The importance of acquiring and maintaining the right types and amounts of insurance to protect your commercial property investments can’t be understated. I place a special emphasis on the word “maintain” because even though you may have started out with the right insurance, dynamic variables, such as property conditions, market values and legal changes can transform comprehensive coverage into an outdated and expensive liability very quickly. The key point here is that committing to regular and thorough reviews of your property and asset values and the associated insurance protection is an excellent idea and will ensure that your coverage is evolving to keep up with the requirements of your property. At least once a year, you should be asking yourself, “Are my properties properly protected?”
If an investor bought a building in 2008 for $1 million and continues to insure it based on the original purchase price, the property may be substantially underinsured. Building costs have changed along with building codes during that time, which may have caused replacement values to rise significantly. Most insurance policies last for a year, so an annual review of the value of your assets is a natural time to restructure your insurance coverage appropriately.
For newcomers to the investment property game, I highly recommend you consult with a reputable and experienced insurance professional who has the expertise to analyze your property, understand your insurance needs, and design just the right insurance plan that effectively balances coverage with costs. A lot of newcomers either don’t realize that they need certain types of insurance or simply put it off until something happens. Ask any veteran property owner and you’ll hear that you need to be proactive in your approach to insurance.
While everyone is familiar with common types of property insurance, such as fire and flood, other types of lesser-known insurance can be equally important. For example, let’s consider law and ordinance coverage. Whether it is updated wind load requirements, the number and size of required bathrooms, handicap access requirements, or other ordinance categories, building codes and land ordinances are in a constant state of flux. The construction and condition of a building or property may no longer be in compliance with local, state and federal building codes. Regardless of whether it’s the ordinances or the property that is changing, the owner will have to make the necessary improvements and alterations to stay current with building codes if he intends to repair the property. Keep in mind that a tenant’s lease may require the landlord to repair the property. This can be a costly obligation if the correct insurance is not in place.
Certain insurance standards may be required by the lender in making a loan for the purchase of the property. For example, income, or rental insurance, is frequently required by lenders for the owner to be in compliance with the loan. This type of protection provides reimbursement of any lost revenues while the building is undergoing repair. Your annual insurance review should include a confirmation that your insurance is still in compliance with your loan terms.
Tenants are also required to carry insurance. While tenants are typically required to carry liability insurance and personal property coverage, many leases have standard, built-in insurance amounts that the tenant will be required to carry. The baseline insurance offered in a “form” lease may be not be adequate protection based on the nature of the tenant’s business. The correct amounts of coverage required for your tenants should vary based on the tenant business and the products and services they offer. For example, a restaurant or business with flammable materials should require more fire coverage than say a bottled water store. Be sure each tenant’s individual liability coverage is equal to the risk of taking them on as a tenant.
In summary, don’t wait until something happens to find out you don’t have the right type, quantity and quality of insurance for your commercial property. Taking the time to regularly audit your property and its insurance coverage, and spending the money to keep your protection equal to your potential risk is a wise investment of time and money.
If your commercial property could benefit from an insurance review, give us a call here at Coldwell Banker Commercial. Our highly-experienced team works in conjunction with our owners to review their insurance policies annually and recommend any adjustments necessary to achieve optimal coverage.
Grayson Powell is the Managing Partner at Coldwell Banker Commercial SunCoast Partners (CBCSCP). CBCSCP leverages the vast experience of highly-skilled real estate professionals and developers and specialize in selling, leasing and managing retail, commercial, and investment property. To learn more about CBCSCP, visit www.cbcwilmington.com or call 910-350-1200.
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