Hazard Insurance for Small Businesses

Any small business owner knows that running a company is a risky proposition. Besides economic downturns, failed product launches, and customer complaints, property that you rely on to run your business can be lost or damaged due to a variety of unexpected hazards.

Hazard insurance, as it's sometimes called, is property insurance (including some related coverages) that can protect you and your wallet from these perils by reimbursing you for your losses. Hazard insurance is one of many types of coverages that small businesses need. Liability insurance, in particular, is a must.

The term "hazard insurance" is not generally used by insurance companies (it's a colloquial term used by many consumers). When you want to buy coverage for hazards, you'll have to ask for commercial property insurance or business property insurance, and you'll need to describe the kinds of hazards and the types of properties you wish to include in your policy.

What Is Hazard Insurance?

Hazard insurance is a type of property insurance that provides financial reimbursement to repair or replace business property, such as real estate or equipment, that's damaged or lost due to unforeseen events like a fire, storm, vandalism, or theft.

If you have a mortgage on the building you own for your business, the bank will require you to carry commercial property insurance. It might also set policy limits and dictate the types of coverage your policy must include, and how you must use any payouts from the carrier (not surprisinbly, the bank gets paid first). But even if you don't have a mortgage, it's likely you'll have other valuable property (owned or leased) that should be insured against loss or damage.

Keep in mind that property insurance is a broad umbrella term, and just because it includes the word "property," it doesn't mean that all your property will be covered or that the insurer will reimburse all your losses regardless of what caused them. Before you buy a policy, make sure that it offers the coverage you need for the types of events and the types of property that are applicable to your business.

Fire damage is covered by even the most basic policies, but damage from mud slides, windstorms, and the weight of snow might be excluded. Earthquake insurance and flood insurance typically require separate policies for an additional premium. (They are often expensive and have a very high deductible, but are worth considering if your building is susceptible to earthquake or flood damage. Some properties might qualify for coverage underwritten by the federal government, through the Federal Emergency Management Agency, or FEMA.) Whatever policy you decide on, read it carefully before you pay for it—not just when you've suffered a loss.

Most insurers offer coverage either for the replacement value of your property (the carrier pays the cost to replace the damaged property) or the actual cash value (your payment is based on the value of the property before the damage). Actual cash value coverage is usually less expensive than replacement value coverage, but it might be of little use when, for example, the insurance company pays you for the pre-damaged value of your five-year old computer system (That payout won't help you much when you purchase a new system.) Some lenders, such as the SBA (see below), require you to purchase replacement value coverage, for the simple reason that a payout for replacement will enable you to purchase needed items without reaching into your own pocket and resume business.

What Does Hazard Insurance Cover?

Each insurer defines hazards differently, and it's important to review your policy carefully to understand the events and property types covered and those that aren't.

Keep in mind too that hazard insurance coverage is dependent on what caused the hazard as well as the type of damage incurred. For example, a typical hazard insurance policy might cover the cost of damages due to a fire on your premises, but you'll likely have to buy additional coverage (called an addendum or rider) to be protected against fire damage caused by wildfire that began on a neighboring hillside.

In general, hazard insurance covers losses and damage from events such as:

• theft
• explosions such as those caused by gas leaks
• vandalism
• riots
• fire and smoke
• sprinkler leaks

The types of property covered by hazard insurance typically include:

• buildings and furnishings
• business vehicles
• tools and equipment
• inventory
• computers, phone systems, and video equipment
• accounts receivable, and
• valuable documents such as title deeds, books, or films.

Hazard insurance policies also might provide coverage for lost income if you cannot open your business due to any of the events listed above, although some policies require you to purchase a separate addendum for business interruption coverage.

What Incidents Are Typically Covered by Hazard Insurance?

Unlike liability insurance, which protects your business assets if a customer or other outsider is injured or damaged by your business or your products, hazard insurance protects you, the business owner, from losses you incur. Here are some examples of events that are usually covered by hazard insurance:

• Burglars break into your retail store and steal merchandise.
• A fire in your company's garage damages your delivery trucks.
• A drunk driver crashes into the fence around your property and destroys it.
• A private plane crashes on your building roof, destroying the roof and some of your factory equipment.
• Vandals break into your property and set off the fire extinguishers, destroying your computers and phone system.

What Hazard Insurance Doesn't Cover

Just as you should pay careful attention to the items your policy covers, it's important to carefully review the exclusions on your policy. The terms of your policy might differ, but in general, hazard insurance policies exclude these types of events:

• normal wear and tear
• intentional damage (whether caused by the owner or renters of your property)
• vandalism that occurs on some vacant properties
• mold and fungus
• damage caused by pets, wildlife, and vermin
• damage due to earthquakes or other natural disasters
• damage due to mechanical failures
• damage to your company vehicles due to a traffic accident, and
• damage that is a result of delayed or deferred maintenance.

Watch out for certain exclusions that are dependent on the cause of the disaster. The same type of damage might be covered or excluded, depending on what caused it. For example, if your building floods due to a thunderstorm, it's likely to be covered by hazard insurance. But coverage for flooding caused by an overflow from the river or stream located near your property requires a separate flood insurance policy.

Keep in mind, too, that property insurance is different from liability insurance, which covers injuries or losses suffered by others as well as the cost of settling personal injury claims that result from defective conditions on your property. Suppose a vehicle crashes into your storefront injuring a customer. A property insurance policy will help you to repair your damaged store, but if the injured customer sues you, you'll need liability insurance to cover the cost of settling the lawsuit.

Do You Need Hazard Insurance for Your Small Business?

Like all types of insurance, the purpose of hazard insurance is to reduce the likelihood that you'll have to reach into your own pocket to replace or repair your business property. If you risk losses from damage to your business property (including the ability to operate your business) due to disasters such as those listed above, you'll need hazard insurance.

In addition to mortgage lenders, other lenders might require you to carry property insurance for equipment that you lease or finance, and some states also require small business owners to carry this coverage.

Don't assume that your homeowner's policy will cover losses in your home-based business. Most homeowner policies exclude business property located in your home. For example, if you keep your company car in your home garage and it's destroyed in a fire, you'll need hazard insurance to cover you for the loss, because your homeowner's insurance protects only your personal vehicles.

Similarly, if you run an online retail business and a fire destroys the inventory that you store in your home garage, your homeowner's policy won't cover the losses. Homeowner's policies also exclude the loss of your computers and the information you store on them when the computers are used for your business.

Do You Need Hazard Insurance to Get an SBA Loan?

Before the SBA grants any loan secured by collateral, it requires the borrower to have hazard and other types of insurance. If the collateral used to secure the loan is destroyed or damaged, hazard insurance ensures that it can be repaired or replaced.

The principle is similar to the reasons you're required to carry auto insurance on a car you've financed. You've used the car as collateral to secure the loan, and the lender wants to know you'll be able to repair or replace it if it's damaged, so you won't be forced to default on the loan.

The hazard insurance requirement applies to both SBA 7(a) loans (loans typically used for working capital, business expansion such as buying additional real estate or purchasing equipment and supplies), and SBA 504 loans (typically used to buy or renovate real estate). It's not required for SBA microloans.

The SBA also requires property located in what it deems a special flood hazard area to carry flood insurance.

Because the SBA issues loans in combination with banks and Community Development Corporations (CDCs), these financial institutions might require you to carry additional coverage, such as life insurance or product liability insurance.

The amount of insurance you'll be required to carry depends on the amount of the loan, the collateral used to secure the loan, and the type of loan. For most SBA loans, your insurance policy must cover the full replacement value of the assets used as collateral.

How Much Does Hazard Insurance Cost for a Small Business?

The cost of a hazard insurance policy depends on many factors including:

• the location of the property
• the size and age of the building
• the building's fire safety features, such as sprinkler systems and fire alarms
• the type of equipment and furnishings insured
• the amount of time you've been in business
• the deductible you choose
• the limits of your coverage, and
• other coverage details.

On average, small business owners spend between $45.00 and $85.00 per month on hazard insurance.

Costs vary from one insurance carrier to the next, so it's important to shop around for hazard insurance, just as you would for any other type of insurance. Many insurance companies provide an online cost estimator that uses information you supply about your business and desired coverage to provide a rough calculation of your costs. (The actual cost might be different when you apply for a policy.)

Where to Get Hazard Insurance for Your Small Business?

Most major insurance carriers offer hazard insurance coverage. The best way to begin your research is to conduct an online search using the term "commercial property insurance" or "business property insurance". Contact each insurance company directly. You can also contact a business insurance broker who will do the research for you.

You can also use online articles that rate different insurance companies according to certain categories, such as companies that are best for solo operators, those with multiple properties, or those who want to bundle several types of policies. But remember that while some publications base their rankings on research they've conducted, others might solicit payment from the insurance company in exchange for a listing in the article.