Commercial property insurance is three decisions wearing one name: what it would cost to rebuild the building, what it would cost to replace everything in it, and what the business would lose while it could not trade. Those are three separate sums insured, they are set by three different calculations, and getting any one of them wrong reduces what is paid on a claim that had nothing to do with the other two.
Buildings: a rebuilding cost, not a price
The buildings sum insured is the cost of rebuilding: demolition, site clearance, professional fees, compliance with current building regulations and the time the work takes. It has no fixed relationship to what the property would sell for, and in many places it is higher. Professional guidance exists on assessing reinstatement cost, and a periodic assessment is the standard answer to the drift that otherwise accumulates year after year.
Contents, stock and tenant's improvements
Contents and machinery are insured at replacement cost, stock usually at cost price, and tenant's improvements belong to whoever paid for them, which on a commercial lease is normally the tenant even though the fit out looks like part of the building. That last item is the one most often left out entirely, and it is frequently the largest single thing a tenant would have to replace.
Business interruption, and the indemnity period
The third sum insured is the gross profit or revenue at risk, and the indemnity period is how long the cover runs. Rebuilding a commercial building, obtaining consents and refitting it takes longer than most people assume; twelve months is often the shortest defensible period and twenty four or thirty six is common. An indemnity period that expires before trading resumes leaves the rest of the loss with the business.
Unoccupancy, and the clause that bites
A commercial property left empty beyond a stated number of days, commonly thirty or forty five, moves onto restricted cover under most wordings, frequently reduced to fire, lightning, explosion and aircraft, with conditions about inspections, disconnecting services and securing the building. Vacating a unit is therefore a notification event, and doing it on the day the tenant leaves is far cheaper than doing it after a burst pipe.
Questions people ask about commercial property insurance
What does commercial property insurance cover?
Buildings against fire, flood, storm, impact and similar perils; contents, machinery and stock; tenant's improvements; and usually business interruption for the income lost while the property cannot be used.
How is the buildings sum insured calculated?
As a reinstatement cost: rebuilding, demolition, site clearance, professional fees and compliance with current regulations, not the market value. Professional guidance exists on assessing it and periodic reassessment prevents drift.
What happens if a commercial property is left empty?
Most wordings restrict cover after a stated number of days of unoccupancy, often to a short list of perils, with conditions about inspections and securing the building. It is a notification event, and the day the tenant leaves is the day to tell the insurer.
Who insures tenant's improvements?
Normally the tenant, because the tenant paid for them, even though a fit out looks like part of the building. It is the item most often missing from a sum insured and often the largest thing a tenant would have to replace.