The Basics of Commercial Property Underwriting and Rating: COPE

I. Property Underwriting and COPE

A. The advent of the modern property policy can be traced back to just after the Great Fire of London in 1666

B. From the very beginning of property insurance, real property underwriters have used the same information to evaluate the risk:

1. Construction (C)

2. Occupancy (O)

3. Protection (P)

4. Exposure (E)

II. Construction (C)

A. Broken into three parts

1. Construction Materials

2. Square Footage

3. Age of the Structure

B. Construction Materials

1. Insurance Services Office (ISO) defines six construction classifications based on combustibility and damageability of the major structural features.

2. The Major Structural Features considered are:

a. Exterior, load-bearing walls - Primary element

1) Masonry

2) Fire Resistive / Modified Fire Resistive

3) Non-masonry / non-fire resistive (non-combustible or slow burning)

4) Combustible

b. Roof and floors Secondary elements

1) Concrete

2) Fire Resistive / Modified Fire Resistive

3) Non-masonry / non-fire resistive (non-combustible or slow burning)

4) Wood or other combustible materials

3. Primary and secondary elements combine to delineate the construction class. The lower the number, the MORE susceptible to fire damage the structure is considered:

a. Construction Class 1 Frame

b. Construction Class 2 Joisted-Masonry

c. Construction Class 3 Non-Combustible

d. Construction Class 4 Masonry/Non-Combustible

e. Construction Class 5 Modified Fire Resistive

f. Construction Class 6 Fire Resistive

4. Four Rules of Classification

a. If the exterior, load-bearing wall is combustible (wood or a combustible assemblage), the entire building is rated as construction class 1 regardless of the roof material.

b. If rule 1 does not apply and if the exterior, load-bearing wall is non-combustible or slow burning, the structures construction class is based on the roof and floor construction materials but in no case can the construction class be better than the classification assigned to the walls.

c. If the load-bearing walls are masonry, fire resistive, or modified fire resistive, the construction becomes a function of the floor/roof materials.

d. Major structural features are often an assembly of several parts. If the walls are anything other than masonry, modified, or fire resistive material, the entire assemblage is classed using the most combustible or susceptible member of the assemblage.

Example: An all metal exterior building on metal studs with the interior studs and insulation covered with plywood. The plywood makes this a combustible assembly.

5. Construction Class Cheat Sheet:

Wall Material

Floor/Roof Material

Construction Class

Code

Wood/Combustible

Wood/Combustible1

Frame

1

Non-Comb./Metal

Wood/Combustible1

Frame

1

Wood/Combustible

Non-Comb./Slow Burning3

Frame

1

Wood/Combustible

Concrete, Modified Fire Resistive or Fire Resistive

Frame

1

Masonry2

Wood/Combustible1

Joisted Masonry

2

Modified Fire Resistive

Wood/Combustible1

Joisted Masonry

2

Fire Resistive

Wood/Combustible1

Joisted Masonry

2

Non-Comb./Metal

Non-Comb./Slow Burning

Non-Combustible

3

Non-Comb./Metal

Concrete, Modified Fire Resistive or Fire Resistive

Non-Combustible

3

Masonry

Non-Comb./Slow Burning

Masonry Non-Comb.

4

Modified Fire Resistive

Non-Comb./Slow Burning

Masonry Non-Comb.

4

Fire Resistive

Non-Comb./Slow Burning

Masonry Non-Comb.

4

Masonry4

Concrete, Modified Fire Resistive or Fire Resistive

Modified Fire Resistive4

5

Modified Fire Resistive

Concrete, Modified Fire Resistive or Fire Resistive

Modified Fire Resistive

5

Fire Resistive6

Modified Fire Resistive

Modified Fire Resistive

5

Masonry5

Concrete or Fire Resistive

Fire Resistive

6

Fire Resistive6

Concrete or Fire Resistive

Fire Resistive

6

1Includes a Combustible Assembly

2One layer of non-load-bearing bricks covering metal studs is not considered a masonry wall. It is a non-combustible wall with a brick faade.

3This includes Built-Up Tar and Gravel Roof

4If the masonry does not meet the requirements of footnote 5 but is at least 4 thick, then the structure is classed as modified fire resistive.

5To qualify, the wall must be either: 1) solid masonry at least 4 thick; 2) hollow masonry at least 12 thick; or 3) hollow masonry between 8 and 12 thick with a listed fire resistance rating of at least 2 hours.

6Fire Resistive is defined as a non-combustible material or assemblies with a fire resistance rating of at least 2 hours. Can be accomplished based on the material or by the application of a sprayed on cementitious mixture covering all exposed metal. If between 1 and 2 hours fire resistance rating, the member is considered modified fire resistive.

6. Problems with Mixed Construction

a. Major structural features may not be consistent throughout the entire ratable structure.

b. Primary and secondary major structural feature are assigned the superior class only when 66 2/3% or more of the subject major structural feature is of the superior class. If this is not the case, the entire structural feature is assigned the lower class.

c. Examples below:

Example 1: Different Wall Materials

This building is located in an industrial park. This is a one story building measuring 120 feet by 60 feet with a wall height of 10 feet. The front of the building has been converted into office space and the rear is for storage and minor production. When originally built, the walls and roof were all metal siding on metal studs with approved slow-burning insulation on the interior of the walls qualifying the building as a construction class 3 structure. Upon moving in, the tenant and landlord installed a dividing wall between the intended office area and the warehouse/production area. Wood paneling was attached to the metal studs in the office area to a height of 8 feet and a drop-panel ceiling installed. The office area is 20 x 110. Does the creation of a frame assembly change the construction class of this building?

Total Exterior Wall Area

(360 perimeter x 10 feet tall)

3,600 square feet

Combustible Assembly Wall Area

(160 exterior perimeter x 8 feet high)

1,280 square feet

(35.6%)

Non-Combustible Wall Area

(160 exterior perimeter x 2 feet high) + (200 exterior perimeter x 10 feet high)

2,320 square feet

(64.4%)

(120)

(60) (20) (40) (Non-Combustible) (Non-Combustible) (Non-Combustible) (Storage / Production Area) (Office Area)

((Roof is Non-Combustible. Floor is Concrete.))

(Combustible Assembly (to 8))

Example 2: Differing Floor and Roof Materials

This structure was originally constructed as a one story, 3000 square foot (50 x 60) structure with 12 inch masonry walls and a non-combustible, built-up tar and gravel roof and a wall height of 20 feet. The building/business owner, due to the need for more storage area, added a 50 x 30 mezzanine storage area over the front office area and extending into part of the work area. The storage area is inch plywood on top of metal joists a combustible assembly. Prior to this addition, the building was rated as masonry non-combustible (construction class 4). How does this addition affect the buildings construction class? The answer is based on the combination of the floor and roof area since the exterior walls are all of the same masonry material.

Total Floor and Roof Area

(50 x 60)+(50 x 30)

4,500 square feet

Combustible Floor Area

(50 x 30)

1,500 square feet

(33.33%)

Non-Combustible Roof Area

(50 x 60)

3,000 square feet

(66.67%)

(50)

(1 Story (50x30))

(30)

(60)

(10)

(30) (2 Story(50x30 Storage Above))

(20)

(Office Area(1st floor))

7. Other Construction Material Considerations

a. A large amount of combustible interior walls (including assemblies)

b. Combustible flooring

c. Combustible exterior attachments

These minor features do not affect the construction class of the building, but they do alter the underwriting view (and overall rate) of the building.

C. Square Footage

1. Structure size maters because of the relationship between maximum possible loss (MPL) and probable maximum loss (PML).

2. To adequately judge PML requires a review of the Protection features found in and part of the structure.

D. Age of the Structure

1. Does the building comply with all current building codes?

2. Have the major systems been maintained and updated as necessary?

3. When were the last updates?

4. Extent of updates?

5. Who did the updates?

6. Depending on the construction materials, older buildings may easily burn or contain materials that have potential to create health problems

III. Occupancy (O)

A. Two main parts of occupancy

1. What the insured does

2. How the insured manages the hazards associated with what they do (Hazards of Occupancy)

What is a hazard?

B. What the insured does

1. Two primary occupancy classifications used by ISO for rating commercial property:

a. Non-Manufacturing

b. Manufacturing

2. Each individual class of insured (within the primary classifications) presents its own relative risk of property loss

3. The greater the basic risk, based on primary and individual classification, the more closely the underwriter analyzes the operations (occupancy)

C. How the insured manages its operations and the hazards of those operations

1. Similarly classed insureds do not necessarily manage their operations in a similar fashion

2. Each insured presents its own hazards of occupancy

3. Body Shop example of differently managed Hazards of Occupancy (Storage of Flammable and Combustible liquids)

a. Flammable

b. Combustible

4. Restaurant example how they manage their hood and duct

5. Hazard of Occupancys other considerations

a. Housekeeping

b. The amount of combustible materials within the building

c. The condition of major systems (heating and wiring)

d. Dust-collection systems for woodworking and like operations

e. Use of spark-reduction/arresting equipment where necessary

f. The amount and storage of any other potentially hazardous materials

g. Cooking equipment protection

h. Portable Heating Systems

i. Smoking control in and around the building

IV. Protection

A. Protection features LESSEN the amount of property damage

B. Classed as:

1. Public or Private

2. Active or Passive

a. Active Human presence is not required for activation. However, human involvement is ultimately necessary

b. Passive Human presence is required or the feature is just there. These features take no action on their own.

C. Public Fire Protection

1. Fire departments are the only protection feature classified as public.

2. They are funded by local governments to protect a somewhat large area.

3. Each fire department is inspected and assigned a grade its public protection class (PPC).

a. Most fire departments are inspected and graded by ISO

b. Each department is assigned a number grade ranging between 1 and 10 (and now 10W).

c. The lower the number, the more effective ISO (or other jurisdictional authority) considers the department.

d. Public protection grades are based on factors such as: 1) department response times, 2) water supply, 3) personnel training, 4) equipment, communications, and 5) personnel (paid versus volunteer).

4. Split Classifications

a. When a fire department is assigned two PPCs.

b. A function of the structures distance from a creditable water supply:

1) Hydrant

2) Draw point

c. Historically: 6/9 or 5/8B

d. Changed in 2013:

X or Y

D. Private Active Protection Features

1. Sprinkler systems

a. Can the system meet the demands of the current operation?

b. What type of system?

c. What is the systems condition?

d. Is the water supply adequate?

e. How much unprotected areas?

f. Adequate clearance below the heads?

g. Any high-rack storage?

h. Has the system been properly tested?

2. Alarm Systems

a. Type of system?

b. Who receives the alarm?

c. What type of external communication is used?

d. What protection exists if the power is off?

e. Are there any unprotected areas?

f. Are there any special features?

g. Is the system installed properly?

E. Private Passive Protection Features

1. Fire extinguishers

a. Are there enough for the building

b. Are they properly located at eye level

c. Are they in the path of natural exit

d. Are they the correct size

e. Are they the correct type

1) Class A

2) Class B

3) Class C

4) Class D

5) Class K

f. Are they inspected at least annually and charged as needed

2. Fire walls and fire doors

a. Directly affect the Probable Maximum Loss (PML)

b. Properly compartmentalized spaces limit the spread of fire

1) Location 1: A 15,000 square foot, one story building open from end to end; or

2) Location 2: A 15,000 square foot, one story building divided into three equal 5,000 square foot sections by fire walls and fire doors.

c. Fire walls must meet minimum standards

1) Continuous masonry wall

2) At least 6 to 8 thick (based on the masonry material used)

3) Must come into direct contact with fire resistive, masonry or non-combustible roof or walls

4) Must pierce slow burning, or combustible (including assemblies) roof or walls

5) HVAC ducts must be protected by at least ONE 1 hour damper

6) Any openings must be protected by proper fire doors

d. Any openings within a firewall must be protected with proper fire doors

1) Self-closing

2) Listed for 3 hour protection (Class A by UL) or have a sprinkler curtain

3) Cannot be blocked open

e. If the wall/door combination does not meet guidelines, may only be considered a fire stop

F. Miscellaneous protection

1. Standpipe and hose

a. Augment a sprinkler system by allowing occupants to fight fires

b. Some states have removed the hoses for safety reasons

2. Watchman services

a. Hours patrolled

b. How patrol is monitored

V. Exposures

A. Proximity to a high-hazard operation

B. High wind danger

C. Wildfire risk

D. Flood zone (Special Flood Hazard Area)

E. Earthquake exposure

F. Jurisdictional building code requirements

VI. Why Knowing COPE Helps

A. Allows better planning

B. Knowing what to provide and why makes the property underwriting smoother and quicker

C. You can better assist clients with they are planning upgrades to current structures or constructing new buildings

VII. COPE Worksheet

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