Ever play, which one of these things is not like the others?
When you’re a child, it’s a fun exercise with low stakes. When you’re a commercial property underwriter, your grasp of subtle differences in seemingly similar structures and construction can be far more challenging and have millions of dollars in premium riding on it.
Many insurance companies utilize the ISO Construction Class to develop rates for commercial property customers. The system consists of six classes that describe a building’s properties, particularly fire resistance, with Class 1 indicating the highest risk and Class 6 the lowest. A study by Verisk found that insurers assign the wrong ISO Construction Class to a whopping 32.5 percent of commercial properties.1 This misclassification is a major reason why commercial property insurers suffer $1.3 billion in premium leakage every year.2
To help ensure your commercial property book is properly priced, learning how to better assess construction classification may help. While there are many potential pitfalls when it comes to correctly classifying commercial structures, these are three that we’ve found underwriters and field inspectors usually find challenging.
1. Mistaking an ISO Construction Class 1 structure for a Class 3 structure
When inspecting a metal frame building with a metal exterior, many inspectors may simply assign a Construction Class 3 (Noncombustible) rating to the building. However, some buildings may have wood stud framing supporting the metal cladding. Frequently, combustible insulation is attached to the interior surface of the metal walls. If these two cases occur and are high enough on a percentage basis relative to the materials used in the overall construction of the building, that could warrant a Class 1 designation, not a Class 3.
This is a significant error. In fact, misclassifying an ISO Construction Class 1 building as a Class 3 can result in a 20-30 percent lower loss cost than what is appropriate for the risk being rated, according to Verisk research.
Data assets to solve the classification conundrum
Keeping tabs on how building owners have modified their structures is one reason Verisk maintains a database on commercial properties, with critical underwriting details on 11.5 million properties. This database includes 4 million properties verified by our experienced staff of on-site inspectors, giving us critical, ground-level intelligence that’s used to inform our classifications. This in-person data collection is supplemented with virtual surveys using state-of-the-art aerial imagery to develop loss costs. Machine learning models are utilized to predict building characteristics even in the absence of in-person surveys.
2. When insulation fools you
Another common mistake is misclassifying a metal frame construction as an ISO Construction Class 3 when it features an Exterior Insulation and Finish System (EIFS). EIFS, sometimes referred to as “synthetic stucco,” is typically combustible and available in a wide range of styles. If EIFS covers a high enough percentage of a wall area, a building’s classification could actually warrant an ISO Construction Class 1 designation.
It’s not just EIFS. Insulation may confuse inspectors in other ways. Commercial structures created using metal building systems are frequently assigned a Class 3 rating on the rather obvious grounds that metal resists burning, but some commercial inspectors ignore the type of insulation employed inside those structures. In some regions of the country, the insulation typically used in these buildings is combustible and its presence in the building would warrant the building receiving a Class 1 rather than Class 3.
Staff training to identify insulation issues
Knowing regional variations in building codes and common construction materials is an absolutely critical piece of intelligence when it comes to accurately applying ISO Construction Class. Verisk’s 400 field inspectors undergo hours of rigorous training on just these regional nuances. The roughly 60 training sessions also include courses on sprinkler system design, alarm, and electrical systems. Field staff performance is reviewed regularly to ensure high performance.
3. Tilt-wall buildings and related roofing materials
Regional variations also play a critical role when it comes to evaluating tilt-wall buildings.3 Depending on what region of the country you’re in, these buildings will typically have either a metal or lumber roof and could thus be assigned either a Class 4 or a Class 2, respectively. As with the difference between Class 1 and Class 3, there’s a lot riding on making the right call.
So how do you tell?
Local knowledge = actionable insights
Verisk’s commercial inspectors have, on average, 12 years of experience and operate within geographically defined regions. This enables them to recognize the nuances in construction and materials used that can enhance their ability to determine ISO Construction Classes. They know that if the building is located in a region with a concentrated lumber industry and/or susceptibility to earthquakes, it may very well use lumber for the roof of these structures, which would indicate a Class 2 designation.
Classify with confidence
Assigning to commercial properties the proper ISO Construction Class can be critical to setting appropriate commercial property rates. To learn more about how Verisk’s data assets, analytics and field staff can improve your risk classification, visit: https://www.verisk.com/insurance/products/onsite-surveys-inspections/
- According to Verisk research.
- Tilt-wall is a building technique defined by, among other things, the use of concrete.