Commercial property owners may not recognize how their decisions can impact their property insurance premiums. Here's how agents can help them avoid mistakes.
Bad decisions cause commercial property clients to pay higher property premiums. Sadly, the insured may not even recognize their poor choices. However, with the right information, agents can help clients identify their bad decisions.
Here are the three most common property mistakes and how agents can help them avoid them:
1) Altering the construction class. A building's construction class is a function of its major structural features. The two structural features used to develop the construction class are the exterior, load-bearing walls and the floors and roof.
Occasionally, the insured alters the characteristics of one of these features. Generally, it is the exterior, loadbearing wall that is sabotaged.
Warehouses, assembly operations and manufacturing operations are the most common offenders. Consider an all-metal building—steel I-beam studs wrapped on the exterior with metal sheet siding and slow-burning insulation between the studs for comfort—a common construction method in many industrial complexes. The roof is likely made of the same construction.
If the insured leaves the building alone, this is considered a non-combustible—construction class 3—building. However, for one reason or another, the insured may decide to attach plywood panels to all interior walls of the production areas, often to protect the insulation from damage. When the plywood is attached to the metal studs it creates an "assembly."
Assemblies are rated based on the most combustible feature of the assembly, a rule that does not apply to masonry and fire-resistant walls. The plywood causes the walls to be rated as frame assemblies.
When discussing mixed construction, as discussed in the Big “I" Virtual University (VU) session, "The Unseen 'Magic' Behind Commercial Property Underwriting," when more than 33 1/3 percent of a major structural feature is of an inferior construction class, the entire feature is assigned to that class. Because the production area is likely the majority of the building, the addition of the plywood causes much more than one-third of the walls to be rated as frame assemblies.
Because the insured made this decision, the building is classified as a construction class 1 rather than 3. Depending on the occupancy and protection class, this difference may result in a 25%-30% higher Group I rate.
Don't misunderstand. This doesn't mean the insured cannot protect the insulation or cover the interior walls in some way—they just shouldn't use combustible materials to do so. There are other materials that can be used such as drywall or other material with the necessary flame spread rating to avoid creating a combustible assembly. This is where agents can properly advise insureds.
2) Improperly managing hazards of occupancy. Occupancy is what the insured does—how it uses the building. But more important than what the insured does is how the insured does what it does. In other words: Its methods of operations resulting in hazards of occupancy.
When insureds improperly manage their hazards of occupancy, they increase their own premiums and sometimes they mismanage themselves out of coverage.
What hazards are unique to the insured? Once those are known, they must be managed properly to garner the best property premium. To analyze the occupancy exposure, apply the "RUA" method:
- Recognize the hazard.
- Understand the risk.
- Act appropriately.
The three body shops in "The Unseen 'Magic' Behind Commercial Property Underwriting" are essentially the same: Construction class, square footage, age and protection features. The only difference is how each stores its 100-gallon reserve of flammable and combustible paints and other liquids.
- Location A: All flammable and combustible liquids are stored in a specially constructed building outside and separate from the shop. The required amount of liquid is brought in when needed.
- Location B: All flammable and combustible liquids are stored within the building in National Fire Protection Association (NFPA) 30-compliant storage cabinets and the required amount is removed on an "as-needed" basis.
- Location C: Flammable and combustible liquids are stored in the open in one corner of the shop with no spark arresting mechanism or any other protection feature in use.
When your insureds improperly manage their hazards of occupancy, they cost themselves money and maybe coverage options. Help them avoid these problems.
3) Negating or neglecting fire protection systems. Fire protection systems do just what the name suggests—protect the building from damage caused by fire. None of the systems prevent fires, but all are intended to reduce the damage caused by fire. And if these systems are not maintained, installed or used properly, the insured is going to see an increase in property premium.
Additional information on protection systems can be found in "The Unseen 'Magic' Behind Commercial Property Underwriting" and “RCP: What Does That Little Code Mean?"
Chris Boggs is Big “I" executive director of risk management and education.
The VU offers a two-hour on-demand webinar on Construction, Occupancy, Protection and Exposure (COPE), "Understanding Commercial Property Underwriting - COPE in all its Glory" intended to help you help your clients avoid costly property mistakes and unnecessary premium costs. This content is also available as a Risk & Reality Report white paper.