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8 Common Exclusions in Commercial Property Insurance
Learn what (probably) isn't covered by your commercial property insurance policy and why.
- What Are Insurance Exclusions?
- Common Exclusions in Commercial Property Insurance
- 1. Wear and Tear
- 2. Neglect
- 3. Natural Disasters
- Floods
- Earthquakes
- Other Natural Disasters
- 4. Acts of War or Terrorism
- 5. Nuclear Hazards
- 6. Pollution
- 7. Ordinance or Law
- 8. Vacancy
- Understanding Limitations vs. Exclusions
- How to Protect Yourself from Exclusions
- Conclusion
- Get Financing
As a commercial real estate investor, understanding the ins and outs of your property insurance policy is really important. You might think you're fully protected, but a blind spot could leave you exposed to some serious financial risk.
In this article, I'll take you through eight of the most common commercial property insurance exclusions, helping you navigate these potential pitfalls and ensure your investment is truly secure.
What Are Insurance Exclusions?
Before we get into specific exclusions, I want to be clear what I mean by "exclusions" in the first place. Simply put, exclusions are specific circumstances, events, or types of damage that are not covered by your insurance policy. These are explicitly stated in your policy document and can vary depending on your insurer and the type of coverage you've purchased.
Common Exclusions in Commercial Property Insurance
Here's a rundown of some of the most common exclusions you might encounter in your commercial property insurance policy:
1. Wear and Tear
One of the most universal exclusions in commercial property insurance is wear and tear. This refers to the gradual deterioration of your property due to normal use over time. Insurance companies expect property owners to maintain their buildings and replace aging components as part of regular upkeep.
Example: A roof that starts leaking due to age and weathering over many years would typically not be covered.
2. Neglect
Closely related to wear and tear is neglect. If damage occurs because you failed to perform necessary maintenance or repairs, your insurance likely won't cover it.
Example: If a pipe bursts because you didn't properly insulate it during winter, the resulting water damage might not be covered.
3. Natural Disasters
Many standard commercial property insurance policies exclude certain types of natural disasters, particularly those that are more common in specific geographic areas.
Floods
Flood damage is almost universally excluded from standard commercial property insurance policies. This is particularly important to note if your property is in a flood-prone area.
Solution: You can typically purchase separate flood insurance through the National Flood Insurance Program (NFIP) or private insurers.
Earthquakes
Like flood damage, earthquake damage is usually excluded from standard policies, especially in areas with higher seismic activity.
Solution: Separate earthquake insurance can be purchased to cover this risk.
Other Natural Disasters
Depending on your location, other natural disasters like hurricanes, tornadoes, or volcanic eruptions may also be excluded or have limited coverage.
4. Acts of War or Terrorism
Most commercial property insurance policies exclude damage caused by acts of war or terrorism. This can include damage from bombs, bio-chemical attacks, or other forms of warfare or terrorist activities. You might think this isn't a likely scenario to find yourself in, but insurance companies can notoriously be super generous in their interpretation of this clause. For example, damage from riots and other unrest may often be excluded (rightfully or not).
5. Nuclear Hazards
Damage resulting from nuclear reactions, radiation, or radioactive contamination is typically excluded from standard commercial property insurance policies. Probably (hopefully?) not one of your top concerns, though.
6. Pollution
Many policies exclude damage caused by pollution or contamination, whether it's sudden or gradual. This can be particularly relevant for industrial properties or those with a history of certain types of commercial use. Say, a retail property with a dry cleaner establishment on site.
7. Ordinance or Law
If local building codes have changed since your property was built, your policy might not cover the cost of bringing the building up to current standards after a covered loss.
Solution: You can often add ordinance or law coverage as an endorsement to your policy.
8. Vacancy
If your property is vacant for an extended period (usually 60 days or more), your coverage may be severely limited or voided entirely.
Tip: If you anticipate a vacancy, speak with your insurance provider about vacancy permit endorsements or other solutions.
Understanding Limitations vs. Exclusions
While this article focuses on exclusions, it's important to understand how they differ from limitations:
- Exclusions are specific events or types of damage that are not covered at all under your policy.
- Limitations are restrictions on the amount of coverage provided for certain types of damage or losses.
- Review Your Policy Carefully: Understand what is and isn't covered under your current policy.
- Work with an Experienced Broker: A broker specializing in commercial real estate can help identify potential gaps in your coverage. (We can help!)
- Consider Additional Policies or Endorsements: For risks that are excluded from your standard policy, look into purchasing separate policies or adding endorsements.
- Implement Risk Mitigation Strategies: Take proactive steps to reduce the likelihood of excluded events occurring.
- Regularly Update Your Coverage: As your property and circumstances change, so should your insurance coverage. Review your policy at least annually.
For example, your policy might have a limitation on the amount it will pay out for valuable equipment or machinery, even if the cause of damage itself is covered.
How to Protect Yourself from Exclusions
Conclusion
Understanding the exclusions in your commercial property insurance policy is crucial for protecting your investment. While it might be tempting to opt for the cheapest policy available, doing so could leave you exposed to significant financial risks.
At Janover Insurance, we specialize in getting commercial real estate investors the best, tailored insurance solution for your needs. We'll work with you to identify potential gaps in your coverage and find solutions that provide comprehensive protection for your valuable assets.
Don't leave your investment vulnerable to unexpected risks. Contact us today to review your current coverage and ensure you're fully protected against all potential threats to your commercial property.