When a business owner shops for commercial insurance, they may expect the insurance company to focus primarily on the business itself:

What does the company do? How much revenue does it generate? What property does it own? What liability exposures does it have?

But sometimes there is another factor that can significantly affect an insurance company’s willingness to provide coverage: habitational exposure.

If residential tenants live in the same building as a business—or if the insured owns residential rental property as part of its operations—the account may be considered to have a habitational exposure. Depending on the property, location, occupancy, and insurance carrier, this can make coverage more difficult to obtain.

What Is a Habitational Risk?

In commercial insurance, habitational risks involve properties where people reside. Examples can include:

• Apartment buildings and multifamily properties
• Mixed-use buildings with businesses on the first floor and apartments above
• Residential rental properties owned by a business
• Condominiums and certain other residential developments

For example, imagine a small retail business purchases a building. The store operates on the first floor while several apartments are rented to tenants upstairs.

From the business owner’s perspective, it may seem like a fairly simple commercial property. From an insurance company’s perspective, however, the residential occupancy creates additional exposures that need to be considered.

Why Are Some Insurance Companies Leaving Habitational Risks Alone?

One of the biggest factors to consider with habitational property is that people are occupying the building for extended periods of time—including overnight.

This can vastly change the severity of certain losses.

A fire in a commercial building that is empty overnight is already serious. A fire in a building containing several sleeping tenants creates the potential for injuries, fatalities, temporary displacement, and significant liability claims in addition to the property damage itself.

Insurers will also consider exposures involving:

• Cooking fires
• Electrical and heating systems
• Water damage
• Slip-and-fall injuries
• Balconies, stairs, and railings
• Security and lighting
• Smoke and carbon monoxide detectors
• Tenant maintenance and housekeeping
• Building age and condition
• Roof, plumbing, HVAC, and electrical updates

Because of these additional considerations, an insurance company that is comfortable insuring a standalone commercial building may not be comfortable with that same business operating in a mixed-use building containing apartments.

Every Insurance Company Has a Different Appetite

This is where habitational insurance can become especially tricky.

Insurance carriers have an underwriting appetite, meaning there are certain types of businesses and properties they actively want to insure and others they prefer to avoid.

Habitational exposure is an area where carrier appetites can vary considerably.

One company might comfortably insure a newer mixed-use building with two apartments above a retail store. Another might consider it only if certain underwriting requirements are met. A third company may simply decline any property containing residential units.

That doesn’t necessarily mean there is something wrong with the business or building. It may simply fall outside that particular insurance company’s underwriting guidelines.

Building Condition Becomes More Important

The presence of habitational exposure can also lead to greater scrutiny of the property itself.

An underwriter will want to know the building’s age, construction type, number of residential units, occupancy rate, and when major systems were last updated.

Older electrical systems, aging roofs, outdated plumbing, older heating equipment, or a lack of documented updates can make an already challenging risk more difficult to place.

Loss history matters as well. A property with repeated water, fire, or liability claims may have fewer insurance options available.

This is why maintaining good records of building improvements can be valuable. If you replaced the roof, upgraded the electrical system, installed new plumbing, or made significant safety improvements, having documentation available can help an insurance agent present a clearer picture of the property to potential insurers.

Mixed-Use Buildings Can Be Particularly Tricky

Mixed-use properties are a good example of why commercial insurance isn’t always as straightforward as it appears.

Consider a building containing a restaurant on the ground floor with apartments above it.

The insurer isn’t simply evaluating a restaurant or an apartment building. It is evaluating the combination of the two.

The restaurant may introduce cooking, fire, customer, and employee exposures, while the apartments introduce residential property and liability exposures. An insurance company needs to be comfortable with the entire risk—not just one portion of it.

As the combination of exposures becomes more complicated, the number of standard insurance carriers willing to consider the account can sometimes shrink.

What Happens If Standard Insurance Companies Won’t Take It?

A difficult habitational risk isn’t necessarily an uninsurable risk.

If standard or admitted insurance companies aren’t comfortable with an account, an independent insurance agent may need to explore additional markets, including excess and surplus (E&S) or non-admitted insurance carriers.

These markets can sometimes accommodate properties or businesses that fall outside the underwriting guidelines of standard carriers.

However, these policies can operate differently from traditional commercial insurance policies. Pricing, deductibles, coverage terms, exclusions, and other conditions may differ, making it especially important to carefully review the coverage being offered.

Why Working With an Independent Agent Can Help

Habitational exposure is a good example of why the cheapest quote isn’t always the most important part of purchasing commercial insurance.

Two businesses that appear almost identical on paper can have very different insurance options simply because one owns a standalone commercial building while the other has tenants living above its business.

An independent insurance agent can help identify these exposures early, determine which carriers are willing to consider them, gather the information underwriters will need, and explore alternative markets when necessary.

The goal isn’t simply to find an insurance company willing to write the policy. It’s to find coverage that appropriately addresses both the commercial operation and the habitational exposures associated with the property.

If your business owns or occupies a building containing residential units, mentioning that exposure early in the insurance process can help avoid surprises later and give your agent more time to find the right market for your risk.