Author: Chris Boggs
Bad decisions cause commercial property clients to pay higher property premiums. Sadly, the insured may not even recognize their poor choices. Worse still, agents can help clients identify their bad decisions with the right information.
The three most common property mistakes made by your insureds are:
- Altering the construction classification of the building;
- Improperly managing their operational hazards; and
- Negating or neglecting their fire protection systems.
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 (as detailed in the article, "The Unseen 'Magic' Behind Commercial Property Underwriting").
Occasionally, the insured alters the characteristics of one of these features. Generally, it is the exterior, load bearing wall that is sabotaged.
Warehouses, assembly operations, and manufacturing operations are the most common offenders. Consider (or imagine) an all metal building – steel I-beam studs wrapped on the exterior with metal sheet siding with "slow-burn" insulation between the studs for comfort. A common construction method in many industrial complexes. Oh, and just for the discussion, the roof is likely 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 decides 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 (this rule does not apply to masonry and fire resistive walls). The plywood causes the walls to which they are attached to be rated as frame assemblies.
Think back to the mixed construction discussion presented in "The Unseen 'Magic' Behind Commercial Property Underwriting." As discussed in that article, when more than 33 1/3 percent of a major structural feature is of an inferior construction class, the entire feature is assigned that class. Because the production area is likely the majority of the building, the addition of the plywood results in much more than 1/3 of the walls to be rated as frame assemblies.
Because the insured made a bad decision, the building is classified as a construction class 1 rather than a 3. Depending on the occupancy and protection class, this difference may result in a 25 to 30 percent 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 like material with the necessary flame spread rating to avoid creating a combustible assembly. This is where agents can properly advise insureds.
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 they do – their methods of operations resulting in "hazards of occupancy."
When insureds improperly manage their hazards of occupancy, they increase their own premiums. And sometimes they "manage" or mismanage themselves out of coverage completely.
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; and
- Act appropriately.
An example used in "The Unseen 'Magic' Behind Commercial Property Underwriting" was three body shops. All three shops are essentially the same (construction class, square footage, age, protection features, etc.), 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. Only the required amount is brought in when needed.
- Location B: All flammable and combustible liquids are stored within the building in NFPA 30-compliant storage cabinets. Only the required amount it removed on an "as-needed" basis.
- Location C: Flammable and combustible liquids are stored in the open in one corner of the shop. There is no spark arresting mechanism or anything else in use.
Obviously the highest premium applies to Location B. Well why not Location C you ask; because the underwriter is going to run screaming from that particular insured.
When your insureds improperly manage their hazards of occupancy, they cost themselves money and maybe coverage options. Help them avoid these problems. "RUA" good source of information for your clients?
Negating or Neglecting Fire Protection Systems
Fire protection systems do just what the name suggests, protects the insured 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.
Review the previously linked article, "The Unseen 'Magic' Behind Commercial Property Underwriting" for more information on protection systems. There is no need to retell the story here. Your job is to be prepared with the necessary information to explain to your clients how they may have made a bad decision in regard to some of these protection systems.
Here is another article you might like to read about this topic:
2-Hour COPE Class
The Virtual University offers a 2-hour on-demand webinar - Understanding Commercial Property Underwriting - COPE in all its Glory - intended to help you help your clients to avoid costly property mistakes and unnecessary premium costs. This content is also available as a Risk & Reality Report white paper.
Last Updated: March 16, 2017
First Published: February 3, 2017