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Commercial Landlord Insurance: Types of Coverage and Costs

Understanding the types of insurance options available and the coverage you may need will help ensure you're taken care of when the unexpected happens.

[Updated: Feb 04, 2021 ] Jun 15, 2020 by Kevin Vandenboss
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Insurance companies have found ways to insure almost anything. With so many types of insurance available, it can be hard for a commercial property owner to know what they should have and what's simply a waste of money for their situation. We're going to look at what commercial landlord insurance is and what types of coverage options are available and give you an idea on costs for each.

Why a commercial landlord needs insurance

Unexpected issues will arise at some point, and some of these issues can be quite expensive, even expensive enough to cause a commercial landlord to lose their property or file bankruptcy.

This is why there are a number of insurance options available for commercial property owners. Landlords don't only have the risk of significant property damage; they also face the risk of lawsuits from injuries or personal property damage in the common area, or even in a tenant's unit in some cases.

Even if a property owner doesn't think they will need an insurance policy, most lenders will require it if they have a mortgage on the property. Without any coverage, they could lose the value in their security on the loan if there's property damage that the landlord either can't afford or chooses not to pay for.

Lenders will require their borrowers to provide proof of insurance coverage and will likely check on the coverage regularly to make sure it's still in place. If at any point the borrower doesn't have insurance, the lender will place insurance on it themselves.

Most mortgage agreements have a clause that will require the borrower to pay the cost of the lender's insurance if they have to insure it. Their insurance is usually quite expensive, so it's not ideal for the owner.

There are two primary types of commercial landlord insurance:

  • Liability insurance.
  • Property insurance.

We'll look at each of these types of insurance, as well as some of the various kinds of additional insurance a property owner can get.

Commercial landlord liability insurance

Liability insurance protects the landlord from claims due to personal injury or personal property damage. In this case, personal property may be somebody's car that was damaged on the property.

Injuries can result from a slip and fall from ice or from damage to the parking lot, sidewalk, stairs, or other parts of the property that haven't been fixed.

Most commercial leases require tenants to have their own liability insurance policy for their business and rental unit. This not only protects the business from claims but also protects the landlord if a person is injured inside the tenant's unit.

Personal injury cases can become extremely expensive for a defendant. This includes not only the cost of a judgment or settlement, but the cost of defending yourself can become astronomical as well.

The insurance company takes over the defense of the lawsuit, minus any deductibles. They take on the cost of the legal defense as well as the settlement or judgment.

The insurance company will usually use their own attorneys instead of covering the bill for yours. They want to have control of the legal defense to minimize the amount they'll be required to pay if they have to settle or if they lose the case.

What liability insurance covers

A good general liability insurance policy for a commercial landlord will cover most situations that result in a personal injury or personal property damage claim that involves the property. Some common items covered include:

  • Medical expenses for anyone who gets hurt on the property.
  • Personal property damage, such as automobiles and mobility scooters.
  • Legal fees, court costs, and judgements or settlements related to covered claims.

What liability insurance doesn't cover

There are, of course, limitations on what an insurance company will cover. While liability insurance usually covers a wide array of circumstances, some common ones that won't be covered include:

  • Damage to your own property.
  • Injury to yourself or employees.
  • Illegal or malicious acts done on purpose.
  • Errors in service.
  • Environmental issues, such as pollution, contamination, oil spills, etc.

Commercial landlord property insurance

Property damage on commercial real estate can easily result in hundreds of thousands, or even millions, of dollars in repairs. A commercial property insurance policy can cover the cost of these repairs in many instances.

The exact coverage you get from a commercial landlord policy will vary some among insurance providers. In most cases, coverage will include common losses from:

  • Fire.
  • Wind.
  • Hail.
  • Tornadoes.
  • Vandalism.
  • Theft of business assets on the property (excluding cash).

Basic coverage doesn't usually include losses from:

  • Floods.
  • Earthquakes.
  • Hurricanes.
  • Theft of cash and currency.
  • Loss of income.
  • Acts of terrorism.
  • Loss of rental income.

Keep in mind that each policy is slightly different, and basic coverage may vary from one area to the next, depending on the types of risks associated with the geographical area.

There are additional types of coverage available for most of the items not covered by a basic policy. We'll look at those next.

Additional types of insurance for commercial landlords

Additional coverage may be necessary if you want protection against damages that aren't covered in a standard insurance policy. Some of these may be required by a lender, depending on the nature of the commercial investment property, its location, and whether it's in a flood zone.

Additional coverage includes:

  • Flood insurance: Many people don't realize that floods aren't covered in their policy if they don't pay close attention. This can leave them hanging if there is significant flood damage that they don't have coverage for.
  • Earthquake insurance: Properties in areas where earthquakes are common should have earthquake insurance, and a lender is likely to recommend it. Damage can be significant and may even result in a total loss.
  • Hurricanes: Hurricanes are a major risk factor for commercial properties in some parts of the world. Properties in areas along the coast, and even a little further inland, should seriously consider hurricane coverage.
  • Crime insurance: Crime insurance is common for businesses in owner-occupied real estate but may not be necessary for a lot of commercial landlords. This covers losses such as embezzlement and theft of cash. This may be beneficial for a commercial property owner if they have their own management or maintenance staff on payroll.
  • Terrorism insurance: Terrorism insurance may be something to consider if your commercial property is in major cities or near areas that draw a large crowd. Small towns are less likely to suffer from terrorist attacks, so it's not nearly as common of a type of coverage in these areas.
  • Errors and omissions insurance: Errors and omissions (E&O) insurance covers claims from mistakes or negligence. For commercial landlords, this will mostly apply to mistakes in how they represented the property to a tenant, errors in the lease, or improperly handling enforcement of the lease. This insurance covers court costs, legal fees, and judgements or settlements up to the insured amount. The important thing to remember is that only claims for mistakes or negligence that occurred after the policy went into effect are covered.
  • Environmental insurance: Properties that pose an environmental risk, such as air pollution, ground contamination, and water contamination, can be responsible for cleanup costs and damage to other properties. Environmental insurance may cover these costs as long as the contamination wasn't intentional or done knowingly.
  • Rent loss insurance: Rent loss insurance covers the loss in rental income due to property damage that prevents tenants from using their space. Even missing out on one month of rent can put a landlord in a difficult position.

How much commercial landlord insurance costs

There's not one general price range for all commercial landlord policies, since the price varies greatly depending on the type, condition, size, and location of the property, the owner, and previous claims filed against the property or owner.

In terms of property insurance, the amount will depend quite a bit on the amount of coverage needed. This will be less for small commercial rental properties and much more for a large commercial property.

The same is true for liability insurance. Commercial landlords with small business offices will likely need less coverage than property owners with large companies that are at greater risk of financial loss as their tenants.

Next we'll look at common ranges of insurance premiums for some of the different types of commercial insurance we discussed.

Costs of liability insurance

The cost of general liability insurance will vary based on the general risk of the property. These risks are determined by things such as the number of tenants, the types of businesses in the property, age of the property, location, condition, claim history, and the policy holder's overall history.

In general, commercial landlord liability insurance will cost about $300 per $1 million of coverage.

Cost of property insurance

The average cost of commercial property insurance is between $1,000 and $3,000 per year. This may be higher or lower depending on the replacement cost or cash value of the property.

Average additional annual coverage costs

Insurance Type Price Range
Flood insurance $708 to as much as $5,000 or more in areas in a known flood zone.
Earthquake insurance $1 to $15 per $1,000 of coverage, based on geographical area.
Crime insurance $240 for $25,000 in coverage, up to $5,000 per million in coverage.
Terrorism insurance $19 to $49 per million.
Errors and Omissions insurance $700 for real estate businesses.
Environmental insurance $3,500 to $7,000 up to $50,000+ for properties with known contamination.

The cost of each type of coverage is usually lower when they're bundled into one policy. This is similar to insurance costing less when you bundle homeowners insurance and car insurance. A commercial landlord insurance policy that provides all of the types of coverage you need will be less than each individual coverage on their own. Many times, the price continues to decrease with the more options that are bundled.

Things that affect the price of commercial landlord insurance

While some factors are outside of your control when it comes to the cost of insurance premiums, there are still things you can do to help control the costs. Most importantly, anything you can do to avoid having to file a claim will help prevent your premiums from increasing.

Require tenants to carry their own business insurance

At a minimum, you should require your tenants to carry their own general liability coverage. You should also require them to carry a minimum amount of coverage based on the size of their space and the amount of traffic they have. Most landlords require at least $1 million in coverage.

Commercial renter's insurance will also cover the cost of damages to their personal property in case of a fire or theft. If your property is in a flood zone, it may also be a good idea to require them to have their own flood insurance.

Tenants having their own insurance can reduce your liability, which can reduce your premiums. Their insurance company will probably still want your insurance provider to cover certain costs, but each company can usually work that out among themselves.

Improve your building's security system

A quality security system will help protect your building, and tenants, from theft and vandalism. If you lower the risk of these damages, your insurance company may give you a break on your premiums. Even if the discount isn't substantial, it will still reduce your chances of having to file a claim.

The type of security system may also make a difference in the amount of discount you'll receive. Having cameras, window break detectors, and motion sensors will likely be more effective than just a door sensor.

Fire monitoring and suppression systems

Fire is one of the most expensive claims for insurance companies. By improving the response time for the fire department, and minimizing the damage, the insurance company has less risk of covering the cost of an entirely new building.

A complete fire suppression and monitoring system is the most effective in minimizing fire damage. Once a fire is detected, the suppression system is activated (either water or dry suppression) and the alarm sends a signal to the monitoring company, who will dispatch the fire department. If a fire occurs late at night when nobody is in the building, the fire can spread to the point of causing a complete loss before anybody calls 911.

In addition to the monitoring and sprinkler system, there are also certain construction materials that can slow down the spread of fire, such as:

  • Fire-rated doors.
  • Fire-resistant windows.
  • X gypsum board for drywall.
  • Ceiling fire barrier.
  • Fire-resistant roofing.
  • Fire sealant.

While you're not going to change the structure of your building to reduce fire risk, structures built with concrete or bricks have much less fire damage than wood structures. However, the sheathing on a wood structure can potentially be covered in stucco, which has fire resistance properties.

Continuous insurance coverage

Having a gap in coverage can result in higher rates, even if it's just temporary. If you plan on buying new coverage from another provider, be sure to continue your current coverage right up to when your new policy takes effect.

Having a lapse in coverage may cause concern with an insurance company that you either can't afford your insurance payments or are willing to take on unnecessary risks to save money. Either of these can be bad for insurance companies.

Building safety and maintenance

An insurance company is likely to want to send somebody to inspect your property before providing coverage or giving you a concrete price. Make sure all of your maintenance issues are fixed before they arrive and all safety issues are addressed. Even if your local building code doesn't require certain safety measures, or the building is grandfathered in, it's still wise to do what's feasible to add to the safety of the property.

Maintenance and safety issues to address include:

  • Sidewalk and walkway cracks or uneven surfaces.
  • Insufficient lighting indoors or outdoors.
  • Too little spacing between walkways and trees, bushes, and shrubs.
  • Debris in storm drains and floor drains and/or improper draining.
  • Rails improperly secured.

Keeping up with curb appeal is also important. While a fresh coat of paint and well-manicured landscaping isn't going to reduce the risk of an insurance claim, it will still impact the insurance company representative's first impression of the property. Old, worn-out looking properties automatically make people assume they're prone to damage and safety hazards.

Check with insurance companies on any other potential discounts

There may be other things you can do that will provide you with a discount on your coverage, and the insurance company is usually happy to tell you what they are. While they may be getting a little less in premiums, they're also reducing their risk of paying out on claims.

How to choose your insurance company and coverage

It's important to review coverage options with at least a few different companies when getting insurance quotes before choosing a policy with one. You also want to consider more than just the cost. The cheapest insurance policy may end up leaving you out to dry when they can find a reason to not cover your loss. Policies can also be different within the same company, so carefully compare insurance options with each company.

The exact coverage is often different from one company to the next, so consider what coverage is most important to you and your specific situation. You'll also want to consider the amount of coverage you may potentially need for things like E&O insurance. If you have tenants paying several hundred thousand dollars per year in rent, $1 million in coverage may not be enough to cover a potential claim.

You also want to consider the deductible amount. The cost of a policy often varies depending on how large of a deductible you want. If you're willing to pay a higher deductible, your annual premium may be lower. However, don't put yourself in a situation where your deductible will be more than you can afford or costs as much as some of the potential damage.

You want to consider the reputation of each insurance company you look at. Some lesser- known companies offer discounted insurance, but that's often because they're difficult to work with when it comes time to file a claim. You can easily lose more money waiting for them to pay the claim than you saved by choosing the discount coverage.

Talk to other commercial landlords about who they use and how helpful they were if they had to file a claim.

The bottom line

Nobody likes another bill, so it's common for people to shop for the lowest-priced landlord insurance and call it a day. While that insurance policy may just be another annoying bill every month, it can be your greatest blessing when the unexpected happens. The right insurance coverage isn't something you're going to regret having one day, but it can definitely be something you can regret not having.

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