Commercial Property Insurance Myths Debunked: Don't Fall for These Common Misconceptions

When it comes to commercial property insurance, there are plenty of misconceptions floating around that can leave property owners dangerously under-protected. Believing these myths might seem harmless, but they can cost you dearly when it comes time to make a claim. In this article, we'll debunk three of the most common commercial property insurance myths and show you exactly why they're wrong—often with real-world examples of how these misunderstandings have hurt property owners.

Understanding the truth behind these myths is crucial because commercial property insurance works differently from residential insurance. Unlike home insurance, where many standard covers are automatically included, commercial property insurance requires you to actively choose what coverage you need. This means if you're operating under false assumptions, you could end up with gaps in your coverage that you don't even realise exist until it's too late.

Myth 1: Flood Damage is Automatically Included

The Misconception: Many commercial property owners assume that flood insurance comes standard with their policy, just like fire or storm damage coverage.

The Reality: Flood insurance is typically an opt-in coverage, meaning it's not automatically included in most commercial property insurance policies. Unless you specifically request and pay for flood coverage, damage from floods may not be covered at all.

This is particularly important in Australia, where flood risk varies dramatically depending on location. Some insurers won't offer flood cover at all for high-risk areas, while others may offer it but with significant limitations or higher premiums. Even if you think your property is safe from flooding, remember that changing weather patterns and urban development can alter flood risks over time.

What This Means for You: If you want protection against flood damage, you need to explicitly ask for it when setting up or renewing your policy. Don't assume it's included. Check your current policy documents carefully—if flood coverage isn't mentioned or is listed as excluded, you're likely not covered. Speak with your insurance broker or provider to understand your options, assess your flood risk, and determine whether this additional coverage makes sense for your property.

Myth 2: Reducing Sum Insured Only Matters for Total Losses

The Misconception: Some property owners believe that if they reduce their building sum insured (the amount the building is insured for), it only affects them if the entire building is destroyed. They think that for partial losses, they'll still receive full compensation up to the remaining sum insured.

The Reality: This is one of the most dangerous misconceptions in commercial property insurance. Almost all commercial property insurance policies in Australia include an under-insurance clause, also known as a co-insurance clause. This means if you under-insure your building by more than a certain percentage (typically 15% or more), the insurer can apply a penalty even for partial losses.

Here's how it works in practice: Let's say your building's true replacement value is $2 million, but you've only insured it for $1 million. That's 50% under-insurance. Now imagine you have a fire that causes $100,000 in damage. You might think the insurer will pay the full $100,000 since it's well under your $1 million sum insured. But because of the under-insurance clause, the insurer will only pay 50% of your claim—$50,000—because you've only insured half of the building's value. The insurer views this as you choosing to self-insure the other half of your building.

Real Example: A property owner who accidentally under-insured their $2 million building by declaring only $1.2 million in coverage (40% under-insured) experienced $150,000 in storm damage. Even though the damage was well below their declared sum insured, the insurer applied the co-insurance clause and only paid 60% of the claim—$90,000—leaving the property owner to cover the remaining $60,000 out of pocket.

What This Means for You: Always ensure your building sum insured reflects the true replacement cost of rebuilding the property at today's construction prices. This isn't about what you paid for the property or what it's worth on the market—it's about what it would cost to rebuild everything from scratch. If you're unsure about your building's replacement value, consider getting a professional valuation or working with an insurance broker who can help you calculate the correct amount.

Myth 3: My Tenant's Public Liability Insurance Protects Me

The Misconception: Many commercial property owners believe that if their tenant has public liability insurance, they don't need their own coverage because the tenant's insurance will handle any claims.

The Reality: Public liability insurance policies only cover the specific entity and activities named on that policy. Your tenant's public liability insurance covers them for their business activities and operations—not for you as the property owner. As a commercial property owner, you face your own separate public liability risks that need their own coverage.

Property owners can be held responsible for injuries or property damage that occur on their premises, even if they didn't directly cause the incident. This could include issues like:

• Unsafe building conditions (cracked footpaths, faulty stairs, poor lighting)
• Defective fixtures or fittings that cause injury
• Inadequate maintenance of common areas
• Structural issues that lead to accidents

The good news is that public liability insurance for commercial property owners is typically more affordable than it is for businesses, because insurers generally view property ownership as lower risk than active business operations.

Real-World Example: A commercial property owner in South East Queensland owned a property that was leased to a business tenant. One day, an employee of that tenant tripped over a crack in the concrete at the premises and suffered an injured shoulder, along with mental anguish from the incident. The injured employee went to an accident lawyer, who filed a lawsuit against both the tenant's business and the property owner.

Even though the tenant had their own public liability insurance, the property owner was brought into the claim as a co-defendant because the accident was partially attributed to the condition of the property itself. The commercial property owner's public liability insurance covered their legal defence costs and their portion of the settlement. In the end, the courts determined that 40% of the responsibility for the incident lay with the property owner, who settled their portion of the claim for $240,000 (40% of the total $600,000 settlement). Without their own public liability insurance, this property owner would have faced those costs entirely out of pocket.

What This Means for You: Don't assume your tenant's insurance will protect you. You need your own public liability coverage as a property owner, regardless of what insurance your tenant has. The risks you face as a property owner are different from the risks your tenant faces as a business operator, and they require separate coverage.

Why These Myths Persist

These misconceptions often arise because people apply their understanding of residential insurance to commercial property insurance. Residential insurance policies tend to be more "all-inclusive," with many standard covers built in. Commercial property insurance, on the other hand, is more modular—you choose the specific covers you need, which means you need to actively ensure you've selected the right protections.

Additionally, insurance policy documents can be complex and filled with legal terminology that's difficult for non-experts to understand. This complexity makes it easy to miss important details or make incorrect assumptions about what's covered.

How to Protect Yourself

The best way to avoid falling for these myths is to work with an experienced insurance professional who specialises in commercial property insurance. A knowledgeable broker can:

• Review your current coverage and identify any gaps
• Explain the nuances of your policy in plain language
• Ensure your sums insured are accurate and up-to-date
• Help you understand which optional covers make sense for your specific situation
• Shop around for competitive premiums while maintaining adequate coverage

Don't wait until you need to make a claim to discover that you believed in one of these myths. Take the time now to review your policy, ask questions, and ensure you have the right coverage for your commercial property. The small investment in getting proper advice today could save you hundreds of thousands of dollars—or more—if something goes wrong.

Conclusion

Commercial property insurance myths aren't just harmless misunderstandings—they can leave you financially exposed when you need protection most. Understanding that flood coverage requires opt-in, that under-insurance affects partial losses too, and that tenant insurance doesn't replace your own public liability coverage are all crucial for protecting your investment.

Remember, commercial property insurance is designed to protect your financial future. Making sure you have the right coverage starts with understanding what you actually need, not what you assume is included. If you're unsure about your current coverage or want to make sure you're not falling for any of these common myths, consider speaking with a commercial property insurance expert who can review your situation and provide personalised advice.

Ready to make sure your commercial property is properly protected? Book a no-obligation 15-minute call with one of our commercial property insurance experts today for a complimentary review and advice. Want to see how your premium compares? Get up to 8 quotes online within minutes at assetshield.com.au.