(August 2019)
The American Association of Insurance Service, Inc. (AAIS) Commercial Output Program is an extremely broad property coverage form. It differs from the standard property coverage form in three particularly important ways:
The form does not limit coverage to only property at a scheduled location because there is no location or property listing. As a result, the underwriter must be confident that the information provided by the applicant is thorough, accurate, and complete or else coverage may be provided that is well in excess of the exposure priced for.
ACORD application forms may be insufficient for use with this policy. These forms are helpful in identifying the exposures the insured wishes to cover but do not necessarily identify every one of the insured’s exposures. The unendorsed coverage form insures all buildings and business personal property, whether identified or not.
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Example: Johnson Furnishings insures
its two buildings along with the business personal property under a standard
commercial property policy. Johnson’s insurance agent encourages that the
coverage be renewed on a COP and the
underwriter agrees. The underwriter evaluates the two buildings and contents
and writes the policy. A loss subsequently occurs at the original Johnson
building, which was not listed on the ACORD form or even covered under the
previous policy. Johnson had no intention of covering the building but after
seeing the cost required to demolish it, turned in the claim on the COP and
was surprised when the claim was paid. |
The underwriter should always obtain a list of locations. A signed statement of values is also very helpful but is not required. The statement of values should include information on building construction, occupancy, square footage, fire protection, and values, along with the location address. The underwriter must evaluate the concentration of values and the perils that may threaten the property, including the crime perils. The underwriter may determine that one or more locations are unacceptable and require that they be excluded and written on a separate policy elsewhere.
Once all locations are identified, basic property underwriting can begin which means evaluating C.O.P.E. This is the acronym for Construction, Occupancy, Protection and Exposure. Although the primary underwriting concern is the potential for fire, all other causes of loss must also be evaluated.
Construction
One of the critical considerations in property risk evaluation is to determine the susceptibility of the building or structure to damage from the covered causes of loss.
Fire is the primary consideration. Is the building construction wood or frame, meaning is it highly susceptible to fire spreading and causing extensive damage? Or is it built using fire-resistant materials that reduce the spread of fire and the resulting damage if a fire does begin?
Many risks are located in areas of the country subject to tornados, hurricanes, or high winds. Are the buildings designed and built to resist losses these conditions cause (or to at least minimize the damage they cause)?
What about earthquake? If this cause of loss is covered, will the building's construction stand up to the damage likely to result from an earthquake?
Another important element of any type of construction is the building's age and the dates its systems were last updated or replaced. When were the heating, roof, plumbing, and electrical systems last updated or replaced? When any of these systems or components are not properly maintained or updated, the potential for one of them to cause or contribute to a loss increases.
Construction quality is another important element. Inferior construction that does not comply with building codes is a serious concern. Each structure must have the proper number of properly constructed load-bearing walls.
Green aspects of the building plus any anticipated green replacement after a loss must be taken into consideration. If a building is having a certification, the added cost must be included in the valuation. Any vegetative roof landscaping must also be considered.
Occupancy
Another important area of concern is the building's occupancy and use. The main underwriting concern is to determine the nature of the operations conducted in the building that could start or contribute to the spread of a fire. The type of occupancy and the processes it employs determine the nature of the property in the building. What kinds of property, contents, stock, chemicals, flammables, and related materials in the building or on the premises could provide additional fuel if a fire begins?
However, while fire's relationship to occupancy is probably the greatest concern, it is not the only one. An important question to consider is whether the normal business operations use contents and business personal property that are attractive targets for theft.
Do the operations conducted at the premises create a higher exposure to loss or damage from vehicles or aircraft, such as at an auto racetrack or an airport?
It is important to consider if an operation might cause an emotional social response. How does an emotional social response lead to higher loss potential? Consider the medical clinic that also performs abortions. Even though the hazardous processes on the premises are minimal, the potential for loss or damage by vandalism, burglary, and arson are higher simply because of the nature of the business.
If earthquake coverage is provided, the susceptibility to loss or damage by even relatively minor tremors must be evaluated. Even a minor shake could result in a large loss to a business that manufactures or sells glassware and statuary.
Damageability of contents must also be considered. Are the contents so delicate and sensitive that even a small flame or amount of heat could cause a disproportionately large amount of damage? Electronic equipment, high-quality clothing, and sterile equipment are examples of contents susceptible to significant loss from even a small amount of smoke or a minor nuisance fire.
Is a fire that does start difficult to extinguish? A fire that involves scrap tires is difficult to extinguish and it could take weeks or even months to burn itself out. Some operations are considered too risky for firefighters to enter under any circumstances and are fought only from the outside (or are allowed to burn out).
Protection
The two areas of concern in this category are public protection and private protection.
Public Protection
When considering fire as the cause of loss, the nature and extent of the protection available, the water supply, and fire department response time are the most important factors. Public protection in the form of fire departments can range from the volunteer fire department whose availability and equipment is questionable to the fully paid and well-equipped service available around-the-clock.
The water source, supply, location, and the rate of flow or pressure are all important elements to consider. A public grading system in place grades and evaluates fire protection based on a scale of one to ten. In this system, one represents the best public protection available and ten means that no reliable public protection is available. Understanding all the components of the grading system and how they fit together (in addition to the public protection class at risk) is essential to evaluate the fire loss potential of a given risk.
Private Protection
It is important to understand the type of private protection available and how it coordinates with the public protection. If there is a sprinkler system, it can be effective only if its water supply is adequate. Does the risk have a sprinkler system, standpipes, and hoses, any kind of fire suppression system, sprinkler alarms, pressurized or gravity water tanks, fire alarms, fire brigades, or similar types of protection? Is the fire department aware of the private protection systems provided so that it can coordinate its response with them?
What about exposure to loss due to theft or criminal acts? What types of safes, alarms, watch service, locks, fencing, lighting, and similar deterrents are in place to protect the premises? Does the alarm sound both on premises and at a central station or reporting center?
When evaluating wind and hail, what protective devices are installed, or procedures initiated to reduce or eliminate damage to windows, glass, and property in the open? Are hurricane blinds and shutters used on risks in coastal areas?
Exposure
Adjacent or
Surrounding Properties
What is the construction and occupancy of adjacent properties? What is the distance between the covered risk and those properties? A hazardous exposure can have a significant negative effect on the loss potential of an otherwise acceptable property risk. A relatively low hazard retail card shop located a few feet away from a restaurant becomes a much higher hazard because of the potential fire and smoke from the restaurant. The point is that part of an overall risk evaluation must include the risk's exposure that adjacent or surrounding occupancies and operations present. This issue affects the tenants within a building as well as the building itself. A clothing store located next door to a restaurant is considerably different from the clothing store located next to an office supplies store. Exposure evaluation must also include analysis of fire walls, fire doors, each structure's construction, vegetation that grows between buildings, and differences in building height, to name a few.
Geographic Location
Another major consideration in risk evaluation and underwriting is the risk's geographic location and the corresponding increase in certain hazards because of it. Some common examples are:
After identifying all locations, the underwriter must be comfortable that the values are adequate. This may require the use of a cost estimator or copies of appraisal information. The estimator or appraisal must reflect the values of additional structural items, such as foundations, that are covered under the COP. Because the form has no coinsurance requirements, there is no coinsurance penalty as an incentive to maintain proper insurance to value so the underwriter must be even more diligent than with other forms that are subject to the coinsurance requirement.
The coverage that applies to business personal property under the COP is also broader than the coverage provided under most standard commercial property coverage forms or policies. For example, the COP covers mobile equipment and does not restrict coverage to apply at only the covered location. For this reason, contractors’ equipment can also be covered under the COP. The values of all such equipment must be added to the total values to ensure adequate insurance to value. Under the COP, personal property must be in a building at a covered location or within 1,000 of the building either in the open or in or on a vehicle. Because locations are not scheduled, the personal property could be virtually anywhere. For these reasons, it is very important that the underwriter knows exactly where the insured's business personal property is located. It is also important for the underwriter to understand exactly what property is included in order for coverage to be adequate and to eliminate duplicate coverage.
LOSS HISTORY
Loss history is another issue to address. Loss history should consist of no less than five years of verified loss information. Because property losses occur infrequently or sporadically, additional years of experience offer a better view of the risk. Property loss history should include details on the types of losses, the dates they occurred, the causes of loss, complete details of the losses, amounts paid, and the deductibles that applied. It is also important to determine what the insured did after the loss to prevent similar losses from occurring again in the future. Loss frequency and loss severity are important issues when evaluating overall loss experience.
Complete and accurate loss information is essential to forge the relationship between the agent, the insured, and the insurance company, and is needed to establish and implement an effective and affordable insurance program.
FINANCIAL UNDERWRITING
The named insured's financial condition can lead to moral and morale hazards and issues that can destroy an operation. When continuing operations will result in only continuing losses, the named insured may become desperate or merely inattentive. Either one can result in a significant loss. Remember, if the only party interested in preventing a loss is the insurance company, the potential for loss is very high.
Moral hazard is the situation where the insured or members of the insured’s team take active steps to fraudulently create a loss for gain.
Morale hazards are less obvious than moral hazards, but their effect may be even greater. A morale hazard occurs when the named insured reduces its vigilance in loss prevention and control. There is not an active attempt to cause a loss but there is also no active attempt to prevent it. A business strapped for cash will seek out ways to cut costs. This may result in fewer employees and fewer outside services. This can then lead to deferred maintenance and poor housekeeping. Poor housekeeping in an office could mean dirty carpets and overflowing trash but in a manufacturing plant it means an accumulation of greasy rags, lint and dust accumulation, and haphazard filter cleaning. Major losses can and do occur once an insured is no longer actively concerned about the business continuing.
CUSTOMIZING COVERAGE
The Commercial Output Program is extremely flexible and allows the underwriter to work with the named insured to develop a tailor-made program. Customizing takes time and requires a combination of rating, coverages, and underwriting to develop a coverage program “just right.” However, the time is well spent when it establishes a long-term relationship that benefits the named insured, the agent, and the insurance company.
It is very important to consider the implications of moving an account from a standard property form to a COP because of the difficulty of moving a customer back to a standard property form. Because the COP is extremely broad, the insurance agent recommending the change must list and explain the reductions in coverage as a result of making such a change. If the agent simply makes the change without providing such an explanation, if an excluded loss occurs that would have been covered under the COP, the agent may be involved with a significant errors and omissions claim.