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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." 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.
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Commercial Property Insurance
Commercial property insurance helps businesses, including farms and ranches, pay to repair or replace buildings, associated structures, and contents damaged by fire, storms, theft, and other events outlined in the policy.
This publication provides general information about the kinds of commercial property coverage that are available in Michigan . It can help you evaluate different commercial property policies, understand how rates are determined, and ask the right questions when shopping for insurance. However, keep in mind that it’s not a substitute for the policy itself. You should review your policy carefully to know your specific coverage.
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Tenant Commercial Property Policies
The rules and procedures for tenant commercial property policies are essentially the same as those for owned commercial property. An insurance company will still evaluate the same factors, such as a structure’s location and construction materials, to determine the likelihood of a property loss. The cost of tenant coverage will generally be significantly less than for owned property coverage, however, as the policy will only extend to the leaseholder’s on-premises property and not the actual structure.
Actual Cash Value vs. Replacement Value
A commercial property policy may pay based on either the "actual cash value" or "replacement value" of a loss. An actual cash value policy will pay only the amount of the property’s worth at the time of the loss – in other words, the value of the property after depreciation due to such factors as age and normal wear and tear are subtracted. A replacement value policy will pay the amount needed to purchase new property of like kind and quality after a loss. In general, a replacement value policy better ensures that a business can recover fully after a significant loss. Replacement value policies are typically more expensive than actual cash value coverage, however, because the policy limits should reflect the cost to replaced damaged property with new property.
Multiple Premises
Typically, businesses operating on multiple premises are covered by a single policy. In certain instances, such as when two business locations serve widely different functions and have different risk profiles, separate policies may be needed. This may sometimes be the case when a business insures both an office location and a factory, for example.
Deductibles
Almost all policies have a "deductible," which is an amount the business must pay out of pocket toward the cost of a claim before the insurance company will pay. Generally, the higher a policy’s deductible, the lower its premium will be, as the policyholder is accepting a greater share of the cost of any eventual claims. Most policies will also include a "policy limit," which is a maximum amount the insurer will pay toward any covered loss.
Understanding Coverage
Different types of commercial property policies protect against different risks, or "perils." It’s important to understand which types of losses a policy does and does not cover. A commercial property policy will almost never cover any loss that is either not specifically included in the policy language or is specifically excluded. Therefore, be sure you read a policy carefully before you purchase it. You may need to buy certain specialized policies, such as flood, windstorm, or crime coverage to be protected from those particular losses.
Underwriting
Insurers use a process called "underwriting" to evaluate the likelihood that a given policyholder will file a claim for a loss. The greater the likelihood, the higher the premium will be. If an insurer determines that a business poses too great a risk of a loss, it may decline to issue a policy entirely. If your business is declined for coverage, keep shopping; companies have their own criteria for determining whether to issue coverage and the rate to charge. If one company turns you down or is too expensive, another may be willing to issue coverage or offer a lower premium. There may also be certain steps your business can take to lower its risk and either qualify for coverage or get a lower rate.
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