Rating commercial properties for insurance purposes is complex work done by experienced underwriters. While you’ll probably never need to have that level of knowledge, a basic understanding of how properties are rated is useful, especially if you’re considering multiple options for the next location of your business. Let’s take a look:
The first decision an underwriter will make is which of two methods to use: class rating or specific rating. The class rating method assigns buildings with similar characteristics to the same class, or group, often using an average to determine rates. The class rating method will typically be applied to buildings that are 25,000 square feet or less, do not have a sprinkler systems, are not fire-resistive, and are not manufacturing facilities.
Buildings not falling under those criteria will typically be rated individually, or via the specific rating method, and that’s where the acronym COPE becomes important.
COPE stands for Construction, Occupancy, Protection and Exposure. Let’s look at each one individually:
The Construction factor, as you would expect, looks at the materials a building is made of, categorizing the structure into one of six classes. A Class 1 building, considered to be at the highest risk of catching fire, would have exterior walls made of wood or other combustible material, while a Class 6 building might be made of reinforced concrete and have a fire rating of at least two hours.
Occupancy assesses how the space will be used. Will it be rented offices, retail, manufacturing or some other purpose? Underwriters will also want to understand the contents of the building and how they might impact combustibility.
Protection relates to the available methods to safeguard a building from a fire, and falls into public and private categories. Public protection considerations would include the proximity of the fire department and the adequacy of the water supply. An ISO-developed rating system from 1 to 10 is used here, and it’s important to understand that a lower rating in this case is better and will result in lower coverage rates.
Private protection factors would include methods that are within the control of the policyholder: Is there a fire alarm system or sprinkler system? Are fire doors and fire extinguishers in place as appropriate?
Exposure, the final component of COPE, refers to external hazards that are due primarily to a building’s location. These include both weather hazards and man-made hazards. For example, a building located in a high-crime area will have a greater exposure – and will pay higher rates – than a comparable building in a safer area.
While not all of these factors are within the power of a policyholder to change, taking steps such as installing alarms or a sprinkler system can make a difference. And as noted above, if you’re assessing the pros and cons of a new location for your business, understanding these rating factors could make a big difference in your insurance costs going forward.
Questions about this or other commercial lines issues? Contact Consolidated Insurance.