To an insurance underwriter, the most important aspects of a commercial building are its construction, occupancy, protection, and exposure. These four characteristics are used in the underwriting and rating of commercial property insurance. They are often abbreviated COPE. All of these factors affect the price you pay for a commercial property policy.
The most basic element of a building is its construction. This term means the materials from which a building is made.
Many insurers classify buildings into categories based on their construction type using a system developed by the Insurance Services Office (ISO). This system includes the six classes described below. Each classification reflects both the building materials used (such as wood or concrete) and the combustibility of those materials. ISO's categories are numbered from one through six in descending order of combustibility. Of the six categories, Class 1 (frame) buildings are the most likely to burn, while class 6 (fire-resistive) buildings are the least likely to burn.
- Class 1, Frame: Buildings are classified as frame construction if their exterior walls are made of wood or some other combustible material. Frame buildings often consist of a wood interior clad with stucco, or with brick or stone veneer. The roof is generally made of wood decking topped with wood or composition shingles.
- Class 2, Joisted Masonry: A joisted masonry building has non-combustible exterior walls made of masonry material, such as concrete block, stone, brick, or adobe. The floors and roof are combustible, consisting partly or entirely of wood. Load-bearing walls may be clad with stucco, brick veneer or another non-combustible material.
- Class 3, Non-Combustible: A building is classified as non-combustible if its exterior walls, floors, and roof are made of, and supported by, non-combustible or slow-burning materials such as metal, asbestos or gypsum. Many class 3 buildings have a steel frame. Non-combustible buildings don't burn readily but may collapse at high temperatures.
- Class 4, Masonry Non-Combustible: A masonry non-combustible building has exterior walls made of brick, concrete block, or another type of masonry. The floor and roof are constructed of metal or another non-combustible material. A class 4 building is less likely to collapse in a fire than a class 3 structure.
- Class 5, Modified Fire-Resistive: For a building to qualify as class 5, modified fire-resistive, it must have a fire rating of at least two hours for the walls, floor, and roof. The walls, roof, and floors must be solid masonry at least four inches thick. Most class 5 buildings are constructed of concrete. Many include steel.
- Fire Resistive: A class six, fire resistive, the building has a fire rating of at least two hours for the walls, floor, and roof. The walls must be solid masonry at least four inches thick. The floors and roof must consist of reinforced concrete at least four inches thick. Structural steel used for load bearing must have a fire rating of at least two hours. Many modern high-rise office buildings are classified as fire-resistive.
A second key factor underwriters consider when evaluating and rating commercial property is occupancy. This term means the purpose for which property is used. Examples are the retail food market, furniture manufacturing, and apartments.
The type of contents a building contains depends on the manner in which the building is used. The contents affect the building's combustibility. A grain mill contains dust that can ignite and explode. Thus, a grain mill is more prone to fire than an office building. A sawmill contains logs, lumber, and sawdust, all of which burn readily. A machine shop, on the other hand, may contain mostly metals that are not very flammable.
Protection means the methods used to safeguard a building from fire. It includes both public and private protection.
Public protection is provided by the local fire department. ISO has developed a numeric system for rating the quality of public protection. Fire departments are assigned a Public Protection Class rating from one (superior) to ten (doesn't meet ISO's standards). The ratings reflect the following three characteristics:
- the caliber of the fire department
- the adequacy of the water supply
- the effectiveness of the fire alarm and communication system
Generally, a building located in a community with a low Public Protection Class rating will be charged a lower rate for commercial property insurance than a similar building located in an area with a high-class rating.
Private protection refers to fire suppression mechanisms that are under the control of the policyholder. Examples are fire doors, fire alarms, fire extinguishers, and sprinkler systems. If your building includes one or more of these features, your insurer may apply a credit to your property insurance rate.
Exposure refers to external hazards that exist largely due to a building's location. Some hazards are natural. A building located in a breezy area may be subject to damage by high winds. Other natural hazards include sinkholes, hail, lightning, and heavy snow. Natural hazards can vary widely from one location to another.
Man-made hazards may be created by neighboring businesses, local infrastructure (such as highways) or the general public. A warehouse situated next to a fertilizer plant may be vulnerable to damage by explosions. A building located in a high-crime area may be vulnerable to vandalism. Other examples of man-made hazards are civil unrest, pollution from nearby freight trains, and smoke from industrial operations.
Types of Property Rating
There are two basic methods insurers use to rate property insurance: class rating and specific rating. In some states, insurers develop class and specific rates using loss cost data provided by ISO. In other states, insurers calculate rates based on data they have collected themselves.
In class rating, buildings that have similar characteristics are assigned to the same class. All buildings in that class are charged the same rate. Your building will likely be class rated if it has all of the following characteristics:
- it consists of 25,000 square feet or less
- it doesn't contain a sprinkler system
- it is not fire-resistive
- it is not used for manufacturing
A class rate is an average rate for the group. This rate may be adjusted up or down to reflect positive or negative features of a specific building. For example, a greenhouse that is class rated may be subject to a debit if it stores large amounts of fertilizer.
When a building isn't eligible for class rating, a specific rate is calculated based on individual characteristics of the building. Specific rates are determined by considering the building's construction, occupancy, protection, and exposure.
Buildings that are specifically rated are generally more complex and have higher values than class-rated structures. Because specific rates are based on a building's unique features, the building must be inspected before the rate can be calculated. A physical inspection may be performed by ISO or the insurer. Information about the building is gathered during the inspection. ISO or the insurer then uses that information to calculate a rate (or a loss cost). The rate is typically generated by the use of a formula.