Insurance companies have found ways to insure almost anything. With so many types of insurance available, it can be hard for a commercial property owner to know what they should have and what's simply a waste of money for their situation. We're going to look at what commercial landlord insurance is and what types of coverage options are available and give you an idea on costs for each.
Why a commercial landlord needs insurance
Unexpected issues will arise at some point, and some of these issues can be quite expensive, even expensive enough to cause a commercial landlord to lose their property or file bankruptcy.
This is why there are a number of insurance options available for commercial property owners. Landlords don't only have the risk of significant property damage; they also face the risk of lawsuits from injuries or personal property damage in the common area, or even in a tenant's unit in some cases.
Even if a property owner doesn't think they will need an insurance policy, most lenders will require it if they have a mortgage on the property. Without any coverage, they could lose the value in their security on the loan if there's property damage that the landlord either can't afford or chooses not to pay for.
Lenders will require their borrowers to provide proof of insurance coverage and will likely check on the coverage regularly to make sure it's still in place. If at any point the borrower doesn't have insurance, the lender will place insurance on it themselves.
Most mortgage agreements have a clause that will require the borrower to pay the cost of the lender's insurance if they have to insure it. Their insurance is usually quite expensive, so it's not ideal for the owner.
There are two primary types of commercial landlord insurance:
- Liability insurance.
- Property insurance.
We'll look at each of these types of insurance, as well as some of the various kinds of additional insurance a property owner can get.
Commercial landlord liability insurance
Liability insurance protects the landlord from claims due to personal injury or personal property damage. In this case, personal property may be somebody's car that was damaged on the property.
Injuries can result from a slip and fall from ice or from damage to the parking lot, sidewalk, stairs, or other parts of the property that haven't been fixed.
Most commercial leases require tenants to have their own liability insurance policy for their business and rental unit. This not only protects the business from claims but also protects the landlord if a person is injured inside the tenant's unit.
Personal injury cases can become extremely expensive for a defendant. This includes not only the cost of a judgment or settlement, but the cost of defending yourself can become astronomical as well.
The insurance company takes over the defense of the lawsuit, minus any deductibles. They take on the cost of the legal defense as well as the settlement or judgment.
The insurance company will usually use their own attorneys instead of covering the bill for yours. They want to have control of the legal defense to minimize the amount they'll be required to pay if they have to settle or if they lose the case.
What liability insurance covers
A good general liability insurance policy for a commercial landlord will cover most situations that result in a personal injury or personal property damage claim that involves the property. Some common items covered include:
- Medical expenses for anyone who gets hurt on the property.
- Personal property damage, such as automobiles and mobility scooters.
- Legal fees, court costs, and judgements or settlements related to covered claims.
What liability insurance doesn't cover
There are, of course, limitations on what an insurance company will cover. While liability insurance usually covers a wide array of circumstances, some common ones that won't be covered include:
- Damage to your own property.
- Injury to yourself or employees.
- Illegal or malicious acts done on purpose.
- Errors in service.
- Environmental issues, such as pollution, contamination, oil spills, etc.
Commercial landlord property insurance
Property damage on commercial real estate can easily result in hundreds of thousands, or even millions, of dollars in repairs. A commercial property insurance policy can cover the cost of these repairs in many instances.
The exact coverage you get from a commercial landlord policy will vary some among insurance providers. In most cases, coverage will include common losses from:
- Theft of business assets on the property (excluding cash).
Basic coverage doesn't usually include losses from:
- Theft of cash and currency.
- Loss of income.
- Acts of terrorism.
- Loss of rental income.
Keep in mind that each policy is slightly different, and basic coverage may vary from one area to the next, depending on the types of risks associated with the geographical area.
There are additional types of coverage available for most of the items not covered by a basic policy. We'll look at those next.
Additional types of insurance for commercial landlords
Additional coverage may be necessary if you want protection against damages that aren't covered in a standard insurance policy. Some of these may be required by a lender, depending on the nature of the commercial investment property, its location, and whether it's in a flood zone.
Additional coverage includes:
- Flood insurance: Many people don't realize that floods aren't covered in their policy if they don't pay close attention. This can leave them hanging if there is significant flood damage that they don't have coverage for.
- Earthquake insurance: Properties in areas where earthquakes are common should have earthquake insurance, and a lender is likely to recommend it. Damage can be significant and may even result in a total loss.
- Hurricanes: Hurricanes are a major risk factor for commercial properties in some parts of the world. Properties in areas along the coast, and even a little further inland, should seriously consider hurricane coverage.
- Crime insurance: Crime insurance is common for businesses in owner-occupied real estate but may not be necessary for a lot of commercial landlords. This covers losses such as embezzlement and theft of cash. This may be beneficial for a commercial property owner if they have their own management or maintenance staff on payroll.
- Terrorism insurance: Terrorism insurance may be something to consider if your commercial property is in major cities or near areas that draw a large crowd. Small towns are less likely to suffer from terrorist attacks, so it's not nearly as common of a type of coverage in these areas.
- Errors and omissions insurance: Errors and omissions (E&O) insurance covers claims from mistakes or negligence. For commercial landlords, this will mostly apply to mistakes in how they represented the property to a tenant, errors in the lease, or improperly handling enforcement of the lease. This insurance covers court costs, legal fees, and judgements or settlements up to the insured amount. The important thing to remember is that only claims for mistakes or negligence that occurred after the policy went into effect are covered.
- Environmental insurance: Properties that pose an environmental risk, such as air pollution, ground contamination, and water contamination, can be responsible for cleanup costs and damage to other properties. Environmental insurance may cover these costs as long as the contamination wasn't intentional or done knowingly.
- Rent loss insurance: Rent loss insurance covers the loss in rental income due to property damage that prevents tenants from using their space. Even missing out on one month of rent can put a landlord in a difficult position.
How much commercial landlord insurance costs
There's not one general price range for all commercial landlord policies, since the price varies greatly depending on the type, condition, size, and location of the property, the owner, and previous claims filed against the property or owner.
In terms of property insurance, the amount will depend quite a bit on the amount of coverage needed. This will be less for small commercial rental properties and much more for a large commercial property.
The same is true for liability insurance. Commercial landlords with small business offices will likely need less coverage than property owners with large companies that are at greater risk of financial loss as their tenants.
Next we'll look at common ranges of insurance premiums for some of the different types of commercial insurance we discussed.
Costs of liability insurance
The cost of general liability insurance will vary based on the general risk of the property. These risks are determined by things such as the number of tenants, the types of businesses in the property, age of the property, location, condition, claim history, and the policy holder's overall history.
In general, commercial landlord liability insurance will cost about $300 per $1 million of coverage.
Cost of property insurance
The average cost of commercial property insurance is between $1,000 and $3,000 per year. This may be higher or lower depending on the replacement cost or cash value of the property.
Average additional annual coverage costs