Commercial property insurance

What is commercial property insurance?

Commercial property insurance, sometimes called commercial building insurance, protects the building that a business operates from. It covers the main structure of the building. That's the roof, walls, ceilings etc.

In some cases, commercial property insurance will also protect the things inside of a business, such as fixtures and fittings, machinery and equipment or stock. This is most useful for both people who run a business from a property they own,and those who are renting; either way, it’s vital to protect your ability to produce an income, and that is at risk if you don’t have adequate indurance. Note that glass is a big one and often separate from standard inclusions in your policy.

Typically, commercial property insurance comes as part of a complete business insurance package. That way, you get cover for more risks, such as legal liability, cyber crime and business interruption.

However, if you're a landlord and you lease your commercial property out to another business, you may benefit from landlord insurance or standalone commercial property insurance.

What does commercial property insurance cover?

Commercial property insurance covers the building from which a business operates. In some cases, it also covers the contents of the building.

Covered

• The roof, walls and ceilings
• Glass and doors
• Fixtures and fittings
• Equipment and machinery
• Stock
• Furniture
• Decorative items

Not Covered

• Your own criminal or reckless acts
• Gradual deterioration
• Poor maintenance or neglect
• Damage from termites and vermin
• Unexplained shortages
• Design errors and faulty workmanship
• Government-approved demolition
• Rust or mould

Make sure you read the PDS

2022 Finder research shows that 23% of Australians can't be bothered reading the PDS. Reading the PDS is important because it can vary significantly between different insurance companies.

What situations will commercial property insurance cover?

Commercial property insurance will help in lots of different situations. Some common examples include:

• Storm damage
• Fire damage
• Water damage – for example, from a burst water pipe
• Flood damage (although this may be optional)

• Impact – for example, from a fallen tree or crashed car
• Vandalism
• Accidental damage (this may be optional)
• Machinery breakdown (this may be optional)

• Additional cover options

  Several additional cover options are generally available on policies, including:

  • Professional fees incurred to repair damaged buildings and reinstate the property. This can include legal fees and fees charged by architects and surveyors.
  • The cost of the removal, disposal, demolition or dismantling of debris.
  • Reinstatement of the sum insured following a claim for a partial loss.
  • The cost of temporary repairs to maintain the safety of the property or allow access.
  • An increase in the sum insured for stock in trade at certain times of the year, which can be especially during heavy trading times such as the lead-up to Christmas.
  • Cover for stock lost, damaged or destroyed while in transit.
  • Fire extinguishing costs.
  • The cost of the restoration of computer data after a machinery breakdown may be covered.
  • Cover for directors’ and employees’ personal property that is lost, damaged or destroyed on your business premises as the result of an insured event.
  • Cover for temporary security measures, including security guards, to help ensure your business property remains safe and secure.
  • Cover for government fees that may need to be paid in order to repair or replace your premises.
  • If you decide to repair or replace property with a more environmentally-friendly option, your insurer may be willing to pay out more money to cover increased costs.
  • Cover for the cost of the temporary removal of stock to another premise.
  • You may be covered if, for example, a refrigerator breaks down and you are forced to throw out stock that needs to be kept chilled.

Traps to avoid when getting cover

There are a number of common mistakes to avoid when purchasing commercial property insurance:

• Not updating cover. Many business owners forget to update their policy to accurately reflect the increased value of their business property, whether this is due to renovations or simply rising building costs. As a result, these businesses are under-insured. If the cover is updated annually, some policies won’t be updated to reflect a business's increase in turnover.
• Not aware of exclusions. There’s a reason we keep telling you to study the PDS closely and that’s so you know exactly what your policy covers. If you’re not aware of what is excluded from your policy, you could get a nasty surprise when the unexpected occurs.
• Underestimating. Many business owners also underestimate the cost they need to insure, from misjudging the cost required to reinstate a building, to failing to allow for the cost of replacing machinery.
• No business interruption insurance. This insurance is designed to help cover the loss of income a business suffers when it is unable to trade due to an unforeseen event. While it’s useful cover that can stop companies going bust, the percentage of businesses that have this type of insurance is quite small.
• Not getting advice. Insurance is complex at the best of times and commercial property insurance can be particularly confusing. Get expert advice from an insurance broker to get the coverage you need.

How much commercial property insurance do I need?

When determining how much cover you need, remember the aim of commercial property insurance is to return your property to the same financial position it was in before the insured event took place. In order to assign a coverage amount to a property, there are two ways to determine the value of that property: actual cash value and replacement cost.

Actual cash value

The actual cash value is the present-day value of a property. That figure is arrived at by calculating how much it would cost to replace a property, then deducting for depreciation caused by wear and tear.

Replacement cost method

The replacement cost method calculates the replacement cost of the property as new, rather than at its depreciated value. This figure can be very different to a property’s real-world market value. Location is a particularly important consideration in this method.

Many brokers recommend using the replacement cost method to calculate how much cover you need, but speak to an expert to get tailored advice for your situation.

What are the advantages of commercial property insurance?

Pros

• Commercial property insurance can help keep your business afloat should you suffer from a one-off event.
• Disaster can strike at any time and this insurance gives you the peace of mind that comes with knowing you’re covered against the unexpected.
• If your property or contents are damaged or lost, your cover will help you replace or repair these assets.
• Additional cover options can help you take care of the cost associated with repairing and reinstating your business.

Cons

• Exclusions applied to policies. Many exclusions apply to commercial property insurance policies, so it can be difficult to find the right policy for you.
• Complex terms and conditions. Reading PDS documents for these policies can be quite confusing, so it may be a good idea to get help from an insurance adviser.
• Differences between policies. Cover can differ greatly from one policy to the next, so don’t assume that every policy will include the same features.

Speak to a broker about commercial property insurance

Brokers are trained to make these things easier to understand, so you know exactly what you're paying for and don't end up disappointed further down the line.

How do I compare commercial property insurance?

• How do I compare commercial property insurance?

  Below are the features of business insurance policies you should compare to help find suitable cover:

  • Range of losses covered. Does your policy cover a large variety of events and situations or are there exclusions you feel should be included in your cover? You can also take into account the location and type of your business when comparing this feature.
  • Range of additional benefits. Added cover options can make a big difference to your level of cover. From covering professional fees to repair your business, to restoring computer data after a machinery breakdown, compare the different benefits offered by each policy.
  • Exclusions. All policies feature many exclusions, so check if they are things you can do without or whether they represent essential coverage for your business.
  • Conditions for benefit payment. Read the fine print to make sure what conditions are attached to your policy to determine if and when you will receive a benefit payment in different situations.
  • Policy excess. As with any other type of insurance cover, consider what excess you’ll have to pay if you make a claim.
  • Actual cost of the cover. Are the premiums reasonable or expensive? Don’t be sucked in to buying the cheapest coverage available without checking if it’s right for you.
  • Premium payment flexibility. How often do you have to pay premiums on each policy? Find a policy that offers a payment plan that suits your financial situation.
  • Cooling-off period. How long do you have to change your mind if circumstances change or you decide a policy is not right for you.
  • Policy inflation indexation. Is the policy indexed to reflect inflation or is there a danger of you ending up under-insured?
  • Policy cancellation. How easy is it to cancel your policy? Are there any fees or other drawbacks involved?
  • Maximum level of cover provided. Consider whether each policy’s maximum level of cover is enough for your business? Will you be able to restore your business to its former financial state when disaster strikes or will the policy fall short of what you need?

Justine Mclean is a business finance expert, author, speaker, financial educator and host of the Secrets of Successful Business podcast. With 30 years of experience in small business, Justine is on a mission to help business owners increase their financial literacy, build solid financial foundations and create profitable and sustainable businesses.

Justine released her book Become A Business Money Magnet - Simple habits to manage your money and supercharge your profits in 2024; she is a registered BAS Agent, Ladies Finance Club Ambassador, and named one of Coach Foundation’s Top Female Business Coaches for 2022.