Jane Dotson
Commercial property insurance is an important investment for businesses of all sizes and industries, offering protection against physical property damage and financial losses. However, it is crucial to understand the standard exclusions in these policies to avoid unexpected risks. Some common exclusions in commercial property insurance include flood damage, earthquake damage, and other natural disasters like hurricanes and tornadoes. Acts of war or terrorism are typically excluded, as are instances of intentional damage and normal wear and tear. Equipment malfunctions or breakdowns may also not be covered, and utility failures can sometimes fall outside the scope of these policies. Understanding these exclusions can help business owners make informed decisions about their insurance choices and consider additional coverage to fill any gaps in their protection.
| Characteristics | Values |
|---|---|
| Flood damage | Not covered by standard commercial property insurance |
| Earthquake damage | Not covered by standard commercial property insurance |
| Acts of war or terrorism | Not covered by standard commercial property insurance |
| Vacancy | Coverage may be voided if the property is vacant for an extended period |
| Ordinance or law coverage | Not covered by standard commercial property insurance |
| Wear and tear | Not covered by standard commercial property insurance |
| Intentional damage | Not covered by standard commercial property insurance |
| Equipment malfunctions or breakdowns | Not covered by standard commercial property insurance |
| Commercial auto insurance | Not covered by standard commercial property insurance |
| Off-premises damages | Not covered by standard commercial property insurance |
| Deductibles | Can be a percentage of the building value or a flat rate |
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Flood damage
To secure coverage for flood damage, you will need to purchase a separate flood insurance policy. This type of insurance is typically offered through the National Flood Insurance Program (NFIP) or private insurers. The NFIP, administered by FEMA, provides flood insurance to property owners, renters, and businesses, aiding in their recovery from flooding incidents. It's important to note that flood insurance policies have a waiting period, typically around 30 days, before they take effect. Therefore, proactive planning is essential.
When considering flood insurance, it's crucial to understand the factors that influence the premiums. These factors include the location of the property in relation to flood zone risk, the elevation of the building, and the deductible amount. The deductible refers to the portion of the claim that the insured party must pay, and it is usually set as a percentage of the building's value. A higher deductible generally results in lower premiums.
In addition to flood insurance, it's worth noting that commercial property insurance policies may also exclude coverage for damage caused by moisture, mildew, or mold if proper maintenance could have prevented it. Damage caused by sewer or drain backup is also typically excluded unless it was directly caused by a flood. Currency, precious metals, and valuable papers like stock certificates are often excluded from flood insurance coverage as well.
To summarize, flood damage is a significant exclusion in standard commercial property insurance policies. To ensure coverage, separate flood insurance is necessary. Understanding the specific exclusions and factors influencing premiums is vital for making informed decisions about protecting your commercial property from flood-related risks.
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Acts of war
The war exclusion clause specifically excludes coverage for acts of war, such as invasions, insurrections, revolutions, military coups, civil wars, rebellions, civil strife, and terrorism. It also covers damage caused by warlike acts between sovereign or quasi-sovereign entities, such as capture, seizure, arrest, restraint, or detainment, as well as derelict mines, torpedoes, bombs, or other derelict weapons of war.
The reason for the war exclusion clause is that insurance companies cannot accurately compute the premiums to charge for damages sustained by war. The potential cost of claims resulting from acts of war could be astronomical and could potentially drive the insurance company into bankruptcy.
However, entities that are faced with a significant risk of war, such as companies located in politically unstable countries, may be able to purchase a separate war risk insurance policy. War risk insurance provides financial protection against losses sustained from invasions, revolutions, military coups, insurrections, riots, strikes, terrorism, kidnappings, ransom, sabotage, emergency evacuation, worker injury, long-term disability, and loss or damage of property and cargo. Some war risk insurance policies also cover event cancellations due to war.
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Wear and tear
For instance, if a business has an old, poorly maintained roof, it could start leaking and cause damage to the contents inside the property. In this case, an insurance claim would likely be denied as it would be considered wear and tear. Insurers may also improperly cite wear and tear as the cause of damage, even when it is not the case, to avoid contractual payments. For example, in the event of a natural disaster, insurers may blame property damage on a pre-existing condition.
To avoid issues with wear and tear exclusions, property owners must understand their responsibilities in maintaining their property and take proactive steps to prevent damage. Regular inspections and maintenance can help identify and address small issues before they become more significant problems.
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Vacant properties
Vacancy is generally defined as a building being completely empty, with no occupants or personal property inside. However, insurers have different methods of determining whether a property is 'occupied' or 'vacant'. Some may consider a building to be vacant if, for example, more than 40% of the building remains empty for 60 days or longer. It is crucial for property owners to understand these thresholds and the specific definitions used by their insurer.
To address these risks, property owners can purchase vacant commercial property insurance, which provides coverage for loss events that result in damage to the property, including vandalism, fires, and storms. This type of insurance can help owners gain financial protection, meet mortgage or lease requirements, and obtain liability coverage. Implementing security measures, such as alarms and surveillance systems, and proactive maintenance routines can also help make vacant properties more insurable and reduce the risk of incidents.
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Equipment breakdowns
Equipment breakdown insurance is particularly important for businesses that rely heavily on machinery and equipment for their operations, such as manufacturing facilities, restaurants, hotels, hospitals, retail stores, and offices. For example, a restaurant with a broken oven during dinner hours will not only lose the ability to cook but also risks losing customers and damaging its reputation. Similarly, a hotel with a faulty HVAC system may struggle to provide comfort to its guests, and a hospital with non-operational medical equipment may compromise patient care.
Equipment breakdown insurance covers a broad range of devices, equipment, and machinery. This includes mechanical equipment such as motors, engines, generators, elevators, water pumps, and specialised production equipment. It also covers electrical equipment like transformers, electrical panels, and cables, as well as computer and communication systems, including computer systems, phone systems, security systems, and fire alarm systems.
However, it's important to note that equipment breakdown insurance does have its limitations and exclusions. Common exclusions include wear and tear, neglect or abuse, natural disasters, and pre-existing conditions. Wear and tear refer to normal wear and gradual deterioration over time, which is typically not covered. Neglect or abuse refers to damage caused by improper care or intentional misuse. Natural disasters like floods, hurricanes, and earthquakes are usually covered under separate policies, and pre-existing issues present before the policy start date might not be covered.
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Frequently asked questions
Commercial property insurance policies typically exclude flood damage, earthquake damage, acts of war or terrorism, wear and tear, and damage caused by insects, birds or rodents, rust, rot, mold, and smoke or smog from industrial or agricultural equipment.
Certain perils are excluded from commercial property insurance policies because they are considered high-risk events that are more likely to result in significant financial losses for insurance companies.
Yes, commercial property insurance policies often have deductibles, which are out-of-pocket expenses that must be paid by the policyholder before the insurance company covers the remaining costs of a claim. Some policies may also require the purchase of separate coverage for specific risks.
Business owners should work with an experienced broker who can help identify potential gaps in coverage and recommend additional policies or endorsements to ensure adequate protection. Regular reviews of insurance coverage are also important to keep policies up-to-date with changing circumstances.
