Understanding Commercial Property Underwriting and ‘COPE’

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by Christopher J. Boggs, CPCU, ARM, ALCM

Working nearly four years with the Commercial Risk Services division (now known as RDS) of Insurance Services Office (ISO) afforded me the opportunity to become somewhat well-versed in the recognition, gathering and reporting of the necessary property underwriting information known as “COPE” data.

Construction, Occupancy, Protection and Exposure (COPE) are the same four basic elements of underwriting data real property underwriters have been using for nearly 300 years. Commercial property applications are designed to capture most of this basic underwriting data. Each element is discussed in more detail in this and the following post.

Construction (“C”)

The construction element can be further broken down into three sub-parts. Each of the following sub-parts is detailed in the next several paragraphs:

  1. Construction materials;
  2. Square footage; and
  3. Age of the structure.

Construction Materials
ISO defines six construction classifications (from “1” to “6”) based on the combustibility and damageability of the materials used to construct the “major structural features” of a particular structure. The lower the number, the more susceptible the structure is to damage by fire (the main construction rating factor in this system). The “major structural features” used to determine the construction class codes are the exterior load-bearing walls, roof and floor(s).

Assigning a construction class code is first a function of the load-bearing wall material and secondarily a function of the floor and roof materials used. Four exterior, load-bearing wall types are considered: 1) masonry, 2) fire-resistive/modified fire-resistive; 3) non-masonry or fire resistive; and 4) combustible materials (wood). Likewise, there are four floor and roof types considered: 1) concrete; 2) modified fire resistive/fire resistive; 3) non-combustible/slow burning; and 4) wood or materials other than “1,” “2” or “3.”

Combining one of the three wall types with one of the four floor/roof types produces the structure’s construction class. Attached is a chart indicating how these combine to generate a specific construction class. Only two universal “rules” apply to construction classifications: 1) if the exterior load-bearing wall is frame, the entire building is rated as frame (construction class “1”), regardless of the roof material; and 2) if the exterior load-bearing wall is anything OTHER THAN masonry, modified fire resistive or fire resistive, the structure’s construction class is based on the roof and floor construction material.

In applying this chart, remember that each “major structural feature” is often an assembly of several parts. When assessing one of these features, the entire assemblage creating that part must be considered; and no “assembled” feature can be assigned a classification greater than its most combustible or susceptible part.

Two examples of “assemblages” lowering the structural feature’s “class” are:

  • An exterior metal-on-metal-stud wall with plywood or other combustible material attached to the inside of the wall (common in industrial settings). The combination of these two disparate materials requires that the entire section of wall covered with the combustible material be considered a type “3” combustible wall. If enough of the wall area is comprised on this assemblage, the entire wall, for rating purposes, may be considered frame.
  • Wood joist roof supports covered with metal is considered a frame assemblage and is thus assigned a frame rating.

(The assembly rule, however, does not apply to load-bearing masonry, modified fire resistive or fire resistive walls.)

Beyond the six construction classes presented above and in the attached chart, there are actually three more construction classifications relating to Group II causes of loss (windstorm, hail, aircraft, riot, civil commotion, etc.). Construction class codes “7,” “8” and “9” modify construction classes “2,” “3” and “4” respectively. Agents will never use these three additional codes, just know that they exist and relate mostly to the structure’s ability to withstand heavy wind loads.

Mixed Construction Problems. What affect does a combination of building materials and assemblies have on a commercial property’s construction classification? Factually, such mixing can be detrimental to the building’s construction class. From the attached chart it is evident that any building with a wall or wall assembly classified as frame results in the entire structure being rated as construction class “1” – frame, with some very expensive property rating results.

Simply, to qualify or a higher construction class rating, the superior construction must equal or exceed 66 2/3 percent of the ratable structural feature. This 2/3 requirement applies first to the walls and separately to the combined area of the floors and roofs. (The lowest floor is not considered when calculating the total floor and roof area.)

Attached are two examples of mixed construction. The first is a one story building combining non-combustible and frame assembly walls all under a non-combustible roof. The second is a partial two story building with masonry walls a non-combustible roof and the second floor constructed of 3/4 inch plywood on metal joists – making the second floor a combustible assembly.

Other Construction Material Considerations. In addition to the “major structural features” highlighted above, underwriters also review interior construction features that affect the damageability of the structure under consideration. Bowling alleys are a good example of this review; a rating charge is generally applied to bowling alleys due to the raised combustible floors making up the bowling lanes.

Square Footage
The size of a structure influences many aspects of the underwriting process related to the “construction” element of COPE. Structure size also plays a part in the “protection” section of COPE (i.e. the need for a sprinkler system, etc.). But the main aspect of structure size from the underwriting aspect is in the comparison of the building’s “maximum possible loss” versus its “probable maximum loss.”

“Maximum possible loss” (MPL) and “probable maximum loss” (PML) were concepts explored in the article, “How NOT to Explain Coinsurance to Clients.” Essentially, it is “possible” that the entire structure may be destroyed in any one loss; thus the MPL is the entire structure. However, the chances that the building will suffer a total loss are inversely proportional to the size of the structure. Basically, the larger the building, the less likely the entire structure will be destroyed in a single event. The PML is a smaller percentage of the MPL in larger buildings.

Age of the Structure
Aging structures create concern and questions in the underwriter’s mind. Specifically, underwriters will concern themselves with the building’s major systems (roofing, plumbing, HVAC and wiring) when underwriting an older structure. The older the structure, the more likely a major system will malfunction, leading to a possible claim due mostly to an internal issue rather than caused by an external force.

Have the systems been maintained and updated as necessary? When were the last updates? What was the extent of those updates? Who did the updates? These are all questions underwriters may ask regarding older structures.

Agents should concern themselves with the age issue as well. Many construction-related ordinances and laws may have been updated or enacted since the building’s original construction. Any increased cost related to bringing a structure into compliance with local building codes following a covered cause of loss is specifically excluded in the commercial property policy. See the previously posted five-part ordinance or law series for more detailed information.

The Importance of “Construction” Information

Taken on its own, “construction” may ultimately be the most important element in property underwriting. Although the second element, “occupancy” (what the insured does), is often seen as primarily important among the four elements; occupancy really is secondary to construction when the risk is a class of business the underwriter normally writes.

Granted, construction and occupancy can each be seen as a function of the other in regard to underwriting decisions, often times the decision comes back to construction. For example, an underwriter may offer coverage to a restaurant in a masonry/non-combustible building (construction class “4”); but may not be willing to offer coverage to the same operation located in a joisted/masonry building (construction class “2”).

The next post finishes out this COPE discussion with explanations of Occupancy, Protection and Exposure.

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  • October 26, 2009 at 2:29 pm
    Jared Morgan says:

    I wish I had seen this when I started in the business – this is the most complete explaination of ISO I have ever seen. I’d challenge you to do the same for AAIS – they class buildings differently than ISO, and the difference can really change premium.

    Thanks! AWESOME! We’ve linked and archived this on our intranet for future use.

  • October 26, 2009 at 2:29 pm
    Jim Olsen says:

    This will totally confuse the “estimate writer” adjusters. I hope many of them read this and actually start adjusting claims, rather than take the easy road and simply write checks and walk away. Good job!

  • October 27, 2009 at 4:18 am
    Pierre-Michel FEUZ says:

    The Master at Arms, Mr C.J. Boggs does it again!!.
    Everyone, will wish to have read this, so comprehensive, yet so absolutely to the point and easy to read…..more so to understand. I hope your US Domestic Market is receptive and appreciative.

    Even from afar in the UK, where our own Market has so many involvments underwriting US Risks, your Article(s) and Links will be found of help and offer brilliant technical support to our young elements.

    Congratulations to the Author.

  • October 27, 2009 at 1:32 pm
    dave says:

    Good article on the basic wxposure data needed for every property asubmission and quote.

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    Easy to read and offer excellent background and understanding from an underwriter’s point of view.

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