Commercial real estate insurance in Maryland is an important part of owning, financing and occupying commercial property.

A building may represent a substantial investment, but the real estate itself is only part of the risk. Owners and businesses may also face exposure from property damage, injuries, interrupted operations, equipment losses, liability claims and other events.

Insurance requirements can also affect a commercial real estate transaction before closing. A lender may require particular coverage, and a commercial lease may impose detailed insurance obligations on both the landlord and tenant.

Why Commercial Property Insurance Matters

Commercial property can be exposed to a wide range of risks.

Depending on the property and business, those risks may include:

• Fire
• Storm damage
• Water damage
• Theft
• Vandalism
• Liability claims
• Business interruption
• Equipment damage
• Flooding
• Other covered or excluded events

The appropriate insurance program depends on the property, occupancy, business operation and policy terms.

Commercial Property Insurance vs. Business Insurance

These terms are sometimes used interchangeably, but it helps to distinguish the real estate from the business operating inside it.

The coverage needed for a landlord who owns a leased warehouse may therefore be different from the coverage needed by the distribution company occupying the warehouse.

1. Commercial Property Coverage

Commercial property insurance may provide protection for insured physical property against covered causes of loss, subject to the terms, exclusions, limits and deductibles of the policy.

Depending on the policy, insured property may include:

• The building
• Certain permanently installed improvements
• Business personal property
• Furniture
• Equipment
• Inventory
• Other covered property

2. Replacement Cost vs. Actual Cash Value

One important insurance question is how covered property will be valued after a loss.

Two concepts frequently encountered are:

• Replacement Cost
• Actual Cash Value

The exact definitions and settlement provisions depend on the policy. Generally, replacement-cost coverage is designed around the cost of replacing covered property subject to the policy terms, while actual-cash-value settlement may reflect depreciation or other policy-defined considerations.

3. Building Replacement Cost Is Not the Same as Market Value

A commercial property’s insurance replacement cost and its market value can be very different.

Market value can reflect:

• Land value
• Location
• Income
• Lease terms
• Investor demand
• Zoning
• Development potential

Insurance replacement-cost analysis focuses on a different question involving the cost associated with replacing insured improvements under the terms of the policy.

4. General Liability Insurance

Commercial general liability coverage can be an important part of the risk management program for both property owners and businesses.

Liability exposure could arise when someone alleges bodily injury or property damage associated with the premises or business operations.

Examples could involve:

• A customer injury
• A visitor slipping on the premises
• Damage allegedly caused to another person’s property
• Other covered liability claims

Coverage depends on the policy’s terms, limits, exclusions and circumstances of the claim.

5. Business Income / Loss of Income Coverage

Physical damage can create a second financial problem: interruption of income.

For example, a covered fire could damage a building and also prevent a business from operating from the premises for a period of time.

The Maryland Insurance Administration identifies loss-of-income protection as one type of coverage that may be included in commercial insurance arrangements.

Property owners and business operators should discuss the appropriate form and amount of income-related coverage with a qualified insurance professional.

6. Loss of Rental Income

Commercial landlords have a related concern.

If covered property damage makes leased space unusable, the owner may face both:

• Repair costs
• Loss of rental income

An owner should determine whether the proposed insurance program appropriately addresses the rental-income exposure and for what period.

7. Flood Insurance

Flood risk deserves separate attention when evaluating commercial property.

Buyers should not assume that ordinary commercial property insurance automatically provides the flood protection they need.

During due diligence, investigate:

• Whether the property is in or near a mapped flood hazard area
• Past flooding history
• Drainage conditions
• Lender flood-insurance requirements
• Available flood coverage
• Coverage limits and deductibles

8. Ordinance or Law Coverage

Older commercial buildings can present an additional issue after major property damage.

Repairing or rebuilding may trigger requirements to comply with current building codes or ordinances.

Depending on the property and policy, owners may wish to discuss ordinance or law coverage with their insurance professional.

This can be particularly relevant for older buildings where current code requirements differ materially from the standards in effect when the building was originally constructed.

9. Equipment Breakdown Coverage

Some commercial properties depend heavily on mechanical, electrical or other equipment.

Examples include:

• Boilers
• HVAC systems
• Electrical equipment
• Refrigeration systems
• Other specialized equipment

Property owners and businesses should discuss whether equipment-breakdown coverage is appropriate for the specific building and operations.

10. Umbrella or Excess Liability Coverage

Some owners and businesses purchase umbrella or excess liability coverage to provide additional liability limits above certain underlying policies.

The appropriate limits depend on the property, operations, contractual requirements and risk profile.

11. Commercial Auto Insurance

Commercial property itself is only one part of a business’s insurance needs.

Businesses using vehicles for operations may also need commercial automobile coverage.

The Maryland Insurance Administration warns that personal automobile coverage may not protect a vehicle while it is being used in the course of business, depending on the policy and circumstances.

12. Workers’ Compensation

Workers’ compensation is separate from commercial property insurance but can be part of the broader insurance picture for businesses with employees.

Employers should determine their obligations under Maryland law and obtain appropriate professional guidance.

13. Professional Liability

Certain businesses may also need professional liability coverage.

Depending on the profession, this may include coverage commonly referred to as:

• Errors and omissions
• Malpractice
• Professional liability

This coverage addresses different risks from insurance on the building itself.

14. Cyber Insurance

Cyber risk is another business exposure that is separate from the physical commercial property.

Businesses that maintain customer information, financial data or other sensitive electronic records may wish to discuss cyber coverage with their insurance professional.

Insurance and Commercial Real Estate Financing

When commercial real estate is financed, the lender has an interest in protecting the collateral securing the loan.

Commercial loan documents may therefore establish insurance requirements involving matters such as:

• Required property coverage
• Minimum limits
• Deductibles
• Liability insurance
• Flood coverage when applicable
• Evidence of insurance
• Lender-related policy provisions

Exact requirements depend on the lender and transaction.

Insurance Should Be Part of Due Diligence

Insurance is sometimes treated as a closing task.

For commercial property, it can be better viewed as part of the buyer’s financial and physical due diligence.

Before the due diligence period expires, consider investigating:

Property Condition Can Affect Insurance

The physical condition of a building can affect more than repair costs. It may also affect insurance availability, underwriting or premiums.

Potential areas of concern can include:

• Roof condition
• Electrical systems
• Plumbing
• Fire protection
• Vacancy
• Prior losses
• Building age
• Property use
• Other underwriting factors

Insurance for Vacant Commercial Buildings

Vacancy deserves particular attention.

A vacant commercial building may present different risks from an occupied property, including:

• Undetected water leaks
• Vandalism
• Theft
• Fire
• Delayed discovery of damage

Owners purchasing vacant buildings should tell their insurance professional the actual occupancy status and discuss how vacancy affects coverage.

Insurance for Renovation and Construction

A buyer planning substantial renovation should also discuss the construction period with the insurance professional.

The risk profile may change while:

• Walls are being removed
• Electrical systems are being upgraded
• Roof work is underway
• The building is temporarily vacant
• Contractors are working on-site
• New improvements are being installed

Depending on the project, specialized coverage may be appropriate.

Commercial Lease Insurance Requirements

Insurance is also a major commercial leasing issue.

The lease may require the tenant to maintain specified types and amounts of coverage throughout the lease term.

Requirements may include:

• Commercial general liability
• Business personal property coverage
• Workers’ compensation when applicable
• Commercial auto coverage when applicable
• Business interruption coverage
• Umbrella or excess liability
• Other coverage appropriate to the operation

The actual requirements depend on the lease and business.

Additional Insured Requirements

A commercial lease may require the tenant to name the landlord and potentially other parties as additional insureds on specified liability policies.

Tenants should send the insurance provisions to their insurance professional before signing when coverage requirements could materially affect cost or availability.

Certificate of Insurance

Commercial landlords frequently require tenants to provide evidence that required insurance is in place.

A certificate of insurance may be used as evidence of certain coverage information, but the actual insurance policy and endorsements determine coverage.

Tenants should coordinate with their insurance professional to satisfy the lease requirements.

Who Insures the Building in a Commercial Lease?

The answer depends on the lease structure.

In many transactions, the landlord maintains insurance on the building while the tenant maintains coverage for its business property and liability exposures.

However, commercial leases vary substantially.

The lease may also determine whether tenants reimburse the landlord for building insurance costs as part of operating expenses or NNN charges.

Insurance and Triple Net Leases

Under many triple net lease structures, the tenant pays or reimburses its allocated share of expenses that can include:

• Property taxes
• Building insurance
• Common area maintenance

This means insurance premiums can affect the tenant’s total occupancy cost even when the landlord is the party purchasing the building policy.

Insurance Provisions Tenants Should Review

When reviewing a proposed commercial lease, insurance-related provisions may address:

• Required types of insurance
• Minimum limits
• Deductibles
• Additional insureds
• Certificates of insurance
• Policy endorsements
• Notice requirements
• Waiver of subrogation provisions
• Indemnification provisions
• Casualty provisions
• Insurance-cost reimbursements

Insurance and the Commercial LOI

Detailed insurance provisions are typically addressed in the final lease or purchase/loan documentation rather than fully negotiated in a basic LOI.

However, if an unusual insurance requirement could materially affect the transaction, identifying the issue early may prevent problems later.

How Insurance Costs Affect Investment Returns

For many income-producing properties, building insurance is an operating expense.

An increase in insurance expense can therefore reduce NOI if the cost cannot be fully recovered from tenants.

For an investment property, that change can affect cash flow, debt-service coverage and valuation.

Get Insurance Quotes Before the Due Diligence Period Ends

For buyers, one practical approach is to investigate insurance early enough that the information can be considered before important contractual deadlines.

The insurance professional may request information such as:

• Property address
• Building size
• Construction type
• Year built
• Roof age
• Occupancy
• Business use
• Fire protection
• Prior claims or loss history when available
• Requested limits
• Other underwriting information

Providing accurate information is important because the insurer needs to understand the actual risk being considered.

What If Commercial Property Insurance Is Difficult to Obtain?

Some properties may be difficult to insure through the standard private insurance market.

The Maryland Insurance Administration states that limited insurance protection may be available through the Maryland Joint Insurance Association for certain business properties that are unable to obtain essential property insurance through the normal property/casualty insurance marketplace.

Coverage is subject to applicable conditions and underwriting requirements.

Commercial Property Insurance Checklist

Common Commercial Insurance Mistakes

• Waiting until closing to obtain an insurance quote.
• Assuming purchase price equals replacement cost.
• Assuming all causes of loss are covered.
• Ignoring flood exposure.
• Failing to understand deductibles.
• Ignoring vacancy provisions.
• Failing to insure business personal property.
• Ignoring loss-of-income exposure.
• Signing a lease without checking the insurance requirements.
• Assuming an existing business policy satisfies a new landlord’s requirements.
• Ignoring insurance when calculating NOI.
• Failing to account for insurance in NNN occupancy costs.

Commercial Real Estate Insurance FAQs

This article is provided for general informational and educational purposes only and does not constitute insurance, legal, financial, tax or investment advice. Insurance policies, coverage requirements, exclusions, deductibles, limits and premiums vary by insurer, property, business, lender and transaction. Buyers, owners, landlords and tenants should consult a qualified insurance professional and review the actual insurance policies, leases, loan documents and other applicable agreements before making decisions.