Hazard insurance for businesses protects companies against the cost of property damage caused by certain hazards or perils. Covered hazards typically include some natural disasters and a few that humans cause, like storms, fires, and vandalism.
While hazard insurance isn’t something you can buy on its own, it’s a form of coverage included in several types of insurance policies. The two types of business insurance policies that provide it are:
- Commercial property policy: These policies cover the owned or rented property necessary to run your operation, including buildings, business equipment, and inventory. Additionally, they may provide some business interruption coverage, which can pay some of your lost income if your business can’t operate after a disaster.
- Business owners policy: A business owners policy (BOP), bundles commercial property insurance with other forms of coverage that your business might need, such as general liability coverage. A BOP is usually cheaper than paying for commercial property insurance and liability insurance individually.
Note that general liability insurance is different from professional liability insurance. The former protects your business against lawsuits for things like bodily injury, copyright infringement, or advertising injury.
Meanwhile, professional liability coverage, also known as errors and omissions insurance, protects you from lawsuits if your client sues you for negligence or inaccurate advice should you fail to perform your professional services correctly.
If you own a home, you may know that you can get hazard insurance for your personal property through homeowners insurance. Unfortunately, the hazard coverage from your homeowners insurance policy generally won’t be sufficient to cover your business’ property.
Home insurance may cover your home’s structure, but it often has limits on coverage for your business’ equipment or inventory. Even if you do business out of your insured home, you’ll probably still want a separate business policy for hazard insurance coverage.
What Hazard Insurance Covers
In general, hazard insurance helps you pay to repair or replace your business’s property if it takes damage in a disaster. Of course, as with all insurance products, there are limitations. You’ll only get support for damage from certain disasters up to the policy’s limit.
Let’s take a look at the types of restrictions.
There are three types of property coverage options for commercial property insurance, whether you buy the coverage independently or as part of a BOP. They are:
- Basic form: These cover a standard set of natural and human-caused disasters. If your property takes damage from one not listed in the policy, you won’t get any assistance with the costs.
- Broad form: These cover all the same disasters as basic form policies and then some. Though the list of covered disasters is longer, you won’t get help for damage from anything not on it.
- Special form: These are the most comprehensive policies. They cover damage from any source except for the ones that the policy specifically excludes.
Here’s are some types of disasters that basic and broad-form policies frequently list:
- Fire and smoke
- Falling objects
- Sprinkler leakage
- Windstorm or hail
- Vehicles crashing into your business
Special form coverage typically includes a lot of different perils, but some of the frequently excluded damage sources are:
- Floods or sewer and drain back up
- War, including civil and undeclared
- Earthquakes and sinkholes
- Bacteria, funguses, and viruses
- Neglect or wear and tear
These all vary somewhat depending on your location and insurance company, so review your policy’s terms thoroughly before signing to make sure it covers the risks you want to limit.
Coverage Amount Limitations
In addition to having a flat dollar limit, policies provide one of the following two types of coverage:
- Replacement cost coverage: These policies pay to repair or replace your property at current prices, even if the amount is more than you originally paid. Replacement cost coverage is more expensive than actual cost coverage, as it’s more comprehensive.
- Actual cash value coverage: These policies pay your replacement cost minus depreciation to account for the decrease in property’s value from wear and tear since you bought it.
There are usually few limitations on the type of property that your business’s hazard insurance covers. It should help pay for damage to your business’s building, tools, equipment, inventory, and furniture.
Common Exclusions in Hazard Insurance for Businesses
Hazard business insurance coverage frequently excludes some types of damages. While it may vary depending on your business’ location, insurance provider, and policy, hazard insurance typically does not cover:
- Any damage to vehicles
Make sure you check the specifics of the policy you’re considering before you buy one, as each insurance provider can set their own exclusions.
If you want protection for something not included in a standard policy, you can always purchase additional coverage, such as flood or commercial auto insurance.
How Much Does Hazard Insurance Cost?
There are two costs involved in an insurance policy with hazard insurance. They are:
- Premiums: These are the monthly or annual payments you make to maintain your coverage.
- Deductibles: Your deductible is the amount you have to pay toward damages before your coverage takes over and pays the rest.
For example, you might pay $100 in monthly premiums to maintain your replacement cost policy with a $1,000 deductible. If you were to suffer $10,000 of damages from a covered disaster, your insurer would send you a $9,000 payment, making you responsible for the remaining $1,000 in damages to meet your deductible.
The cost of your hazard insurance quote depends on many factors, including your location, coverage terms, business and property types, and whether you get it from commercial property insurance or a BOP. Remember, you can’t buy hazard insurance on its own.
Commercial property insurance policies typically cost between $37 and $79 per month for small businesses. Meanwhile, BOP policies cost around $84 per month, on average. If you want property and liability protection, BOP policies are typically the superior small business insurance from a price perspective.
Do Businesses Need Hazard Insurance?
Unlike workers’ compensation insurance, most states don’t legally require businesses to have hazard insurance, but it’s still a good idea. The risk of lightning striking your office or a thief stealing your computers may be relatively low, but it would be so expensive that protecting yourself makes sense in most cases.
For example, say you own a restaurant and have to stop offering sit-down dining because someone crashed their car into your seating area. You probably wouldn’t have the cash buffer to survive without insurance.
Conversely, say you run a large manufacturing business that keeps a significant amount of inventory on hand. Even if you had plenty of cash savings to fall back on, you’d be extremely compromised if you were to lose your merchandise in a fire.
You may find that your business needs hazard insurance in other situations, too. For example, the Small Business Administration (SBA) required proof of hazard coverage to qualify for a Paycheck Protection Program (PPP) loan or Economic Injury Disaster Loan (EIDL).
The reason lenders like the SBA require hazard insurance is because you’re pledging your property as collateral for the loan. If you ever default, they’ll seize it to cover their losses.
Without hazard insurance, it becomes much more expensive and difficult for you to repair or replace your pledged collateral after damages, which increases the risk to your lender that it might not be there if they need to take it from you.
Ultimately, hazard insurance is often a sound investment for most businesses, so consider getting commercial property insurance or a BOP to keep your business safe. Talk to an insurance agent to get advice on the right coverage for your business.