Property Catastrophe Insurance: What You Need to Know
By Nick Gallo—
Standard commercial property insurance policies cover damages to a business’s physical assets caused by perils like fire, theft, wind, and lightning. However, they often have exclusions for losses due to natural and human-made disasters.
Unfortunately, the frequency and severity of disastrous events have risen globally in recent decades. As the risks increase, your prospects and existing clients may want to consider purchasing property catastrophe insurance.
Here’s what you need to know about catastrophe coverage, including what it is, how it works, and how it can protect your customers.
What Is Property Catastrophe Insurance?
Standard commercial property insurance policies cover damages from weather-related risks, such as wind, rain, and lightning. However, they often exclude losses from catastrophes, which cause severe losses for many policyholders at once.
Property catastrophe insurance closes that gap in coverage, insuring the policyholder’s assets against damages from specific natural and human-made disasters. Coverage may include floods, hurricanes, earthquakes, riots, or terrorist attacks.
Since disastrous events are historically rare, many businesses choose not to purchase coverage for them. However, the number of natural disasters has multiplied fivefold since the 1980s due to climate change and increases in development.
The risks will probably continue to escalate in the coming years, so an increasing number of businesses may benefit from property catastrophe insurance.
How Does Property Catastrophe Insurance Work?
Business owners can add catastrophe coverage to their property insurance as a rider or purchase it as a standalone policy. It depends primarily on the catastrophe they want coverage for, as no single policy or rider covers every possible disaster.
Generally, a business owner should purchase coverage for the risks most likely to affect them based on their property's location. For example, those in California might consider earthquake insurance due to their proximity to the San Andreas Fault.
When businesses operate in areas where the risks of a specific disaster are unusually high, their state government or lender might require that they purchase coverage for it. That’s often the case for Florida business owners who operate in high-risk flood zones.
Catastrophe insurance policyholders who suffer damages from a covered disaster must pay a deductible before they can file a claim. Depending on the coverage, they may receive their assets' replacement or actual cash value.
In addition, policyholders that suffer losses from disaster will usually need to distinguish between the damages covered by their standard commercial property insurance and their catastrophe coverage.
For example, a business suffers $200,000 in property damages due to a hurricane that caused a nearby river to overflow. Fortunately, they have a commercial property insurance policy and standalone flood insurance.
The standard property insurance policy covers the damage to their property from rainwater that entered their building’s roof and windows. However, the policy has an exclusion for damage due to water that rises up from below.
Therefore, the client has to rely on its flood insurance policy for the property damage due to the overflowing river. They pay a deductible and file a separate claim for each set of losses.
What’s the Difference Between Catastrophe and Hazard Insurance?
Catastrophe and hazard insurance are often used interchangeably, but they refer to different types of coverage.
Hazard insurance refers to the portion of a commercial property insurance policy that covers a business’s owned or rented assets against standard perils. These perils usually include fire, precipitation, wind, theft, and lightning.
Meanwhile, catastrophe insurance refers to a rider or standalone policy that covers damages caused by a natural or human-made disaster. These risks aren’t covered by commercial property insurance or hazard insurance.
For example, these disasters may include hurricanes, earthquakes, flooding, riots, explosions, and terrorist attacks. Businesses generally must purchase coverage for these risks individually, as no insurance product covers losses from all types of disasters.
Any business that owns or rents a property for its operations should have hazard coverage through its commercial property insurance policy. However, catastrophe coverage is rare. Businesses usually only purchase it when they operate in an area with an elevated risk of a specific natural or human-made disaster.
How Can Owners Protect Their Businesses From Property Catastrophes?
With the risk of property damage from natural disasters increasing, business owners should be proactive about protecting themselves from catastrophes. Fortunately, there are many steps they can take to mitigate their risks.
First, business owners should talk to their insurance agents about catastrophe insurance. If you have clients in high-risk areas, consider reaching out to discuss the possibility of getting them additional coverage.
Another way businesses can protect themselves from the financial fallout of a catastrophic event is to increase their cash reserves. That can help them afford their insurance deductibles and continue to pay their expenses when disaster strikes.
In addition, business owners can consider taking more tangible steps to reduce their exposure, like:
- Moving to lower-risk areas: Uprooting a business isn’t easy, but it’s one of the most effective ways to reduce the likelihood of property damage for companies in high-risk zones.
- Prioritizing property upkeep: Keeping up with ongoing repairs and maintenance helps make a structure more resilient against disasters and can minimize damages.
- Improving physical structures: Making permanent improvements to a building, such as raising the floor above historic flood levels, can also help prevent or minimize damages.
There’s no way to eliminate the risk to your property from catastrophes, but businesses can reduce them significantly with the proper preparation. If you have clients who face increased risk from disasters, reach out to discuss ways they can protect themselves.
Talk to Your Clients About Catastrophe Insurance
Catastrophe insurance can help businesses protect themselves from the growing risk of property damage due to natural and human-made disasters. Talk to your clients about purchasing coverage, especially if they live in high-risk areas.