what factors affect commercial property insurance cost

What Factors Affect Commercial Property Insurance Cost?

Commercial property insurance cost factors, often referred to as “COPE data”, have been used by underwriters for around 300 years to determine commercial insurance premiums.

You can remember these factors, which are described below, using a simple acronym called “C O P E”, which stands for Construction, Occupancy, Protection and Exposure

What Factors Affect Commercial Property Insurance Cost?

The four factors that affect commercial property insurance cost are known as “COPE data”. 

The acronym “COPE” comes from the four categories of property details that are collected on a property insurance application:

  1. Construction
  2. Occupancy
  3. Protection
  4. Exposure

Underwriters rely on this information and the data related to these factors to determine the likelihood of a property claim. 

By understanding these commercial property insurance cost factors, you’ll be better prepared when quoting your own property insurance and how you may be able to reduce your insurance premiums.

Construction

“Construction” property insurance data is about your building’s construction materials, as well as the size of your building and the age of your building. 

Construction data provides insight into whether building materials are flammable, fire-resistant, or non-combustible, and also how durable your building may be… Concerns about climate change are placing a spotlight on resilience in buildings in the fields of engineering and construction.

Buildings that are wood-framed construction are considered flammable. 

Indeed, even if you have a concrete roof and floors, if your four walls are wood, your building will be classified as “frame” construction… The lowest class.

As such, you’re going to pay less for property insurance if your building is made of a masonry, stone, concrete or steel, or a combination of non-combustible materials. 

The larger your building is, the more you will pay for property insurance. 

Building age is also a factor.

When was the last time your building was updated? Is it a hundred year old building? Has it ever had the electrical or other major mechanical systems updated?

You may pay less for property insurance for a similar size building that is newer and has newer mechanical systems that up to code. 

Also, in the event of a loss, your local building department may require you to rebuild according to code… However, if you don’t have ordinance or law coverage you could be on the hook for these costs… Or even have to pay for the costs to demolish perfectly good parts of your own building prior to a rebuild!

Occupancy

“Occupancy” property insurance data has to do with the type of operations you have going on within the building. 

Not only what are you doing within the building, but also what are you doing to manage the hazards within those specific operations? 

For instance, an office building may be considered low risk because people may be just sitting behind desks or in meeting rooms, working on computers, doing “knowledge work”.

As such, there’s not a lot of operational risk there. 

However, if you operate an auto body shop or a manufacturing operation this is a different operational exposure. 

An auto body shop may have flammable paints or chemicals stored. And a manufacturing operation may have collaborative robots or other machines that are working near or with employees and visitors to the facility. 

As such, you’re going to pay more to insure those operations than you would for a, say, an office building or a school or something like that. 

Protection

What protections does your building benefit from?

“Protection” data focuses on internal and external building features that may reduce the frequency and severity of the most common property losses, such as from the perils of water and fire. 

Does your building have a fire alarm or burglar alarm or security system? What about fire extinguishers…? Does it have a sprinkler system or water leak monitoring?

Property protection systems are proliferating with Internet-connected devices. IoT systems are available that can monitor your building in real time and notify you – or your building engineer – in the event something goes wrong.

Commercial underwriters and homeowners insurance policies may even provide a credit – or discount – for buildings that have monitoring systems that will reduce the frequency and severity of the most common property claims. Systems that are most likely to receive an insurance credit1 are “whole house” water shut-off systems.

An example of a “smart water monitoring system” is “Flo by Moen” which connects to the Internet and allows the homeowner to monitor their water usage with an app.

A water monitoring system can notify you in the event of a frozen pipe burst or bursting pipe or water leak or other water problem. It can also notify you of how much water you’re using – which can help you save money.

If you own a larger building, is it an open configuration space, or is it compartmentalized and separated by firewalls or fire doors that can contain a blaze to prevent it from spreading to the whole building?

How far away is your building from a fire hydrant?

Are you in an area with a really renowned fire department, like a highly rated fire department that has a good rating from the insurance commissioner in your state. These are all factors that insurance writers will look at.

Exposure

Your building’s “exposure” data includes your geographic location, climate-related risk, proximity to external hazards or even hazardous operations. 

For instance, if your building is located in California, is it located near a wildfire zone? 

Is your property located on the coast where it could be exposed to wind, extreme weather or flood risk? Are earthquakes more common where you are located? 

Buildings that are located near potential terrorist targets may be considered high risk. 

Your exposure may also be affected by your local building code requirements, and how stringent they are, or not… 

For instance, New York City has strict laws regarding construction liability and building code requirements for developers and owners. Indeed, starting in 2025, New York Local Law 97 requires properties larger than 25,000 square feet2 to have a carbon emissions limit limiting emissions to no more than 8.46 Kilograms of CO2 per square foot per year… If a building exceeds this amount, it will face fines for non-compliance. 

In 2030 the carbon emissions limit is lowered (i.e. becomes more strict) to 4.53 kilograms of CO2 per square foot per year.

Compliance with Local Law 97 may mean capital expenditures and investments in real assets that, in turn, drive up replacement costs, which may push property insurance premiums higher.

By understanding “COPE” data you have a better understanding of what factors affect commercial property insurance cost. 

If you have questions about your property insurance, or just want to talk with someone to about a specific green building, portfolio or other property insurance risk, schedule an appointment with me. 

I look forward to talking with you. 

Footnotes

  1. For instance Cincinnati insurance may offer a credit for homeowners who install a whole house water monitoring and shut-off system because it can prevent severe water damage by detecting leaks.
  2. Two buildings of over 50,000 square feet on a single deeded parcel must comply even if one of the buildings is less than 25,000 square feet by itself.
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