Commercial property owners and property managers have a lot on their shoulders, and not least of all is the central task of commercial property risk management. All properties are exposed to risk, but protecting commercial real estate investments can feel particularly challenging because they face so many additional risk factors compared to private residential buildings.
Commercial property risk management strategies must address everything from environmental risks caused by natural hazards such as extreme weather patterns to criminal risks such as vandalism and theft. The brokers at Morison Insurance created this guide to explain some of the need-to-know information about commercial property risk management, including common risk exposures for commercial properties and the types of commercial insurance necessary to transfer risk.
When it comes to commercial real estate risk management, there are three broad ways of limiting risk exposure and preventing the entire financial burden of perils that do occur from resting on your shoulders: avoiding risk, controlling risk and transferring risk.
Property owners sometimes wonder which of these three commercial property risk management strategies they should focus on, and the answer is unequivocally all three. They are necessary to protect your property and bottom line from devastation or outright destruction.
Avoiding risk is basically what it sounds like. It involves avoiding certain situations or practices that are likely to cause harm. For example, suppose you have a basement that is prone to flooding. In that case, you're likely not going to put your company's server down there or use that space to file necessary documents to avoid the risk of water damage to expensive equipment or documents that could be destroyed by exposure to water.
Suppose you operate a restaurant and choose not to serve alcohol. In that case, you're avoiding all the risks inherent in that practice, from property damage or bodily injury caused by drunk patrons to liquor code violations and theft of your liquor supply. Risk avoidance is not always possible or desirable, but in many cases, it's the right move for commercial property risk management.
Because risk can't always be avoided, controlling risk is also necessary for commercial property risk management. This involves having a plan and preventative measures to minimize the damage if a destructive event occurs.
A robust sprinkler system is a typical example of controlling risk exposure. There's no way to avoid the risk of a fire altogether, but a sprinkler system will minimize the destruction if a fire starts in your commercial building. You may also have policies in place to help control risk. Using the example of a fire, risk control policies could include fire drills and clearly posted exit plans to help ensure everyone is able to exit the building safely when the fire alarm goes off.
Finally, taking the correct steps to transfer risk is essential when handling commercial property risk management. For the risk exposures inherent in owning a commercial building, the best method of transferring risk is with the right commercial business insurance coverage. This transfers the financial consequences of insured perils to your insurance company.
Insurance can't prevent destructive events from occurring. Still, it can protect you from paying out of pocket for the significant costs associated with building restoration, replacement costs for damaged or lost items, and loss of income while recovering from the devastation caused by an insured peril such as a natural disaster or fire. It can also offer protection against financial losses related to lawsuits should you be accused of causing property damage or bodily injury. That can include expenses such as legal mediation, legal defence costs and legal settlements should you be found liable.
Contracts are another way of transferring risk. For example, if you own a large commercial building and one of your tenants is leasing part of the building to operate a retail store, you could sign a contract with the store owner that states they will assume the risk of third-party bodily injury or third-party property damage that occurs in their store. If a customer trips over a vacuum that a store employee left in the doorway, the cost of liability expenses would fall on the store owner rather than you, the building owner.
Many different types of risk can affect your building and must be factored into a commercial property risk management plan. The risks you are most exposed to will vary quite a bit based on factors such as commercial building types, the type of business or businesses in your commercial property, the location of the property, the number of people working there, steps you've taken to mitigate risk, and so on.
Suppose your building is in an area prone to flooding, for example, because it's located near a river or lake that has flooded. In that case, you are at a much higher risk of water damage from overland flooding than someone who owns a building on a hill and always stays safe and dry during flooding. Some common risks listed below may not apply to your commercial property risk management strategy, but your property is likely at risk for more than you may suspect. Here are ten common risks for commercial buildings to keep in mind:
From hail storms and high winds to tornadoes and hurricanes, there are a lot of destructive weather patterns that nature can produce. Extreme weather is capable of doing a staggering amount of damage to a building—especially one that is not protected by risk control measures such as shatter-proof glass and hail-resistant siding.
Many people assume they can avoid a significant fire by being very cautious, but that's not true. The risk is generally higher for commercial property because it's typically used by a much higher number of people on a regular basis who don't necessarily have a vested interest in keeping the building safe and may carelessly start a fire. But fire can also spread from neighbouring buildings, be caused by a lightning strike or affect your property in numerous other ways.
This is an important commercial property risk. Water is responsible for the vast majority of property damage and destruction, and that makes sense when you consider that every habitable building has water literally running through the walls and under the floors in plumbing pipes. A broken, leaking pipe or a sewer backup can cause significant problems. Still, water damage also occurs from overland flooding when a nearby body of water bursts its banks, from excessive torrential rainfall, and from small or seemingly insignificant leakage that goes on for a long time without being fixed.
We all know that there are criminals out there who won't hesitate to steal or vandalize property if given the opportunity. Still, when discussing commercial property risk management, it's also important to acknowledge that trouble can come from within. If you lease or rent your commercial property, it could be vandalized by your own tenants. And, a building that is open to the general public is vulnerable to casual vandalism, especially somewhere like a shopping mall where there's plenty of opportunity for people to hang out unsupervised.
As buildings age, wear and tear damage naturally occurs and deteriorates over the years. That's why diligent maintenance, repair and upkeep are essential to reduce wear and tear on various building components. Without adequate care and attention, small instances of deterioration can quickly spiral into major issues that can threaten the overall condition of the building and make far more costly repairs or restoration work necessary.
If you or one of your tenants uses hazardous materials on your commercial property, that can present a risk of damage or injury. People sometimes picture big barrels of fuel or toxic waste when they think of hazardous materials. Still, it could be as simple as a harsh chemical cleaning product that destroys your flooring and causes you to have to replace it.
Speaking of hazardous materials, they also have the potential to cause environmental harm if they're not managed and disposed of properly. Pollution can be caused by a wide range of factors, such as a slowly leaking oil tank or an accidental chemical spill, but it can also be caused by substances that are not necessarily toxic but have ended up in the wrong location. For example, if a truckload of gravel was accidentally dumped in a protected wildlife area, that could be considered a polluting event. Clean-up costs in these situations can be very high, and there are also potential environmental fines and litigation to contend with.
Often referred to as "slip and fall" risk, harm to third parties is possible at any commercial property because it can be as simple as a customer slipping on a patch of ice that wasn't cleared off the sidewalk or tripping over a loose cord in an office building, and being seriously injured as a result. The injured party could choose to sue the building owner for causing third-party bodily injury. Transferring risk is the necessary course of action for liability-related concerns. "Slip and fall" risk, in particular, is transferred by obtaining the correct commercial general liability (CGL) insurance coverage, which is a necessary part of any commercial business insurance package.
Electrical power surges don't usually cause damage directly to buildings, though they can sometimes damage a circuit breaker panel, electrical outlets and electrical wiring. But it's important to remember that power surges can destroy or seriously damage computers and other electronic equipment. Aside from the high cost of replacing all that expensive equipment, the damage could cause you to lose access to digital files and information that needs to be backed up elsewhere.
Living in Canada, it's easy to assume that your commercial property will never be exposed to damage from violent protests or rioting, but it does happen. There are many reasons why civil unrest can crop up, from political protesting that gets out of control to destructive rioting after a significant sporting event. Commercial property risk management for civil unrest could include both controlling the risk with defensive measures like window shutters or a security presence and transferring risk with commercial insurance coverage that applies to theft or vandalism in the event of a riot.
When it comes to transferring the risk of economic losses via insurance coverage, it's critically important to have the suitable types of commercial insurance policies in place to address the potential risks you are most likely to be exposed to. Some of the key types of business insurance coverage that apply to commercial property risk management are:
Are you interested in learning more about the best commercial property risk management strategies? Call the Morison Insurance team at 1-800-463-8074 to speak directly with an experienced insurance broker. We'll consult with you to learn more about your unique commercial property so we can recommend your best options to transfer risk with the right commercial insurance coverage. We prioritize the interests of our customers to search out the insurance coverage they need to grow business success, and rest assured they are protected against financial loss in the event of an insured peril.
This content is written by our Morison Insurance team. All information posted is merely for educational and informational purposes. It is not intended as a substitute for professional advice. Should you decide to act upon any information in this article, you do so at your own risk. While the information on this website has been verified to the best of our abilities, we cannot guarantee that there are no mistakes or errors.