Understanding the outside factors that impact your commercial property insurance can be complicated, particularly for those with little to no knowledge of what goes into the underwriting process. While the type of business you’re in, your location and the state of the insurance industry in general can all affect commercial property coverage pricing, there’s often more to it than that.
In fact, when it comes to underwriting and rating commercial property insurance, insurers examine four key characteristics of a building: its construction, occupancy, protection and exposure (COPE). Together, these factors can affect commercial property policy pricing—pricing that can fluctuate drastically following an Insurance Services Office (ISO) inspection. This is especially true if there’s a discrepancy between what’s on an insurance application versus what’s found during an ISO inspection.
This Coverage Insights examines each aspect of COPE and how it can affect an organization’s commercial property insurance rating and, subsequently, their insurance rates.
The Types of Property Rating
Before looking at the specific factors of COPE, it’s important to understand when it is used and how underwriters rate property in general. When rating property insurance, insurers will generally use one of two methods—class rating or specific rating:
1. Class rating—For the class rating method, buildings with similar characteristics are assigned to the same class. Insurance rates for class rating buildings will often be an average of all those in a particular group, with some rates fluctuating based on positive or negative features of a specific structure. Typically, your building will be assigned a class rating 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
2. Specific rating—In instances where a building doesn’t fall under the class rating method, a specific rating will be calculated based on individual characteristics of the structure itself. This is where COPE comes in. Specific ratings are used for more complex buildings and take into account unique features—features that are examined closely during an ISO inspection. Following the inspection, ISO or the insurer will calculate a specific rate.
With a general understanding of the two rating systems, we can now examine how a building’s characteristics under COPE can affect policy pricing.
The first and most basic element of a commercial property insurance rating is a building’s construction (i.e., the materials the building is made of). Based on an ISO-developed system, insurers categorize buildings into one of six classes. These classes not only take into account the building materials used in construction (e.g., wood and concrete), but the combustibility of those materials as well.
These classes—numbered in order of combustibility, with Class 1 being the most likely to burn—are as follows:
Class 1 (Frame)—Buildings generally receive this classification if their exterior walls are made of wood or some other combustible material.
Class 2 (Joisted Masonry)—Buildings in this classification typically have noncombustible exterior walls consisting of concrete block, stone, brick adobe or another masonry material. In addition, Class 2 buildings usually have combustible floors and roofs.
Class 3 (Noncombustible)—Class 3 buildings will have exterior walls, floors and roofs made of and supported by noncombustible or slow-burning materials. This can include materials like metal, asbestos or gypsum. Often, Class 3 buildings are equipped with steel frames.
Class 4 (Masonry Noncombustible)—Class 4 buildings will often have exterior walls made of brick, concrete block or another type of masonry. Unlike Class 2 buildings, the floor and roof are constructed of metal or another noncombustible material.
Class 5 (Modified Fire-resistive)—The walls, floor and roof of Class 5 buildings will have a fire rating of at least two hours. Because these buildings are heavily fire resistant, Class 5 buildings generally have walls, roofs and floors made of solid masonry that are at least 4 inches thick.