If you live in one of India's teeming metro cities, you must have noticed that the number of businesses coming up each year is on the rise. The rise in population, disposable income, and technological tools make it possible for newer businesses to flourish. What this means to you as a real estate investor is a growing demand for commercial space. Offices, showrooms, warehouses, restaurant spaces, and godowns are steadily in demand. Owning a commercial property can earn you a steady rental income or cash flow through the lease. However, it is important to remember that commercial real estate is much more expensive than residential property, making it a more hefty financial investment with greater risks.
Why is commercial property insurance important?
Like with all investments, it is a good idea to mitigate the risks involved in owning a commercial property by taking an insurance policy. A number of major and minor issues can affect the condition and value of your commercial property. For example, natural disasters like earthquakes, tsunamis, floods, or even events like fire outbreaks or structural damage can undermine not only the value of the commercial property but also impact the rental or lease income that you derive from it. An insurance policy that indemnifies you against such risks is referred to as commercial property insurance.
Advantages of owning insurance for property –
Commercial properties are high-value investments. The asset appreciation due to location and demand is expected to offset any loss due to wear and tear. In case of major disasters caused by floods, earthquakes, fires, burst gas pipes, electric fires, or any such events, the value of the property is either completely diminished or completely lost. Repairs and reconstruction may place a high financial burden on the owner. Commercial property insurance helps shoulder the financial strain at such a time. It offers complete peace of mind for the property owner and offers high indemnity at a low cost (premium value).
Points to remember while opting for the policy –
- Like all insurance policies, you must thoroughly understand the terms of coverage and the exclusions. For example, some commercial property insurance policies may not cover man-made events such as damage due to bomb blasts, riots, or protests. Coverage on these may be available as an additional rider. You must be clear about these terms and select additional riders if need be.
- Commercial property insurance policies may, in some cases, decrease coverage every year. This is because of the depreciation of the property's value with time. It may be a good idea to work out the income and asset value appreciation (due to demand, locality etc.) and negotiate the terms of coverage with the insurance company.
- Before signing up for a commercial property policy, it is important to understand the guidelines with regard to leasing or renting. This could influence the claim if you have any.
- Land cost and cost of construction or damages during or due to construction are usually not covered by such insurance policies.
- It is important to compare products and offerings from different insurance providers before picking a policy that suits your needs. Most commercial property insurance policies require the property to be assessed and/or surveyed by a third-party assessor before determining the insurance coverage. Prepare all property documents, registration and sale deed, permits etc., ready for inspection.
- Once you have insurance for commercial property, do not forget to renew it on time and keep it active for times of need.
How is commercial property insurance different from commercial general liability?
Commercial property insurance, as mentioned, is designed to cover the financial damages and losses incurred by the property owner due to events like earthquakes, fire, floods, and even riots or man-made disasters. Therefore, it is the right product for property owners and covers only the value of the real estate asset.
Commercial General Liability (CGL) is an insurance policy that is designed to cover the liability of the business itself due to injury to the personnel, staff, customers, or visitors, bodily harm or physical injury or property damage caused by the operations of the business. For example, if an employee is injured due to the malfunctioning of a machine in the business premises, this is likely to be covered by a CGL policy.
It is important to remember that when a tenant or a lessee causes damage (intentional or unintentional) to the property, commercial property insurance does not cover such loss. This type of damage is usually covered by the tenant or business owner's CGL policy.
In India, most property owners – both commercial and residential – do not opt for insurance. While insurance premiums add to the monthly expenses, the benefits you can claim from these in times of crisis are priceless. Therefore, owning commercial property insurance is always a wise choice.
Conclusion
Hopefully, the above blog has served to educate you about the advantages of investing in a commercial property insurance. Given the uncertainty of nature and its elements, along with man-made disasters, it might be a wise idea to employ certain damage control techniques.
