(June 2020)
The rules for rating the equipment protection coverage form are very specific. It is a step-by-step process that has aspects of both property and liability rating formulas. The rating is premises specific.
This analysis addresses only the basic rating for property damage and business income.
Determine the occupancy for the specific premises being rated. This is important because the occupancy at one premises could be different from the occupancy at another premises. As an example, a manufacturing operation may have an office premises, a premises where its primary manufacturing takes place and another premises used as a warehouse.
The occupancy selected determines the Coverage Modification Table and the Coverage Deductible Group in Table 18. The occupancy selected also determines the base loss cost for property damage and business income in Table 25.
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Example: Leslie Products Premises #1 manufactures cereal products. Based on the occupancy, the following information is developed. |
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Occupancy |
Property Damage |
Business Income |
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Base Loss Cost |
Cov. Mod. Tbl |
Ded, Group |
Base Loss Cost |
Cov. Mod. Tbl. |
Ded. Group |
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Cereal Manufacturing |
.019 |
K |
3D |
.030 |
K |
6A |
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When all four types of equipment are covered, the coverage modification is 1.00. However, if one or more are not covered, a credit factor is developed because fewer types of equipment are available to cause a loss. The credit available depends on Occupancy Class Table and the type of equipment not covered. The coverage modification table is Table 23. C. 2.c. (5) (RF).
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Example: Leslie decides to not insure its production machinery. Table 23.C.2. (5) provides the following information for Coverage Modification Table K: |
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Pressure/Vacuum |
Mechanical/Electrical Modification Table |
Production Machinery |
Diagnostic Equipment |
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.50 |
.35 |
.15 |
.00 |
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The coverage modification is .50 + .35 +.00 = .85. |
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The property damage base limit is $500,000, and it can be increased to as high as $200,000,000.
The base limit is multiplied by the applicable a limits factor in Table 23. C. 2. d. (RF) to develop the increased limit premium.
The business income base rate assumes that the business income limit of loss will be 25% of the business income annual values. An increased limit surcharge is made if the limit of loss is higher. The percentage is determined by dividing the limit of loss by the business income annual value. If the percentage is more than 25%, the base rate is multiplied by the limits charge in Table 25. C. 2. d. (RF).
Note: The Limits Table Group is the numeric portion of the deductible group in Table 18.
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Example: Leslie’s selects a $1,000,000 property
damage limit and $800,000 business income loss limit. Leslie’s annual
business income values are $2,000,000. Because Leslie's property damage deductible
group is 3 D, the property damage limits group is 3. The factor for group 3 and $1,000,000
property damage increased factor is 1.023. Leslie’s business income percentage is $850,000/$2,000,000 = .425. Because
the business income deductible group is 6 A, the business income limits group
is 6. The increased factor for group 6 and 42.5% of annual value is 1.034. |
The standard property damage deductible is $500. Deductibles from $250 to $2,000,000 are available. Deductibles other than $500 must be modified by a deductible factor in Table 23. C. 2. e. (RF). The factor is based on the deductible amount and the deductible group.
The standard business income deductible is 1/2 day. In other words, 12 hours must pass before business income, and extra expense loss amounts begin to accumulate. When a different deductible is selected, rates must be modified by a deductible factor in Table 25. B. 3. b. (RF). It is based on the number of days and the deductible group.
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Example: Leslie Products selects a property damage deductible of $1,000 and a 5-day business income deductible. The Property Damage Deductible Group is 3D. The factor is .971. The
Business Income Deductible Group is 6A. The factor is .583. |
A risk modification factor is applied based on specific characteristics of the premises described in Table 23. C. 2. f. (RF). Six characteristics are evaluated, and the factors for four of them range from – .10 to + .10. The range of the factors for the other two characteristics are from – .20 to + .20. These factors apply per premises, not per risk. The factors are added to develop a combined factor that is then added to 1.00. The final factor must be in the range of .75 to 1.25 (inclusive). The factor applies to both property damage and business income.
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Example: Leslie’s equipment is new,
well maintained, in excellent condition, and easily replaceable. Based on
these characteristics, the factors are – .10 + – .10 + – .10 + – .10 + .20
+.20 = .80 + 1.00 = .20. Because .20 is less than .75, the factor used is
.75. |
The exposure is the total insurable replacement cost value of the building(s) and personal property that is at the named insured’s premises and used to conduct its business operations. Stock is not included.
Note: There is no requirement that the named insured own any of the property.
The exposure is the full reported business income annual value.
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Example: Leslie Products' premises has the following property replacement cost values:
Leslie's property damage exposure basis is $500,000 Building + $500,000 Machinery and Equipment = $1,000,000. Leslie's
business income exposure basis is $2,000,000. |
The base loss cost is converted to a rate using the insurance company's loss cost multiplier. That base rate is then modified by the factors described above. The exposure is then multiplied by the modified rate to produce the premium for each location. This process is repeated for each premises, and the individual premiums are added together to produce the final premium.
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Example: Using the information developed above, Leslie's property
damage and business income premiums are determined as follows: |
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Rating Step |
Property Damage |
Business Income |
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Base Loss Cost |
.019 |
.030 |
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Multiplied by Insurer Loss Cost Multiplier |
1.30 |
1.30 |
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Base Rate |
.0247 |
.0390 |
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Multiplied by Coverage Modification Factor |
.85 |
.85 |
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Multiplied by Increased Limits Factor |
1.023 |
1.034 |
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Multiplied by Deductible Factor |
.97 |
.583 |
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Multiplied by Risk Modification Factor |
.75 |
.75 |
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Final Rate |
.016 |
.015 |
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Multiplied per $100 of Exposure |
$1,000,000 |
$2,000,000 |
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Final Premium |
$160 |
$300 |
A number of other coverages and options are available. Refer to the appropriate rules in Division Two of the ISO Commercial Lines Manual for information and detailed rating instructions.