Property underwriting has changed very little over the last 300-plus years. Yes, the methods of collecting, compiling and calculating rates based on COPE data has changed, but not the need for the basic information. Construction, Occupancy, Protection and Exposure are still the primary needs of property underwriters.
Construction was the focus of the prior post. Occupancy, protection and exposure are highlighted in this second and final COPE article.
Occupancy
"Occupancy" information is comprised of two parts: 1) what the insured does; and 2) how the insured manages the hazards associated with what they do. Determining what the insured does is rather simple; determining how they manage their "hazards of occupancy" requires closer investigation (either by the agent, insurance carrier staff or independent inspection firm).
Each class of insured (retail, office, wholesale, manufacturing, service, etc.) presents its own relative risk of first party property loss. The greater the risk of loss, the more closely the underwriter analyzes the operations (occupancy) and the higher the relational cost of coverage. An office, for example, presents less of an operational hazard than does a paint and body shop; resulting in a lower property occupancy rate factor for the office.
Beyond merely knowing the insured's operations/occupancy, the insurer must also investigate how the insured manages those operations (part two of the occupancy review). Similar insureds do not necessarily manage their operations similarly. Since each insured manages its exposures and hazards differently, each has its own "hazards of occupancy" that must be considered in the underwriting process.
Return to the paint and body shop referenced in a previous paragraph as a "hazard of occupancy" example. Assume the underwriter is evaluating three separate shops; all three have similar construction, location and protection characteristics; however, each applies its own method of storing 150 gallons of flammable and combustible paint.
Shop "A" stores its paint in a non-vented, unapproved storage room within the building. Shop "B" stores all 150 gallons in several storage cabinets meeting NFPA 30 standards; and Shop "C" stores all paint in an appropriately constructed storage building separate and apart from the shop. Which of these three presents the greatest (highest) hazard of occupancy? Which has the lowest relative hazard of occupancy?
All three shops will garner the same "occupancy" charge; but shop "A" will suffer the highest "hazard of occupancy" charge due to its storage methods. Shop "B" has mitigated its hazard by using approved containers and shop "C" has largely removed a common paint shop hazard of occupancy by choosing to store its flammable and combustible paints outside the building. The result is that shop "C" will likely have the lowest occupancy charge.
Paint storage is just one example of a hazard of occupancy; underwriters should review all hazards of occupancy such as:
Protection
Underwriters and building code officials are often jointly interested in the property protection aspects of structures, but for different reasons. Property underwriters view property protection measures in regards to their ability to lessen the amount of property damage; building code officials generally view protection from a general public and personnel protection angle.
Sprinkler systems, fire extinguishers, alarm systems, fire doors and fire walls and public fire protection are the primary protection mechanisms evaluated by underwriters. A particular structure's construction and occupancy may dictate which property protection mechanisms are required or desired by the underwriter.
Sprinkler Systems
The mere presence of a sprinkler system is not, or should not be, sufficient to satisfy the underwriter. To be effective, the sprinkler system must meet the demands created by the hazards specific to the occupancy. A sprinkler designed for an office or warehouse will not provide sufficient protection to a chemical manufacturing operation. Insufficient systems are common when an existing building designed for one type of occupancy is later converted to another use (a warehouse is turned into a manufacturing facility).
Proper evaluation of a sprinkler system is generally done by a qualified professional. These inspectors evaluate the condition of the system and the ability of the system to handle the fire load created by the occupancy. Underwriters can glean important information from the inspector's report, including:
Fire Extinguishers
Fire extinguishers, unlike a sprinkler system, require human interaction. To be effective, the extinguisher must be accessible, appropriate for the hazard and ready for use when needed. To garner maximum benefit from and credit for the presence of fire extinguishers, the underwriter should want to know:
Alarm Systems
Fire, smoke, burglar and combination alarm systems are readily available to fit nearly any purpose or need. Before granting any credit or exception based on the presence of an alarm system, key information is required by the underwriter:
The last question may seem rather simplistic, but planning an alarm system can be done incorrectly. Inspecting an alarm system in a restaurant on one occasion, the owner complained that the fire alarm often sounded (on and off site) for no apparent reason. Upon investigation I found that a "rate-of-rise" detector had been installed over an oven. If the oven was open long enough, the sudden rise in heat would set off the alarm. Proper installation of the system is important.
Fire Doors and Fire Walls
"Maximum possible loss" (MPL) and "probable maximum loss" (PML) are directly related to the presence and effectiveness of fire doors and fire walls. Properly constructed and maintained fire walls and doors limit the spread of fire and lower the PML; the lower the PML, the more favorably the underwriter views the property.
Large open buildings, based of course on the contents of the building, allow a fire the opportunity to spread rather quickly with nothing structural to slow the progress. Compartmentalized spaces created by fire walls and doors contain and slow the spread of fire to reduce the overall damage. At least that's the purpose of fire walls and doors.
To qualify as a fire wall (not just a "fire stop") requires certain conditions be met:
Any masonry or non-combustible wall failing to meet these standards is considered a "fire stop" but not a fire wall. Slow burning and combustible (including assembly) walls qualify as neither a fire wall nor a fire stop.
Public Protection
Fire districts, often involving many individual fire stations, are inspected and graded by Insurance Services Office or other jurisdictions with authority (in North Carolina, it's the Department of Insurance) based on response time, personnel, training, equipment and local water supply. Each district is assigned a number grade from "1" to "10." The lower the number the better the district and the lower the fire rate.
Exposures
Is the insured property exposed to any external hazards? Not all hazards are related to the insured structure or operation; some come from outside the premises or are simply geographic in nature. A few external exposures relevant to property underwriters include:
Finishing Up
Understanding COPE allows better planning during the property underwriting process. Knowing what to provide and why to provide specific information makes the process smoother and hopefully quicker. Also, knowing COPE can assist clients when planning upgrades to current structures or constructing new buildings.
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