How Much Does Commercial Building Insurance Cost?

Commercial building insurance costs differ greatly because commercial buildings come in all shapes and sizes. According to insurance expert NimbleFins, commercial building insurance costs are largely dependent on the rebuild cost of the structure. Smaller commercial buildings with a £200,000 rebuild value, for example, could cost around £200 to insure with buildings and liability coverage. Larger buildings cost an appropriate amount more. But a building with a rebuild cost that is 5X higher will likely not see an uptick of 5X in their buildings insurance premium.

In addition to the rebuild cost, many factors are at play when calculating commercial building insurance premiums.

How is commercial building insurance calculated?         

Commercial building insurance is calculated using several factors, but the primary factor will be the rebuild cost in most cases. Also known as reinstatement value, this includes the costs to demolish and then rebuild a building. In addition to the building costs (e.g., materials and labour), professional costs will be included to reflect fees paid, for example, to architects, surveyors and local authorities.

Rebuild costs are usually lower than the market value of a property—in many cases, rebuild costs are significantly lower than market values. This is because the market value includes the value of the land. Rebuild costs don’t reflect the land value because land does not get destroyed in events covered by insurance like fire or burglary.

To get an estimate for the rebuild cost of a property, commercial building owners have several options. Usually, a chartered surveyor who is an RICS member will be called upon to estimate rebuild cost. They can have access to tools like the RICS Commercial Reinstatement Tool to help determine how much it would cost for a property to be reinstated should it be destroyed. This tool calculates reinstatement costs using a historical database that spans more than 50 years of construction project data in the UK.

Cheaper surveys that can be performed from afar may be possible for less valuable properties. However, more valuable properties typically would require an in-person survey that would be more expensive but more accurate. 

Having an accurate rebuild cost is important to avoid over or to underinsure a property. Overinsuring means the property owner pays a higher premium for their insurance than is necessary. Underinsuring means that any claims would not be paid out to the level expected.

In addition to the rebuild cost, other factors will contribute to the calculation of commercial building insurance premiums. These can include the location of the building. A building located in a higher crime area might cost more to insure due to the higher likelihood of damage from a burglary or vandalism.

The local area is also a very important consideration when it comes to getting flood insurance. Buildings located in areas thought or known to have a higher risk of flooding will come with a higher premium if they can be covered against floods at all.

The previous claims history of the policyholder is also a factor. Those with a history of claims, especially recent claims, are likely to pay higher insurance premiums than someone who has not made any claims or had any incidents for which they could have claimed.

Building security is another factor. When filling out a quote, the building owner will be asked about what types of locks, gates, cameras, alarms and such are present at the property, including an assessment of both door and window access. The more secure a property, the less likely it is to be burgled or vandalised. The risk of fire can even be lower, as burlers sometimes set buildings on fire.

The type of business occupying the building will also be taken into consideration by the insurance underwriter pricing a policy. This is because some businesses may be more at risk of a fire, flood or even a liability claim from a third party. For example, it is usually more expensive to insure a commercial property housing a restaurant than an office—restaurants house lots of dangerous equipment that could overheat or otherwise start a fire or flood. In addition, they see a regular flow of members of the public, any of which could slip and fall, which could result in a bodily injury lawsuit against the building owner.

Summary

In conclusion, commercial building insurance costs depend on many factors, and premiums will be very different from one property to the next. The only way to truly understand how much commercial building insurance will cost for a specific property is to get quotes in the marketplace. It’s generally advisable to get multiple quotes before buying to avoid overpaying.