Commercial Property Insurance to Value – Are You Well Protected?


If you own a commercial property, you know it is a valuable asset. This property is either the home of your business or your tenants. No doubt about it, insuring your property is necessary to manage risk in the event of a loss. Making sure you have the right amount of commercial property insurance is very important. Unfortunately, often businesses fail to adequately insure their commercial properties for the correct value. Here’s why and what you can do to proactively ensure you are well protected.

Why is underinsuring commercial property so common?

There are many considerations and possible mistakes that can take place when estimating the replacement value of a commercial property.

  • Failing to include all items of common property
  • Inaccurately determining demolition and removal costs.
  • Calculating the value based on market valuations, purchase price, original construction cost, etc.
  • Ignoring building code changes or bylaw changes that would affect the cost to rebuild

Why You Must Choose the Correct Insurance-to-Value Number.

What is your commercial building’s property limit or insurance value? Many think the market value of their building, or what someone would pay you for the property in the current real estate market, is the insurance value. Others think the assessed value, the amount your local tax assessor uses to tax the property, is the insurance value. But neither of those is correct.

Only the replacement cost value of your property, the amount it would take to rebuild it with similar quality materials, matters to insurance companies. It should also matter to you because if you choose the wrong number, you may be underinsured even in the event of a partial loss.

Determining Replacement Cost Values.

Since the replacement cost of a commercial building is not its market value or assessed value, how do property owners determine the replacement cost of their buildings? Here are factors to consider when determining your building’s value. However, an insurance appraisal may be the safest way to estimate the cost to repair or replace your property.

  • Building Age. Older buildings are more likely to need upgrades for outdated building materials and equipment. These can substantially increase costs.
  • Direct and indirect costs. Direct costs include the materials and labour needed to reconstruct the building to a similar standard. Indirect costs include permits, architectural costs, consulting fees, engineering, and other costs unrelated to the property’s development and rebuilding.
  • Site accessibility. For example, suppose the building is at a steep location or near to other neighbouring properties. In that case, it may require supports or other measures during the demolition or reconstruction.
  • Building code upgrades. Older buildings often need many code upgrades that can increase rebuilding costs. These include complying with electrical, plumbing upgrades, energy efficiency, sprinkler systems, and other improvements to comply with building and safety codes.
  • Unique or non-typical building characteristics. Historical elements such as stained glass and green rooftops may increase construction costs.

Replacement Costs vs. Reconstruction Costs.

While the concept of “replacement cost” seems logical, a better term to consider is “reconstruction cost.” It almost always costs more to rebuild a property already there than to build something new because of factors like demolition and removal costs. Furthermore, it may be impractical to use the same methods or materials to rebuild your commercial building. So the cost to reconstruct your building may be significantly more than you might estimate.

Having accurate insurance to value for your commercial property will help property owners rebuild quickly, letting them stay focused on their business. Under insuring your commercial property can mean insufficient coverage. In a loss, the policy owner may need to pay more out-of-pocket expenses to reconstruct their property. The time to consider your commercial property insurance to value is before a loss, not after one.

Our business insurance advisors will help you understand your business risks and exposures, including commercial property insurance to value. Visit our webpage for more information about Property Owners Insurance or to request an insurance quote.