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4 Costly (and Common) Commercial Property Insurance Mistakes
Finding the right commercial insurance can be complicated. Go through four common mistakes CRE owners make, and learn how you can avoid them.
Getting commercial real estate insurance for a property isn’t exactly a walk in the park anymore (if it ever was). Many insurers are reducing their coverage options, and premiums keep skyrocketing year over year.
If you own a commercial property, though, it’s absolutely essential to have. Your lender will require it, for one, but even that aside: Going without it can be catastrophically risky. It just takes one lawsuit, one slip and fall, and your profitable investment can go completely sideways.
I won’t cover all the ins and outs of commercial property insurance in this piece, but instead I’ll focus on four expensive and common mistakes many CRE owners make regarding insurance on their property.
1. Not Requiring Tenants to Name You as an Additional Insured
This is something you don’t want to overlook — include language in your lease agreements requiring your tenants to add you, as the building owner, as an additional insured on their business’s liability insurance. And then follow up with them to get a copy of their policy to make sure they’ve done it.
Why is this so important? Let me talk you through an example.
You own a retail property that has a convenience store in one of the suites. An employee (I’ll call him Jason) is stocking shelves one day and drops some cans of soda. Naturally, they explode, covering the floor and shelves with carbonated poison (or whatever you want to call it).
Of course, no decent store would leave that to sit, and your tenant’s one of the good ones, so Jason goes to clean it up. After it’s all mopped, the floor needs to dry. Jason heads back to the store room to get that yellow “slippery when wet” sign, but in the meantime, the worst happens: A customer slips on the floor, completely wiping out.
Her fall ends up being pretty bad, requiring some hip surgery, and she’s understandably pretty hacked off about the whole thing. So: She sues the store — and your property.
The store owner has insurance to cover their end, and it kicks in and handles the claim. But you? You do have your commercial property insurance — and thankfully it’s good — but the liability claim is for more than your policy allows.
That's where being named as an additional insured on your tenant's policy would have saved the day. If Jason's store had you listed as an additional insured, their insurance would kick in to provide coverage to you (up to the policy’s limits, of course).
Being an additional insured gives you direct coverage under the tenant's policy for incidents like this, with their insurer paying out before they can touch your own policy in most cases. You get the benefit of their policy limits in addition to your own. Plus, you can file the claim directly with their insurer, making the whole process smoother.
It’s pretty common sense to get added to the policy, but so many commercial property owners simply don’t do it. That’s fine…until disaster strikes. Jason didn’t do anything wrong — not really — but you as the property owner could still be on the hook for a huge payout if you’re not protected.
2. Failing to Regularly Review and Update Your Coverage
Getting the right commercial property insurance policy is great, but your work (unfortunately) is never really over. You’ll need to evaluate your insurance and how it’s meeting your needs at least once a year — and possibly even more often, depending on your property and its situation.
You’re investing in CRE, so you know that property values are changing regularly — hopefully for the better. But if you take an insurance policy out for a $1 million property and just keep renewing without making any chances, think about it: Your asset could be worth, say, $1.5 million in a few years, but will your insurance cover the higher valuation? I’d argue it’s worth revisiting your insurance anytime you make upgrades or do renovations, too.
Note that your tenants can also play a big part in your insurance review. Let’s say you’ve got a bookstore operating in your property — and they just sold books when you took out your insurance policy. It’s simple enough, but what if the bookstore decides to also run a cafe in the space?
That can open the doors for more liability — including anything from food safety to equipment damage to even changes in how your occupancy could be calculated by your insurer.
3. Not Securing Proper Coverage for a Vacant Property
If you have a vacant (or partially vacant) commercial building, the last thing you want is another expense to add to the list. Vacancy by itself is already plenty expensive, as I’m sure you know. So, why does insurance become often more important when you have fewer tenants in place?
Insurance is all about risk assessment. Vacant spaces are inherently riskier than occupied ones. For one thing, there’s no tenant (with their own insurance policy) there, so any issue is going straight to you, the owner. If someone — even trespassers, in certain cases — slips and falls in an unoccupied part of your property, they can sue you. And without a tenant’s policy to absorb the blow, that can get really expensive really quickly.
But beyond slips and falls, even partially vacant properties just carry a lot more general risk to them, whether we’re talking about vandalism or theft. And because vacant spaces tend to be less of a priority for most owners and operators, maintenance issues can pile up — and having insurance to cover something like an unexpected water leak is a really, really good idea.
4. Skimping Out on Umbrella Liability Coverage
Having a great commercial property insurance policy is an excellent start, but too many commercial real estate investors don’t take the next logical step of taking out a commercial liability umbrella policy.
If you’re not familiar with these, they provide a layer of protection beyond what your main policy covers. Let’s say your main insurance policy provides liability coverage of up to $2 million. If you get sued, for, say, $5 million, what then? You don’t want to be caught unprepared to the tune of $3 million, so it’s a great idea to have an umbrella policy in place.
These policies typically aren’t too expensive — they only get used when your primary insurance maxes out, after all — but ignoring them can be costly in a worst-case situation.
Where to Get Your Next Policy
If you’re ready to start shopping for your next commercial property insurance policy, Janover Insurance Group has you covered. We partner with top insurance companies with a wealth of experience in all commercial real estate asset classes.
Click here to send a few quick details, and we’ll get you a free, no-obligation quote.