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Texas Commercial Property Insurance

What Is Texas Commercial Property Insurance?

Texas Commercial Property InsuranceJust as homeowners insurance protects a homeowner from the full cost of repairing unforeseen damage to a house, commercial property insurance protects businesses, farms and ranches against damage to their buildings and contents.

Commercial property owners, both those operating a business on their property and those leasing property to another entity, may purchase policies that protect the building and associated structures. A property owner´s policy will not protect tenants from loss. Business owners who lease their property may buy policies that protect the building´s contents, such as machinery, furniture and stored or displayed merchandise.

Different types of commercial property insurance policies protect against different dangers, called "risks," "causes of loss," or "perils." Commercial property policies are not standardized in Texas.

Insurance companies are free to use their own policies, subject to approval by the Texas Commissioner of Insurance. Policies must contain reasonable coverages and meet all requirements set out by law. Insurers´ ability to offer different commercial policies allows them to tailor their products to fit the needs of particular businesses. The availability of multiple policies encourages a competitive market.

Commercial property policies available in Texas generally fall into three categories:

  • Basic form -- covers common perils, such as damage caused by fire, lightning, windstorm, vehicles, aircraft, and civil commotion.
  • Broad form -- covers basic perils while adding others, such as water damage, collapse, glass breakage, weight of snow, ice or sleet, and sprinkler leakage.
  • Special form -- covers any cause of loss except those specifically excluded, such as flood, earth movement, war, nuclear disaster, wear and tear, insects, and vermin.

Many commercial property insurance consumers buy additional coverage.

  • Liability policies protect against the cost of a lawsuit and possible judgment.
  • Business interruption coverage reimburses the policyholder for business income lost when a covered cause of loss damages or destroys a building or its contents.
  • Extra expense coverage pays the added amount an insured must spend after a loss to resume business operations as quickly as possible.

Although coverage for floods is available in many commercial policies, commercial property insurance policyholders often buy it separately through the federal government´s National Flood Insurance Program. Ask your insurance agent for details about flood coverage in your area.

Commercial property insurance policies do not cover losses from extensive glass damage or crime. Business owners generally must buy separate, specific glass or crime policies to obtain coverage. Other specialized commercial policies include inland marine, garage, and boiler and machinery. Contact your insurance agent for details.

Commercial multi-peril (CMP) policies include several different coverages in a single policy and are the most popular commercial insurance products in Texas. A CMP policy can cover the same perils as the individual property policy and offer liability and business interruption coverage as well. A business owner could add other types of coverage to ensure full protection within the convenience of a single policy.

Business owner programs, or BOPs, are a common form of commercial multi-peril policy. BOP policies are tailored to the needs of small-business owners and combine property and liability coverage in one policy.

Most business, farm and ranch owners buy commercial property insurance through an insurance agent--either a captive agent, who offers policies from a single company or company group, or an independent agent, who may offer policies from several different companies.

Some insurance companies, known as direct writers, do not use insurance agents. Business owners may purchase insurance straight from the company. To obtain an application, call or write the company´s home office or a regional office.

How Commercial Property Insurance Rates are Determined?

Insurance companies evaluate potential policyholders in terms of the risk of loss that they pose. Businesses that appear to be relatively high risks generally will pay more for insurance coverage, and may have trouble obtaining coverage from some companies. Businesses that appear to be relatively low risks generally will pay less for insurance coverage and find it easier to obtain.

Some elements of risk are difficult to control. An explosives factory will almost always be more at risk of loss than a travel agency, for example.

Other risk factors are easier to control. A business property with neat, orderly grounds is much less at risk of fire than one with debris piled next to buildings. In fact, the risk of loss from fire is one of the main factors determining the cost of commercial property insurance. Building or leasing a fire-resistant building can lower a business´s insurance premiums dramatically.

Ratings

Every commercial building in Texas receives a rating that reflects its basic risk of loss from fire. That rating is a part of the formula that insurance companies use to calculate commercial property insurance premiums. Buildings with poor ratings cost more to insure; those with better ratings cost less to insure. Fire ratings apply to insurance purchased both by building owners and tenants.

Five basic elements affect a building´s fire rating.

  • Construction. Of what materials is the structure built? Are they fire-resistant? Are they combustible?
  • Occupancy. What businesses use the structure? Are they high-risk or low-risk?
  • Location. Is the property within a city or town with good fire protection? Is it located outside of a city or town, in an area with limited or no fire protection?
  • Exposure. Do other hazards exist within the building or within a specified distance that increase the risk of fire?
  • Fire Protection. Does the building contain sprinkler systems, fire extinguishers and alarms that reduce the risk of fire? What level of public fire protection is available?

Construction

A building´s construction establishes the basis of its fire rating. Using fire-resistant materials throughout a structure makes a big difference in insurance premiums.

Buildings must use fire-resistant materials throughout to receive the full benefit of a good rating. Adding-on to an existing structure can hurt its fire rating. Check with your agent or insurer before building or remodeling.

Internal structural elements affect a fire rating. Filling an otherwise fire-resistant building with wood partitions, floors, and stairways nullifies many of the benefits of its construction. Fire-resistant interior walls, floors, and doors can help preserve a good fire rating.

Occupancy

A building´s use also affects its insurance fire rating. Fire rating schedules list different occupancies and assign each one certain penalties, which are added to the base fire rate determined by the building´s construction. A travel agency has a relatively small effect, since it contains little equipment that could start or feed a fire. A restaurant (with grills or ovens) or an auto repair shop presents greater fire risks and raises the fire rating more.

A critical point to remember: a relatively hazardous occupant affects the fire rating for the entire building, not just for its own section. If your business shares space with a more hazardous occupant, your premiums will be higher than for your business alone.

Location

Location is vital for determining fire protection. Rating schedules assume that commercial property inside a city or town with adequate fire defenses (as determined by the Texas Commission on Fire Protection) is safer than property located outside of city limits. Property outside a city or town automatically faces a penalty that can double property insurance premiums.

Location and construction together determine another major portion of commercial property insurance known as extended coverage. The Texas Department of Insurance divides the state into different extended coverage territories based on each area´s history of loss from such perils as windstorms, hail, tornadoes, and hurricanes. Properties in areas with histories of high losses generally will face higher rates than equivalent properties in areas of lower risk.

Since a building´s fire rating reflects its general sturdiness as well as its fire-resistance, construction plays a critical part in extended coverage rating. Buildings with good fire ratings receive a lower charge for extended coverage, those with poor fire ratings a higher charge.

Exposure

Exposure measures the extent to which a structure faces external or unusual internal risks.

A building faces external exposure when it is near any other structure, or any potential source of fire, under the assumption fire in the other structure could spread. Any nearby building or other structure raises rates for a property. Hazardous external exposure (such as having a lumberyard or oil storage tank farm next door) raises rates even more.

Internal exposure includes unusual risks within the building itself not already accounted for in the occupancy rating. Unusual risks might include cluttered grounds or storage spaces, special mechanical or electrical equipment, or volatile storage. Extra risks boost fire rates.

Fire Protection

Good internal fire protection helps: installing automatic sprinklers can cut fire rates by as much as 50 percent. Fire extinguishers and automatic fire alarms also lower rates. Rate schedules include certain discounts for particular occupations. A restaurant could receive a discount, for instance, if its grills were equipped with hoods and automatic fire extinguishers.

Good public fire protection also pays off. The Texas Commission on Fire Protection inspects and evaluates fire departments in Texas cities and towns. It assigns each a rating, called the key rate, which affects commercial insurance rates for every property within the community´s borders.

Cities with good fire protection have low key rates; those with substandard protection have higher rates. Check with a property insurance agent or with the city fire marshal to find the rate for any city in which you are considering locating a business. Commercial property located within a city but more than 500 feet from a standard city fire hydrant receives an extra charge.

Fire Ratings

Fire ratings are determined through physical inspection. Inspections are done by private inspectors under contract from insurance companies.

Inspectors use standard rating systems to determine how a property´s characteristics affect its risk of fire.

The Texas Department of Insurance is the final arbiter for disputed commercial fire ratings.

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