How Is A Commercial Property Insurance Rate Calculated?

Understanding the outside factors that impact your commercial property insurance can be complicated.

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.

When it comes to underwriting and rating commercial property insurance, carriers examine four key characteristics of a building:

• its construction,
• occupancy,
• protection and
• exposure (COPE).

Together with the property inspection, each carrier comes up with its commercial property insurance rate.

The Types of Commercial Property Rating

Before looking at the specific factors of commercial property insurance rating, it’s important to understand when it is used and how underwriters rate property in general.

When rating property insurance, carriers 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:
   1. It consists of 25,000 square feet or less
   2. It doesn’t contain a sprinkler system
   3. It is not fire-resistive
   4. 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 the individual characteristics of the structure itself. This is where the inspection comes in. Specific ratings are used for more complex buildings and take into account unique features that are examined closely during an ISO inspection. Following the inspection, ISO or the insurer will calculate a specific rate.

Building Construction on Commercial property Rate

With a general understanding of the two rating systems, we can now examine how a building’s characteristics impact commercial property rates.

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 six classes.

These classes take into account the building materials used in construction (e.g., wood and concrete) and the combustibility of those materials.

These classes—numbered in order of combustibility, with Class 1 being the most likely to burn—are as follows:

1. Class 1 (Frame)—Buildings generally receive this classification if their exterior walls are wood or combustible. 
2. 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.
3. 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.
4. 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.
5. 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 of solid masonry at least 4 inches thick. 
6. Class 6 (Fire Resistive)—Similar to Class 5 buildings, the walls, floor, and roof of Class 6 buildings will have a fire rating of at least two hours. In addition, the walls, floor, and roof will also consist of reinforced concrete and be 4 inches thick or more. What’s more, structural steel used in Class 6 buildings will be load-bearing and have a fire rating of at least two hours.

Following an ISO inspection, your building may be assigned a specific class, which could substantially impact your rates.

Occupancy

The second factor in commercial property insurance rating that carriers look at is occupancy.

Specifically, underwriters will examine how a particular building is used (e.g., for retailing, manufacturing, or renting).

In addition, underwriters are interested in the contents of a building and how those contents impact combustibility.

For example, a building used as a grain mill will likely contain the dust that could ignite or explode. With this in mind, your commercial property insurance rates will vary depending on the type of work you perform in your building.

Protection Class

The third factor of commercial property rating relates to protection and the methods used to safeguard a building from fire.

When it comes to protection, insurers will take into account both public and private protection:

• Public protection—In general, public protection is provided by local fire departments, and an ISO-developed system is used to rate the quality of that protection. Under this system, fire departments are assigned a Public Protection Class rating—numbered one to 10, with one being the best. Essentially, buildings in communities with low Public Protection Class ratings will be charged a lower commercial property insurance rate. These ratings take into account:
  • The caliber of the fire department
  • The adequacy of the water supply
  • The effectiveness of the fire alarm and communication system
• Private protection—Private protection refers to the policyholder’s fire protection methods. This can include fire doors, alarms, fire extinguishers, and sprinkler systems. Essentially, the more of these features your building has, the more likely your insurer will apply a credit to your insurance rate.

Exposure

The fourth and final factor in commercial property rating refers to exposure.

Exposure relates to external hazards primarily due to a building’s location. This can include natural hazards (e.g., wind, hail, and lightning) or man-made hazards from local infrastructure (e.g., highways) or the general public (e.g., high-crime areas).

The closer your building is to a natural or man-made hazard, the more likely you will pay higher prices for commercial property insurance.

LEARN MORE: Landlord Insurance

The Rub

Commercial property insurance rates are anything but static, and a variety of outside factors can influence pricing.

Despite this, you aren’t alone in managing risks and gaining insight into your unique policies.

If your current insurance professional hasn't taken care of these issues, I would encourage you to contact us today.

• You can call or text us at 518.960.6600
• Click here to contact us via email.

I'm excited to introduce you to a new way of viewing your insurance program.

Thank you,

Ryan Hanley