Hazard Insurance for Small Businesses
- Employee Benefits
6 min. Read
Last Updated: 11/25/2022
Table of Contents
The building you rent or own as well as the equipment you use to operate your business are integral to keeping your doors open. But when a disaster impacts these assets, it could be difficult for a business to recover. Hazard insurance for small business can help cover the costs of repairing or replacing the physical structures and equipment that your business relies upon. Another name for this coverage is commercial property insurance.
What Does Business Hazard Insurance Cover?
Business hazard insurance, also known as commercial property insurance coverage, helps protect the building your business owns or rents, as well as the equipment you use. Depending on your policy coverage, this type of insurance covers the cost to repair or replace:
- Personal property
- Tools and equipment
- Accounts receivable
- Outdoor landscaping
A hazard insurance policy generally covers losses due to unexpected events such as:
- Fire and smoke damage
- Theft and vandalism
- Some weather-related events such as hail, lightning, snow, sleet, or ice
- Damage caused by aircraft or vehicles
- Sprinkler leakage
- Building collapse
- Certain types of water damage
- Civil unrest or rioting
Items typically excluded from a hazard insurance policy are damages due to flooding, earthquakes, acts of terror, nuclear attacks, or damage from war. Protection from these events would require a separate insurance policy.
Why Do I Need Hazard Insurance for a Small Business?
While many states do not require business owners to carry hazard insurance, it's a good idea to have to help cover the costs of damages you would otherwise have to pay out-of-pocket for. You may also need a specific hazard insurance policy if you're planning to secure business funding from a lender. Loans from the U.S. Small Business Administration (SBA), for example, may require proof of business hazard coverage (see below for more details).
Hazard Insurance for Home-Based Small Businesses
If you're looking to protect a business you operate out of your house, your homeowner's insurance policy might not provide adequate coverage for business property stored in your home. Hazard insurance may offer added coverage for your home-based business property that would otherwise not be covered by a homeowner’s policy or be covered at lower limits under a homeowner’s policy.
How Much Does Business Hazard Insurance Cost?
The cost of a hazard insurance policy will differ for every business. Primary factors that can influence the cost of hazard insurance include:
- Property age and value: The more property you have, the more that coverage will cost.
- Replacement value vs. cash value coverage: Replacement value is the cost to purchase a new version of the damaged property, while actual cash value is based on how much the covered item cost before it was damaged. Given depreciation, cash value coverage is usually less expensive than replacement value coverage.
- Coverage limits: As with most insurance policies, your premiums will increase for more coverage.
- Lender requirements: Before granting a loan, a lender may stipulate that you have a specific amount of property coverage.
Hazard Insurance for an SBA Loan
As part of granting a loan, the SBA outlines that proceeds from insurance coverage, which may include hazard insurance, can be deducted from the eligible loan amount. Additional location-related coverage (such as policies that protect against floods or earthquakes) may also be required. This includes economic injury disaster loans the SBA granted to businesses that were negatively impacted due to COVID-19.
What Type of Hazard Insurance Does the SBA Require?
The SBA will require a business to obtain adequate insurance coverage to qualify for a loan. This may mean general liability coverage and/or commercial property insurance that includes hazard coverage. Keep in mind that the SBA may require other insurance coverage (e.g., workers' compensation), depending on the type of loan you're looking to secure.
Specifically, the SBA will be looking for hazard insurance that meets the following criteria:
- The amount of coverage must equal at least 80% of your loan amount.
- The insurance must be listed under the name of the business.
- If you operate under a doing business as (DBA), it must be listed on the policy.
- If the business doesn't currently have the necessary insurance, it must provide proof of coverage within 12 months of receiving a loan.
Is Hazard Insurance Tax-Deductible?
When it comes to business insurance in general, the IRS stipulates that it's a part of the cost of doing business and therefore tax-deductible. In the case of whether hazard insurance is tax-deductible, there are some additional points to consider.
The IRS allows you to deduct home office expenses if you run a home-based business. While this includes items such as utility expenses and home office equipment, it can also include your insurance premiums. For instance, if 50% of your home is used solely for the purpose of operating your business, you can deduct 50% of your yearly hazard insurance premiums.
You may also be able to claim deductions in the event that your business experiences losses in federally declared disaster areas. For example, if you file a claim on your hazard insurance and your insurance company only pays a portion of the amount, you can deduct the remaining amount minus $500 per incident.
If you're unsure whether hazard insurance for small business is tax-deductible, it's a good idea to work with a professional who can help ensure that you're taking advantage of all the tax deductions your business is eligible to claim.
Protect Your Business With Ample Insurance Coverage
Adequately protecting your business is a crucial part of success. That means securing a business insurance policy that protects the business, its assets, your employees, and other important aspects that keep operations up and running. Get the ultimate peace of mind with complete business coverage for your organization, or get in touch for help with policies that match your needs.