains one or more coverage forms, such as commercial property, general liability, inland marine, crime, or commercial auto. A business owner could add other types of coverage to ensure full protection within the convenience of a single policy.

Business owner programs (BOPS) are a common form of commercial multi-peril policy. BOP policies are tailored to the needs of small-business owners and combine property and liability coverage in one policy.

Flood insurance

Some companies may include flood coverage in their commercial property policies for areas with a low flood risk. However, most flood insurance in the United States is administered by the National Flood Insurance Program (NFIP).

To qualify for NFIP coverage, a business must be located within an NFIP-participating community. These communities have adopted federal building and floodplain management programs aimed at reducing the likelihood of future flood damage. "Special Flood Hazard Areas" are high-risk areas within NFIP communities that are a more likely flood risk. The NFIP requires all structures within these areas to have flood insurance. However, even if a business has no property within a hazard area, a flood policy may be a good idea; about a quarter of all floods occur in areas designated as low-to-moderate risk.

Flood insurance is purchased through designated private insurance agents. For a list of agents selling flood insurance in your area, call the NFIP

1-800-427-4661

Windstorm and hail insurance along the Texas coast

If a business is located in one of Texas´ 14 coastal counties, or within certain areas of Harris County east of Highway 146, an insurer will usually exclude windstorm protection from its commercial property policies. Property owners in these areas will have to buy windstorm coverage through the Texas Windstorm Insurance Association (TWIA).

TWIA is a "pool" of all property and casualty insurance companies authorized to write coverage in Texas. The insurers share the claims risk for structures located in areas with a high risk of windstorms. Buildings in these areas constructed, repaired, or remodeled prior to January 1, 1988, are automatically eligible for TWIA coverage. Those constructed, repaired, or remodeled after that date are required to pass a state inspection and receive a Certificate of Compliance, Form WPI-8, before windstorm and hail insurance coverage can be issued through TWIA. 

How commercial property rates are determined

Fire risk is typically the primary factor that determines a policy´s premium. Accordingly, a business with neat, orderly grounds and good fire protection will likely have a lower premium than a business with debris piled next to buildings and little or no fire protection. The type of business also is an important factor. For example, an explosives factory would almost certainly be deemed a higher fire risk than a travel agency.

Fire risk is assessed according to a formula to determine the structure´s "fire rating." The formula is complex, and a typical structure will have many factors weighing both for and against a favorable rating, with the overall balance largely determining the property´s premium rate.

The fire rating is determined through a physical inspection of the property by a state-licensed fire inspector. Fire inspectors are typically contracted by insurance companies to perform inspections as part of the underwriting process. Inspectors are required to use a standard rating system to determine fire ratings. The five criteria used are:

• Construction materials. Buildings made of potentially combustible construction materials will likely warrant higher premiums, while those made of fire-resistant materials could earn a discount. Building additions to an existing structure may negatively impact a fire rating, so it´s a good idea to consult with your agent or insurer before remodeling. Internal structural elements can also impact a fire rating. Using wood partitions, floors, and stairways in an otherwise fire-resistant building will likely nullify any rate reduction, whereas fire-resistant interior walls, floors, and doors can help preserve a good fire rating.
• Location. Buildings located in cities or towns with good fire protection, as assessed by the Texas Commission on Fire Protection, typically cost less to insure than buildings outside of a city, where fire protection may be limited.
• Occupancy. The nature of a building´s use also impacts its fire rating. An office facility will likely rate favorably, provided that it contains little equipment that could start or feed a fire. A restaurant – with grills and ovens – or an auto repair shop will likely rate less favorably than an office. It´s important to remember that one relatively hazardous occupant will negatively impact the fire rating of an entire building, not just for its own section. If your business shares space with a more hazardous occupant, your premiums will be higher than they would be for your business alone.
• Fire protection measures. Automatic sprinklers can reduce a building´s fire rating by as much as 50 percent. Buildings with sufficient placement of fire extinguishers and automatic alarms and those in areas with good fire protection will also generally have lower ratings. Buildings located more than 500 feet from a standard fire hydrant will generally be deemed a higher risk.
• Exposure. Nearby hazards increase a building´s fire risk. Proximity to external fire hazards such as a lumber yard or oil storage tank will negatively impact a fire rating to an even greater degree. Internal exposure risks might include cluttered building grounds, hazards posed by certain types of mechanical or electrical equipment, or on-site storage of volatile materials.

To learn the fire ratings of the individual structures on your business´ premises, ask your insurance agent. Your agent can access a statewide database of the ratings for all commercial properties.

Shopping for commercial property insurance

One of the most effective ways to save on commercial property insurance is to begin shopping for coverage before you build, purchase, or lease a business property. Shopping in advance can help you understand exactly how a building´s characteristics will impact your premium.

Purchasing a commercial multi-peril policy can be another way to save. CMP policies combine multiple coverage forms into a single policy, typically for a lower premium than purchasing the coverage forms individually.

The following additional tips can also help you save money or avoid other pitfalls when buying a commercial property policy:

• Minimize all possible risks before applying for coverage. Examine your business carefully for factors that could contribute to the likelihood of an insurance claim. Improving employee safety, security, and inventory management can reduce the amount you pay for commercial property insurance and other types of coverage, such as workers´ compensation and general liability insurance. Most insurance companies also offer loss-control or risk-reduction services. Contact your agency or company for help identifying potential risks and implementing plans to eliminate them.
• Get quotes from several companies. Companies can have significantly different rates, even for the same or similar coverages. It pays to shop around. When comparing prices, make sure you´re comparing policies with similar coverage. Keep in mind that, while one policy might be cheaper than another, it might also provide less coverage. In general, it´s best to buy the policy that provides the most coverage you can afford.
• Consider higher deductibles. Higher deductibles can lower your premium, but remember that your out-of-pocket costs will be greater if you have a claim.