Commercial Property Insurance: What It Covers and How to Set the Limit
Most property claims that go badly are not denied — they are underpaid, because the limit was set once and never revisited.
- Building, business personal property and business interruption are three separate limits
- Replacement cost versus actual cash value is the single biggest coverage decision
- Coinsurance penalties reduce payment when the limit is under-stated
- Flood and earthquake are always separate policies
- Leasehold improvements are usually the tenant’s to insure
The three limits that matter
A commercial property policy is really three coverages with separate limits. Building covers the structure if you own it. Business personal property covers contents — equipment, inventory, furniture, and your leasehold improvements. Business interruption replaces income while you cannot operate.
Each is stated separately on the declarations page, and each can be wrong independently. The most common pattern is an adequate building limit alongside a contents limit set years ago and a business interruption limit nobody calculated at all.
Replacement cost versus actual cash value
Replacement cost pays what it costs to replace the item new today. Actual cash value pays depreciated value. On a seven-year-old commercial oven, the difference is most of the purchase price.
Actual cash value policies are cheaper and are quietly common on equipment schedules. Check the valuation basis for each coverage on the declarations page rather than assuming replacement cost applies throughout.
Coinsurance, and why claims get underpaid
Most property policies carry an 80%, 90% or 100% coinsurance clause: you agree to insure at least that share of the property’s value. Insure for less and the insurer reduces every payment proportionally, including partial losses.
With 80% coinsurance, a building worth $1,000,000 must be insured for $800,000. Insured for $500,000 instead, a $100,000 loss pays roughly $62,500 before the deductible. Nothing was denied — the penalty applied.
Agreed value endorsements remove the clause. Where available, they are the cleanest fix for a business that does not want to re-value property annually.
What the standard form excludes
Flood and earthquake are separate policies, always. Beyond that, the standard special form excludes wear and tear, mould, faulty workmanship, and the cost of code-required upgrades during a rebuild.
Four endorsements close the gaps most small businesses actually hit.
If you rent your space
Tenants generally do not insure the building, but they do insure their build-out. If you paid for the flooring, walls, wiring or fixtures, that investment is yours under business personal property — and it is the most commonly uninsured item on a small tenant’s policy.
Your lease will also state a liability limit, additional insured wording for the landlord, and a waiver of subrogation. Match the exhibit exactly; a certificate that misses the wording can put the lease in default.
Reviewing the limit properly
Once a year, price the replacement of your five largest assets and add up your build-out. Compare that to your business personal property limit. Then calculate twelve months of gross earnings less non-continuing expenses for business interruption.
That exercise takes an hour and it is the difference between a claim that rebuilds the business and one that funds part of it.