Owning one to four rental units is often insured with a dwelling fire (landlord) policy. But once you buy a five-unit apartment building, a mixed-use building with a shop downstairs and apartments upstairs, or a small strip of retail units, you usually move into commercial property and general liability insurance. Commercial forms work differently, with concepts like coinsurance, valuation choices and lease-driven responsibilities that can catch new investors off guard. This guide explains what small landlords need to know.
For one-to-four unit rentals, see our landlord insurance guide.
When commercial coverage is required
Insurers commonly write dwelling policies for buildings with up to four units. Buildings with five or more residential units, and buildings with commercial tenants, typically require commercial policies. Lenders also have requirements: commercial and multifamily loans usually specify property limits, deductibles, loss of rents coverage and liability limits.
Commercial property basics
A commercial property policy covers:
- Building: the structure, permanently installed fixtures, and often building equipment and outdoor fixtures.
- Business personal property: landlord-owned items such as appliances in units, laundry equipment, lobby furniture and maintenance tools.
- Business income / loss of rents: rent lost while units are untenantable after a covered loss.
Causes of loss forms determine covered perils: basic, broad, or special (sometimes called "open perils" or all risk, subject to exclusions). Earthquake and flood are typically excluded and must be added or bought separately.
Coinsurance: the clause that surprises owners
Many commercial property policies include a coinsurance clause, often 80%, 90% or 100%. If the building limit is less than that percentage of the building's value at the time of loss, the insurer reduces even partial claims proportionally.
Example: a building worth $2,000,000 with a 90% coinsurance clause should carry at least $1,800,000. If you carry $1,200,000, you'd collect only two-thirds of a covered loss (minus the deductible). Ways to avoid this:
- Insure to value using a current replacement cost estimate.
- Ask for an agreed value endorsement, which suspends coinsurance for the policy period.
- Review limits annually as construction costs change.
Valuation: replacement cost vs. actual cash value
- Replacement cost: pays to repair or replace without deduction for depreciation, usually once repairs are made.
- Actual cash value: deducts depreciation. Cheaper, but claim payments may fall far short for older buildings.
- Functional replacement cost: for older buildings with features that would be costly to replicate, pays to replace with modern equivalents.
Ordinance or law coverage
When an older building is damaged, building codes may require upgrades: seismic, fire sprinklers, accessibility, electrical. Standard policies may not cover the cost of those upgrades, the loss of the undamaged portion that must be demolished, or demolition costs. Ordinance or law coverage (Coverage A, B and C) addresses these. It's especially important for older buildings and for buildings subject to local soft-story seismic retrofit ordinances, such as those in Los Angeles: LADBS – Mandatory retrofit programs.
Loss of rents
After a fire, repairs can take many months, and tenants may move out. Loss of rents or business income coverage replaces lost rent during restoration, sometimes with an extended period of indemnity that continues after repairs while units are re-leased. Choose a limit that reflects realistic repair times, which are often longer after a regional disaster.
Equipment breakdown
Boilers, HVAC systems, elevators, electrical panels and laundry equipment can fail mechanically, which standard property forms exclude. Equipment breakdown coverage pays for repair and resulting damage and loss of rents.
General liability
Commercial general liability covers bodily injury and property damage claims arising from the premises, such as slip and fall in common areas, injuries from broken stairs or railings, or pool accidents. Consider:
- Limits: lenders and commercial tenants often require $1 million per occurrence and $2 million aggregate.
- Umbrella or excess liability for higher limits.
- Hired and non-owned auto if you or employees drive personal vehicles for property business.
- Discrimination or fair housing coverage, often limited under general liability. See our tenant screening and liability guide.
Mixed-use and retail buildings
Commercial tenants bring specific considerations:
- Lease insurance requirements: leases should require tenants to carry general liability naming you as additional insured, property coverage for their improvements and contents, and often business income coverage. Collect certificates annually.
- Triple-net (NNN) leases may require tenants to reimburse your property insurance premium.
- Tenant occupancy affects your rates. A restaurant tenant has a higher fire risk than an office tenant. Insurers price accordingly. See our restaurant insurance guide.
- Waiver of subrogation clauses in leases should match what your policy allows.
- Vacancy clauses: commercial policies often restrict coverage when a building is mostly vacant for 60 days. See our vacant home insurance guide.
Employees and workers' comp
If you employ an on-site manager, maintenance staff or cleaners, you likely need workers' compensation. In California, employers with one or more employees must carry it. Independent contractors working on your property should carry their own coverage; verify certificates.
Ownership entities
Many investors hold buildings in LLCs. Make sure the correct entity is the named insured on property and liability policies, and that related entities and property managers are addressed as additional insureds where appropriate.
Small landlord commercial checklist
- ☐ Building limit at full replacement cost
- ☐ Coinsurance clause understood, or agreed value endorsement
- ☐ Special causes of loss form
- ☐ Ordinance or law coverage for older buildings
- ☐ Loss of rents with realistic restoration period
- ☐ Equipment breakdown
- ☐ General liability and umbrella
- ☐ Tenant insurance requirements in leases, with certificates
- ☐ Earthquake and flood considered
- ☐ Named insured matches the ownership entity
Contact Alishahi Insurance or call (877) 711-4545 for a commercial property review.
Frequently asked questions
When does a rental building need a commercial policy?
Typically when it has five or more residential units or includes commercial tenants. Dwelling policies usually cover up to four units.
What is a coinsurance clause?
A requirement to insure the building to a set percentage of its value. If you're underinsured, claims are reduced proportionally.
What is ordinance or law coverage?
Coverage for code-required upgrades, demolition, and the value of undamaged portions that must be torn down after a covered loss.
Should commercial tenants name me as additional insured?
Leases commonly require tenants to carry liability insurance naming the landlord as an additional insured.
Does commercial property cover earthquakes?
Usually not. Earthquake coverage must be added or bought separately.
Alishahi Insurance · 439 N Canon Dr, Penthouse, Beverly Hills, CA 90210 · (877) 711-4545 · CA License #4348151. General information only. This isn't legal, tax or financial advice or a coverage determination. Coverage depends on policy language and underwriting, and rules vary by state.