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What Is Commercial Property Insurance?
Just as homeowners insurance protects a homeowner from the full cost of repairing unforeseen damage to a house, commercial property insurance protects businesses, farms and ranches against damage to their buildings and contents.
Commercial property owners, both those operating a business on their property and those leasing property to another entity, may purchase policies that protect the building and associated structures. A property owner´s policy will not protect tenants from loss. Business owners who lease their property may buy policies that protect the building´s contents, such as machinery, furniture and stored or displayed merchandise.
Different types of commercial property insurance policies protect against different dangers, called "risks," "causes of loss," or "perils." Commercial property policies are not standardized in Texas.
Insurance companies are free to use their own policies, subject to approval by the Texas Commissioner of Insurance. Policies must contain reasonable coverages and meet all requirements set out by law. Insurers´ ability to offer different commercial policies allows them to tailor their products to fit the needs of particular businesses. The availability of multiple policies encourages a competitive market.
Commercial property policies available in Texas generally fall into three categories:
- Basic form -- covers common perils, such as damage caused by fire, lightning, windstorm, vehicles, aircraft, and civil commotion.
- Broad form -- covers basic perils while adding others, such as water damage, collapse, glass breakage, weight of snow, ice or sleet, and sprinkler leakage.
- Special form -- covers any cause of loss except those specifically excluded, such as flood, earth movement, war, nuclear disaster, wear and tear, insects, and vermin.
Many commercial property insurance consumers buy additional coverage.
- Liability policies protect against the cost of a lawsuit and possible judgment.
- Business interruption coverage reimburses the policyholder for business income lost when a covered cause of loss damages or destroys a building or its contents.
- Extra expense coverage pays the added amount an insured must spend after a loss to resume business operations as quickly as possible.
Although coverage for floods is available in many commercial policies, commercial property insurance policyholders often buy it separately through the federal government´s National Flood Insurance Program. Ask your insurance agent for details about flood coverage in your area.
Commercial property insurance policies do not cover losses from extensive glass damage or crime. Business owners generally must buy separate, specific glass or crime policies to obtain coverage. Other specialized commercial policies include inland marine, garage, and boiler and machinery. Contact your insurance agent for details.
Commercial multi-peril (CMP) policies include several different coverages in a single policy and are the most popular commercial insurance products in Texas. A CMP policy can cover the same perils as the individual property policy and offer liability and business interruption coverage as well. A business owner could add other types of coverage to ensure full protection within the convenience of a single policy.
Business owner programs, or 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.
Most business, farm and ranch owners buy commercial property insurance through an insurance agent--either a captive agent, who offers policies from a single company or company group, or an independent agent, who may offer policies from several different companies.
Some insurance companies, known as direct writers, do not use insurance agents. Business owners may purchase insurance straight from the company. To obtain an application, call or write the company´s home office or a regional office.
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How Commercial Property Insurance Rates are Determined
Insurance companies evaluate potential policyholders in terms of the risk of loss that they pose. Businesses that appear to be relatively high risks generally will pay more for insurance coverage, and may have trouble obtaining coverage from some companies. Businesses that appear to be relatively low risks generally will pay less for insurance coverage and find it easier to obtain.
Some elements of risk are difficult to control. An explosives factory will almost always be more at risk of loss than a travel agency, for example.
Other risk factors are easier to control. A business property with neat, orderly grounds is much less at risk of fire than one with debris piled next to buildings. In fact, the risk of loss from fire is one of the main factors determining the cost of commercial property insurance. Building or leasing a fire-resistant building can lower a business´s insurance premiums dramatically.
Ratings
Every commercial building in Texas receives a rating that reflects its basic risk of loss from fire. That rating is a part of the formula that insurance companies use to calculate commercial property insurance premiums. Buildings with poor ratings cost more to insure; those with better ratings cost less to insure. Fire ratings apply to insurance purchased both by building owners and tenants.
Five basic elements affect a building´s fire rating.
- Construction. Of what materials is the structure built? Are they fire-resistant? Are they combustible?
- Occupancy. What businesses use the structure? Are they high-risk or low-risk?
- Location. Is the property within a city or town with good fire protection? Is it located outside of a city or town, in an area with limited or no fire protection?
- Exposure. Do other hazards exist within the building or within a specified distance that increase the risk of fire?
- Fire Protection. Does the building contain sprinkler systems, fire extinguishers and alarms that reduce the risk of fire? What level of public fire protection is available?
Construction
A building´s construction establishes the basis of its fire rating. Using fire-resistant materials throughout a structure makes a big difference in insurance premiums.
Buildings must use fire-resistant materials throughout to receive the full benefit of a good rating. Adding-on to an existing structure can hurt its fire rating. Check with your agent or insurer before building or remodeling.
Internal structural elements affect a fire rating. Filling an otherwise fire-resistant building with wood partitions, floors, and stairways nullifies many of the benefits of its construction. Fire-resistant interior walls, floors, and doors can help preserve a good fire rating.
Occupancy
A building´s use also affects its insurance fire rating. Fire rating schedules list different occupancies and assign each one certain penalties, which are added to the base fire rate determined by the building´s construction. A travel agency has a relatively small effect, since it contains little equipment that could start or feed a fire. A restaurant (with grills or ovens) or an auto repair shop presents greater fire risks and raises the fire rating more.
A critical point to remember: a relatively hazardous occupant affects the fire rating for the entire building, not just for its own section. If your business shares space with a more hazardous occupant, your premiums will be higher than for your business alone.
Location
Location is vital for determining fire protection. Rating schedules assume that commercial property inside a city or town with adequate fire defenses (as determined by the Texas Commission on Fire Protection) is safer than property located outside of city limits. Property outside a city or town automatically faces a penalty that can double property insurance premiums.
Location and construction together determine another major portion of commercial property insurance known as extended coverage. The Texas Department of Insurance divides the state into different extended coverage territories based on each area´s history of loss from such perils as windstorms, hail, tornadoes, and hurricanes. Properties in areas with histories of high losses generally will face higher rates than equivalent properties in areas of lower risk.
Since a building´s fire rating reflects its general sturdiness as well as its fire-resistance, construction plays a critical part in extended coverage rating. Buildings with good fire ratings receive a lower charge for extended coverage, those with poor fire ratings a higher charge.
Exposure
Exposure measures the extent to which a structure faces external or unusual internal risks.
A building faces external exposure when it is near any other structure, or any potential source of fire, under the assumption fire in the other structure could spread. Any nearby building or other structure raises rates for a property. Hazardous external exposure (such as having a lumberyard or oil storage tank farm next door) raises rates even more.
Internal exposure includes unusual risks within the building itself not already accounted for in the occupancy rating. Unusual risks might include cluttered grounds or storage spaces, special mechanical or electrical equipment, or volatile storage. Extra risks boost fire rates.
Fire Protection
Good internal fire protection helps: installing automatic sprinklers can cut fire rates by as much as 50 percent. Fire extinguishers and automatic fire alarms also lower rates. Rate schedules include certain discounts for particular occupations. A restaurant could receive a discount, for instance, if its grills were equipped with hoods and automatic fire extinguishers.
Good public fire protection also pays off. The Texas Commission on Fire Protection inspects and evaluates fire departments in Texas cities and towns. It assigns each a rating, called the key rate, which affects commercial insurance rates for every property within the community´s borders.
Cities with good fire protection have low key rates; those with substandard protection have higher rates. Check with a property insurance agent or with the city fire marshal to find the rate for any city in which you are considering locating a business. Commercial property located within a city but more than 500 feet from a standard city fire hydrant receives an extra charge.
Fire Ratings
Fire ratings are determined through physical inspection. Inspections are done by private inspectors under contract from insurance companies.
Inspectors use standard rating systems to determine how a property´s characteristics affect its risk of fire.
The Texas Department of Insurance is the final arbiter for disputed commercial fire ratings. If you disagree with the rating given any building you own or lease, first work with your agent, the insurance company, and the inspector. If you are still dissatisfied, contact TDI.
Texas Department of Insurance
Inspections and Fire Safety/MC 103-1D
P.O. Box 149104
Austin, Texas 78714-9104
Phone: (512) 322-2259
Fax: (512) 322-3515To learn a building´s fire rating, ask your insurance agent, who can access a statewide database listing commercial properties. If you have trouble finding a building´s rating, contact TDI.
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Shopping for Commercial Property Insurance
You should begin looking for coverage before you build a structure or lease a property. Make sure you understand how each building´s characteristics will influence your commercial property rates.
Check with different companies to compare their prices--you may find that they vary significantly for the same property. When comparing policies, be sure that they offer comparable coverage. A lower-priced policy may include significantly less coverage. Make sure that an insurer knows of any risk-reduction measures you have taken.
Shop as carefully for agents as you do for companies. Ask agents how long they have been selling commercial insurance and whether they have earned any professional designations in the subject. See the following page for additional information you can receive about agents from TDI.
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Saving Money on Business Insurance
After you have eliminated obvious fire risks, ask your agent if you qualify for any discounts.
Examine your business carefully for any factor that could contribute to insurance claims. Proper employee safety equipment and procedures can reduce workers´ compensation claims. Improved security and inventory management can reduce the risk of theft. Changes in building layout could shield customers or visitors from dangerous equipment and your business from a possible costly lawsuit.
Most insurance companies offer loss control services. A loss control expert can help you identify potential risks within your business and work with you to devise plans to eliminate them. Contact your agent or company for details.
For More Information
- TDI offers a variety of insurance-related publications and services. Publications are available in alternate languages and formats and on our website.
- For printed copies of free consumer publications, call the 24-hour Publications Order Line
- 1-800-599-SHOP (7467)
305-7211 in Austin
- For answers to general insurance questions call the Consumer Help Line between 8 a.m. and 5 p.m., Central time, Monday-Friday
- 1-800-252-3439
463-6515 in Austin
- You may file an insurance-related complaint with TDI several ways:
- by our website at www.tdi.state.tx.us/consumer/complfrm.html
- by e-mail at
- by fax at 512-475-1771
- by mail at
- Texas Department of Insurance
Consumer Protection (111-1A)
P.O. Box 149091
Austin, TX 78714-9091The information in this publication is current as of the revision date. Changes in laws and agency administrative rules made after the revision date may affect the content. View current information on our website. TDI distributes this publication for educational purposes only. This publication is not an endorsement by TDI of any service, product, or company.
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Appendix: Sample Fire Rating Factors
The following charts show how common building characteristics and uses affect a commercial property insurance fire rating. They provide examples of factors that inspectors consider when evaluating a building´s potential risk of fire. These lists do not include all factors involved in fire ratings and cannot by themselves yield a fire rating for any building. Only trained professional inspectors can issue a fire rating.
The charts give a sense of the relative levels of risk inherent in certain buildings and their uses, so that commercial property insurance consumers can make wise choices about where to locate. The Construction Configuration Table shows fire ratings for various classes of building construction, illustrating that sturdy, fire-resistant structures receive lower rates than those more at risk of fire. Additional Credits for Superior Fire-Resistant Construction shows building characteristics that earn credits for more fire-resistant properties.
The Description of Elements Graded for Determining Fire Rate shows other features that affect a fire rating, including height and the composition of floors, ceilings and walls. It also lists credits available for fire-protection equipment such as sprinklers and extinguishers.
The Comparison of Common Occupancies lists charges applied to fire rates for buildings´ uses. It contains two columns of charges, one for the building rate (paid by the building owner) and one for the contents rate (paid by the building tenant). It ranks the combustibility of contents, which influences the discounts available for superior fire-resistant construction shown in Chart 2. A fire-resistant building filled with combustible goods would receive a smaller discount than one containing few items likely to burn.
A complete fire rating would include other factors, such as a city´s key rate, the extended coverage area rate and unusual external exposures.
- CONSTRUCTION CONFIGURATION TABLE
Fire rate schedules divide buildings into categories based on the materials used to build the basic structure. A building´s construction classification determines the basis of its commercial property insurance rate.
Construction Classification Construction Symbol Basis Charge Per $100.00 of Coverage Definition (Building Characteristics) Brick B $.25 Supporting walls of brick, concrete, stone or adobe. Or, hollow-tile masonry (such as cinderblock) walls in reinforced concrete frame (between concrete, brick or protected steel columns). Hollow Tile Brick HTB $.35 Walls of hollow-tile masonry units, veneered with brick or stone. Hollow Tile HT $.50 Walls of glass blocks or of hollow-tile masonry units. Iron Clad Metal ICM $.60 Structural metal frame with sheet metal or other non-combustible-material walls and roof. Floors non-combustible. No combustible material allowed in construction (combustible inside trim, doors, partitions and window frames are permitted). Iron Clad Metal
(Substandard)ICMS $.75 Same construction as ICM except for: (1) wood nailing strips in roof and walls and/or wood floors laid flat over non-combustible floors with no air space between, or: (2) 1 5/8 inch solid wood floors with air space beneath. Two-story building with wood second floor does not qualify. Brick Veneer BV $.75 Wood-frame construction veneered with brick, stone or concrete. Stucco S $1.00 Wood-frame construction with stucco not less than 1/4 inch thick (or any non-combustible cementitious-type board on wood frame). Iron Clad IC $1.15 Corrugated iron or sheet metal on wood frame. Frame CD $1.15 Frame and walls of wood.
- ADDITIONAL CREDITS FOR SUPERIOR FIRE-RESISTANT CONSTRUCTION
Buildings using fire-resistant materials throughout may be eligible for the discounts listed below. The rate reductions apply to the basis charges above and to modifications for special building characteristics, occupancy, exposure, location, etc.
Fire-Resistant
Classification ConstructionConstruction Symbol Possible Rate Reduction* Definition (Building Characteristics) Semi-Fire-Resistive SFR and FR 10% to 70% May apply to buildings of B, HTB and HT construction classifications (see above). No combustible exterior wall area allowed. All structural members, including walls, columns, piers, beams, girders, joists, trusses, floors, and roof decks, must be of non-combustible materials. Approved, listed and labeled fire-retardant-treated wood at least 2 inches in nominal dimension may be used. Masonry walls are subject to minimum thickness requirements. Structural steel members are subject to minimum hourly rated fire protection requirements. Non-Combustible Construction NC 10% to 60% May apply to buildings of B, HTB, HT, ICM, and ICMS construction classifications (see above). All structural members, including columns, piers, beams, girders, joists, trusses, floors, walls and roof decks, must be of non-combustible materials. Approved, listed and labeled fire-retardant-treated wood may be used. No more than 10% combustible exterior wall area (ie..e. BV, S, IC, or CD) allowed.
*Depends on the type of construction and the combustibility of building contents. See Chart 4, Comparison of Common Occupancies.
- DESCRIPTION OF ELEMENTS GRADED FOR DETERMINING FIRE RATE
Other characteristics in addition to construction composition influence a building´s fire rate. The list of graded elements below shows how some common building features and fire protection devices directly affect a rate determination.
Graded Elements Description Range, Charge or % Credit Applicable To IC, CD B, HTB, HT, ICM, ICMS, BV, S SFR, FR Debits In Block Within 10 feet of another commercial building N/A $.10 $.10 Additional Occupants Number of leased/subdivided sections in the building Charges apply per occupant $.20 to (no maximum charge) $.10 to $.50 $.05 to $.25 Area Square feet of grade floor area $.02 to $.75 $.02 to $.15 N/A Height/Stories For each story above the grade floor $.05 for each above 1 $.03 for 4th and $.05 for each above 4 $.02 for each above 3 Partition Walls and Interior Paneling Construction of combustible walls between tenants, or combustible paneling on walls between tenants N/A $.02 $.02 to $.05 Plate Glass Glass other than moveable (opening/closing) windows N/A $.01 N/A Roof Wood shingle or board $.25 $.25 N/A Cornice Combustible overhanging eves, fascia or trim N/A $.03 $.02 to $.10 Awning Overhanging canopy (charge depends on combustibility, proximity to other buildings and degree of exposure to building interior) N/A $.05 $.05 to $.15 Floors Wood floor, wood storage decks or wood stages N/A $.01 each floor $.30 to $.35 Ceilings Wood or other combustible ceiling material N/A $.01 each floor $.05 to $.15 Floor Openings Combustible stairwells, stairs, elevator shafts N/A $.05 to $.15 $.05 to $.15 Roof Structures Combustible skylights, light shafts, equipment penthouses and other roof structures N/A $.03 to $.25 $.01 to $.25 Basement Any occupied room or storage area below grade floor N/A $.10 N/A Credits Fire Extinguishers One approved extinguisher for first 3,000 square feet and one additional for each 2,000 square feet 8% 8% 8% VP&H Vertical pipe and hose (fire hoses each floor) 4% to 8% 4% to 8% 4% to 8% Open Joist No ceilings (or concealed air spaces) N/A 5% N/A Floors Concrete or non-combustible 5% 5% N/A Area For each 1,000 square feet less than 3,500 square feet N/A 2% N/A Superior Construction Applies only to buildings qualifying for non-combustible (NC), semi-fire-resistive (SFR) or fire-resistive (FR) construction classifications N/A 10% to 60% 10% to 70%
The above table is for illustration only and does not include all debits and credits available.
- COMPARISON OF COMMON OCCUPANCIES
Occupancies are the various uses for buildings. Their relative degrees of risk determine their effects on fire ratings. The building rate applies to commercial property insurance bought by a building owner to protect the structure. The contents rate applies to the insurance bought by a tenant to protect goods and equipment inside the structure. Remember that a high-risk occupancy raises rates for all tenants of a shared structure.
Occupancy Add-On Charge For Building Rate Add-On Charge For Contents Rate Grouping For
Superior Fire-
Resistance Credit*Antiques $.10 $.50 C Automobile Supplies (Parts) $.05 $.30 C Automobile Filling Station $.10 $.35 B Automobile Repair $.30 $.65 B Bakery (Small Retail - Gas Ovens) $.25 $.65 C Bakery (Small Retail - Electric Ovens) $.05 $.35 C Bank $.00 $.10 A Barber/Beauty Shop $.15 $.35 B Beer Parlor, Bar Room $.05 $.35 C Builder´s Material Storage $.15 $.25 C Butcher Shop $.05 $.30 C Carpenter/Cabinet Shop $.25 $.40 D Clothes Cleaning and Pressing $.25 $.50 C Clothes (Retail) $.05 $.30 C Used Clothing $.25 $1.00 D Concession Stand $.05 $.35 C Convenience Store With Gas Pumps $.05 $.30 C Data Processing $.00 $.10 A Drug Store (No Cooking) $.05 $.35 C Department Store (Large) $.25 $.50 C Electrical Supplies and Appliances With Repair $.10 $.50 C Furniture (Retail, Grade Floor Only) $.15 $.50 C Furniture (Used and/or Repairing) $.50 $.90 D Grocery $.05 $.25 C Office (Private) $.00 $.10 A Restaurant $.25 $.65 C Vacant Building $.00 N/A A General Storage Warehouse With Furniture (Mini-Storage) $.35 $.75 D Washateria $.25 $.60 C Welding Shop $.20 $.35 C Group A Combustibility of the contents is low
Group B Combustibility of the contents is moderate
Group C Combustibility of the contents is high
Group D Combustibility of the contents is very high
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