Most Canadian business owners have a commercial property insurance policy. That is the easy part. The hard part is knowing if that policy actually covers what you think it covers.
A 2025 report by Hub International found that 73% of organizations are underinsured against profit-threatening risks. And 96% lack a formal process for updating property values each year. Those numbers mean the majority of businesses with “good coverage” are carrying commercial property insurance gaps they will not find until they file a claim.
Here are seven of the most common gaps, what they cost you, and how to close them.
Review your commercial property coverage
1. Underinsuring Your Building (the Coinsurance Trap)
This is the most expensive mistake on the list, and the most common.
Most commercial property policies include a coinsurance clause. It requires you to insure your building to a certain percentage of its full replacement cost, usually 80% or 90%. If you fall short, the carrier applies a penalty formula that reduces your claim payout proportionally.
Here is how the math works:
Your building has a replacement cost of $1,000,000. Your policy has a 90% coinsurance clause, meaning you need at least $900,000 in coverage. But you only carry $700,000.
You have a $300,000 fire loss.
The carrier calculates: $700,000 (what you carry) / $900,000 (what you should carry) = 0.778.
Your payout: $300,000 x 0.778 = $233,400, minus your deductible.
You absorb the remaining $66,600 out of pocket. On top of your deductible.
Why it happens: Building replacement costs have risen sharply. Residential construction costs in Canada increased over 60% since 2019. Commercial construction followed a similar trajectory. Many businesses set their building limit years ago and never updated it. The gap between insured value and actual replacement cost widens every year.
How to fix it:
- Get a current replacement cost appraisal or work with your broker to calculate it
- Update your building limit every year at renewal
- Ask about an Agreed Value endorsement, which eliminates the coinsurance clause entirely by locking in a pre-agreed property value with the insurer
- Some extension packages include a coinsurance waiver for smaller losses (typically up to $25,000 or $50,000)
2. Insuring at Actual Cash Value Instead of Replacement Cost
Actual cash value (ACV) pays you the depreciated value of your property at the time of the loss. Replacement cost pays to rebuild or replace at current prices with no depreciation deduction.
The difference at claims time can be six figures.
Example: A 20-year-old roof is destroyed by fire. Replacement cost: $250,000. ACV after depreciation: $90,000. You pay $160,000 out of pocket.
ACV policies are cheaper. That is why some brokers or carriers default to them. But the premium savings (often a few hundred dollars per year) pale next to the payout gap when you need to rebuild.
How to fix it:
- Confirm your policy uses replacement cost valuation, not ACV
- Check this on the declarations page of your policy, it should state the valuation method clearly
- If you are on ACV and want to switch, talk to your broker at renewal
For a detailed breakdown of both valuation methods, see our guide to replacement cost vs. actual cash value.
3. No Business Interruption Coverage (or Too Short a Period)
Your property policy covers the physical damage. But who covers your lost income while the building is being repaired?
That is what business interruption (BI) insurance does. It pays for lost revenue, ongoing fixed expenses (rent, payroll, loan payments), and extra costs to keep operating during a shutdown. Coverage typically runs from the date of loss until operations resume, up to a maximum indemnity period (often 12 months).
Many commercial property policies do not include BI automatically. You need to add it as a separate coverage or extension.
The bigger problem: Even businesses with BI coverage often carry too short an indemnity period. After a major fire, rebuilding a commercial property in Canada can take 12 to 18 months or longer, given contractor shortages and permit timelines. A 6-month indemnity period leaves you exposed for the back half of the rebuild.
How to fix it:
- Add business interruption coverage if you do not have it
- Review your indemnity period and match it to a realistic rebuild timeline for your property type and location
- Consider adding contingent business interruption, which covers income loss caused by damage at a supplier’s or customer’s location
- Some extension packages include BI automatically, others require you to add a base BI form first
4. Missing Flood, Sewer Backup, or Earthquake Endorsements
Standard commercial property policies in Canada do not cover flood, overland water, sewer backup, or earthquake. These are separate endorsements or standalone policies.
This catches business owners off guard. They assume “water damage” is covered. Some water damage is (burst pipes, accidental sprinkler discharge). Flood and sewer backup are not, unless you buy them.
The risk is real. In 2024, insured losses to commercial properties in Canada reached over $1.7 billion, the second-highest total on record. Severe weather events, including floods across the Greater Toronto Area, drove much of that total. Canada’s wildfire seasons in 2023 and 2025 were the worst and second-worst on record.
How to fix it:
- Ask your broker specifically about flood, sewer backup, and earthquake coverage
- In wildfire-prone areas (BC interior, parts of Alberta), confirm your policy covers fire from wildfire and check for any wildfire-specific exclusions or sublimits
- Earthquake coverage is particularly important in BC, with separate percentage deductibles (typically 5% to 15% of the insured value)
- Budget for these endorsements separately, they add cost but the exposure without them is significant
5. Not Covering Newly Acquired Locations or Equipment
You buy a second building, open a new warehouse, or take delivery of a large piece of equipment. Is it automatically covered under your existing property policy?
Maybe. Maybe not.
Many policies include automatic coverage for newly acquired buildings and contents, but only for a limited window (typically 60 to 90 days) and only up to a capped amount. After that window closes, coverage stops if you have not reported the new asset and added it to the policy.
How to fix it:
- Check your policy for the newly acquired property clause, note the time limit and dollar cap
- Report any new locations, buildings, or major equipment purchases to your broker immediately
- Extension packages from most carriers extend automatic coverage for newly acquired property, but limits and timeframes vary by package level
- Do not assume new assets are covered, confirm it
6. Ignoring By-Laws Coverage
After a major loss, you rebuild. But building codes have changed since your property was originally constructed. The municipality requires you to meet current code, which means upgraded electrical, plumbing, HVAC, accessibility, and fire suppression systems.
Those upgrades are not covered by standard property insurance. Your policy pays to restore what you had. By-laws coverage pays the additional cost to rebuild to current code.
This gap is especially expensive for older buildings. A building constructed in the 1970s or 1980s that suffers a total loss may cost 20% to 40% more to rebuild to current standards than the original replacement cost.
How to fix it:
- Add a by-laws endorsement or confirm it is included in your extension package
- Most carrier extension packages include by-laws coverage with additional limits (subject to a cap)
- Make sure the by-laws limit is realistic for your building age and location
- If your building is more than 30 years old, this coverage is not optional
7. No Equipment Breakdown Endorsement
Standard commercial property policies cover damage from external events: fire, theft, windstorm, water damage. They do not cover damage caused by the internal failure of your own equipment.
Equipment breakdown (also called boiler and machinery) insurance covers sudden and accidental breakdown of mechanical, electrical, electronic, and pressure equipment. That includes HVAC systems, compressors, electrical panels, computer servers, refrigeration units, and manufacturing machinery.
If your business depends on any equipment to operate (and almost every business does), a breakdown can shut you down just as effectively as a fire.
How to fix it:
- Add equipment breakdown as a standalone endorsement or confirm it is included in your package
- Combined with your property extension package, equipment breakdown fills the gap between external perils (covered by property) and internal failure (covered by equipment breakdown)
- Some carriers offer equipment breakdown with limits up to $250 million
- If you run a manufacturing plant, food service operation, or any business with heavy equipment reliance, this is a must-have
How to Close These Gaps
You do not need to become an insurance expert. But you do need to have the right conversation with your broker. Here is a checklist to bring to your next policy review:
- What is my current building replacement cost, and when was it last appraised?
- Am I insured at replacement cost or actual cash value?
- Is there a coinsurance clause? What percentage? Am I meeting it?
- Do I have business interruption coverage? What is the indemnity period?
- Is flood, sewer backup, and earthquake covered? At what limits?
- What happens if I acquire a new location or major equipment mid-term?
- Do I have by-laws coverage? What is the limit?
- Is equipment breakdown included or do I need to add it?
If your broker cannot answer these questions clearly, that is a problem worth addressing.
Ai Insurance Organization reviews every commercial property policy for these gaps as part of our standard quoting and renewal process. We work with multiple carriers and extension packages to build coverage that matches your actual risk, not a generic template.
Frequently Asked Questions
What is the most common commercial property insurance gap?
Underinsurance. Most businesses have not updated their building replacement cost in years, and construction costs have risen significantly. This triggers coinsurance penalties at claims time, reducing your payout when you need it most. A 2025 report found that 73% of organizations are underinsured against profit-threatening risks.
Does my commercial property policy cover flood damage?
Not by default. Standard commercial property policies in Canada exclude flood and overland water. You need a separate flood endorsement. Sewer backup is also typically excluded and requires its own endorsement.
What is the difference between equipment breakdown and property insurance?
Property insurance covers damage from external perils (fire, theft, weather). Equipment breakdown covers damage from internal mechanical, electrical, or pressure failure of your own equipment. You need both to be fully covered.
How often should I review my commercial property coverage?
At minimum, every year at renewal. You should also review mid-term if you acquire new property, complete renovations, add equipment, or change your operations. Construction costs and replacement values shift every year, and your coverage limits need to keep up.
Can my broker help me find these gaps?
A good broker will. During the quoting or renewal process, your broker should review your limits, valuation method, coinsurance clause, extension packages, and endorsements. If they are not doing this proactively, consider working with a brokerage that does.
