The application – Homeowner’s insurance.
Ø The u/w will be looking at:
· Whether the size of the dwelling is inappropriate or perhaps disproportionate to the neighborhood;
· Whether the construction is in any way odd or unusual;
· Whether the dwelling is served by a high-hazard form of heating or is heated by an emerging technology for which the loss experience has yet to develop;
· The age of the dwelling;
· Whether the dwelling is under construction or undergoing renovations; and
· Whether the dwelling has concealed spaces that might give rise to or help spread a fire.
Ø Importance of Loss Experience
· Past losses are a most important indicator of future losses. It gives insight into the type of applicant with things such as attitude, safety and the likelihood of taking on preventative measures.
Ø Loss Control Inspections
· Inspections are rarely ordered for personal risks such as homes, which tend to be more uniform and predictable than commercial risks. Inspections may be ordered for the following reasons – the home is older, home is of high value, or the home uses some form of alternative heating such as a wood stove.
Ø Values at Risk
· Values are useful only in context – the importance of context can be seen in certain facts about the physical risk.
· Inconsistency of size and value should cause an u/w to wonder. For example why a home of only 1000 sq ft would need $750,000 of insurance. The discrepancy might imply the same moral hazard as the discrepancy between the value of the home and the applicant’s occupation as a convenience store clerk.
· If a home has been totally renovated, where did the insured come up with the money in a very short period of time? Has the work been done by a reputable contractor or substandardly by unqualified people?
Ø Determining Values and Amounts of Insurance
· Values in personal lines are often determined by valuation guides such as home evaluators (previously Boeckh). Coverages for personal property, additional living expenses and other are often specified percentages of the dwelling amount.
· Values in commercial lines are often more difficult to determine, yet they are more important due to the need for business interruption insurance. A direct loss such as fire may force a commercial risk to cease its operations while property is being repaired or replaced.
· Business interruption insurance covers the risk for indirect loss of revenue not earned and the continuing expenses incurred during the interruption in business.
Ø Expert Systems
· Definition – expert systems are computer software programs that guide u/w’s through a risk analysis, prompting them with questions and directing them according to the answers generated by the facts of the risk. These systems generate a kind of “score card” on the risk and are used most extensively for personal lines risks such as homeowners and also for many small and even mid sized commercial accounts.
· Useful in personal lines and for smaller commercial risks because those risks tend to be more homogeneous. Not useful on larger commercial risks
· Even with the use of expert systems the u/w’s judgment is always needed.
Ø Assessing the Property Risk
· The factors to be assessed in any physical risk can be expressed through the acronym COPE:
· C – Construction, O – Occupancy, P – Protection and E – Exposure.
· Their use in a line guide underscores their usefulness to the u/w as an analytical approach to property insurance for physical risks.
· Construction – includes a description of the types of material used in the walls and roof of the applicant’s building. It may include the size of the building, its age, # of storeys, and the type of heating system and fuel.
· Occupancy – refers to the use of the property by its occupants. It includes the # of occupants, description of operations, the space each occupies, hazards associated with each occupancy and any measures taken to reduce those hazards.
· Protection – includes both public and private protection. Public protection is based in terms of town grades assigned each municipality. Private includes sprinklers, extinguishing systems, fire brigades and fire alarm systems.
· Exposure – refers to the chance the applicant will suffer a loss as a result of proximity to one or more other risks or potential causes of loss to the applicant.
Questions an u/w may ask with respect to the COPE and a single-family dwelling:
Construction
Ø Is the size of the dwelling inappropriate or perhaps disproportionate to the neighborhood? Larger house may mean a greater exposure – walls are closer to the other houses.
Ø Is the construction standard, or is it odd or unusual in any way? Environmentally friendly home made of old automobile tires for example.
Ø How is the home heated? Are non-standard fuels used, such as wood or corn pellets? Is the home heated by oil, are the oil tanks above ground or below.
Ø What is the age of the dwelling? The older the dwelling is the drier and more flammable any wood used is. There is a greater possibility of faulty or older, high-risk wiring or other construction flaws.
Ø Is the dwelling currently under construction or undergoing renovations? Greater risk of a fire.
· most homeowner’s policies exclude renovation. U/w may agree to grant permission depending on the nature and extent of the work for an additional premium.
· U/w should also be alert to the effect or the work on the size or configuration of the dwelling and its increased exposure and likelihood of a loss. Increased value should be reflected in an increased amount of insurance for an additional premium.
Ø Does the dwelling have concealed spaces that might give rise to or help spread a fire? Changes in rooms or layouts may result in concealed spaces.
Occupancy
Ø How many families occupy the dwelling? If it is rented or leased how many tenants occupy it? The greater the # of people the greater amount of activity that could lead to fire or other loss.
Ø How many kitchens are in the dwelling? The # of kitchens indicate the # of families the dwelling is designed to accommodate.
Ø If the owner of the dwelling is not the sole occupant, then is the dwelling leased to other occupants or rented month-to-month? Gives rise to the stability of the tenant. The more stable the tenant the more likely they will take care of or feel a sense of responsibility for the accommodations.
Ø If the dwelling is leased, does the owner require the tenant to have tenant’s legal liability insurance? TLL protects the tenant against his or her liability for damages caused by an insured peril to the premises he or she occupies. It also shows responsibility on the part of the tenant.
Ø If the dwelling is being leased, how often does the owner see the inside of it? The more often the owner visits the more likely they will notice any behavior problems with the tenant or the building itself that could give rise to a loss. See page 13 for reference to grow op’s as a specific concern in rented dwellings. Most companies have now incorporated an exclusion for grow ops under the homeowner’s policy.
Ø Is there a home business in the basement? Home business and the property associated are not normally covered under the HO’s policy. Operations may increase the hazard at the dwelling.
Ø Is the dwelling ever vacant or unoccupied? Losses are more likely if vacant or unoccupied. It may be a target for vandals or occupied by vagrants.
Ø Are there any other common or special hazards associated with the occupancy? See definitions of hazard, common hazard and special hazards on page 14.
Protection
Ø Is the dwelling in an unprotected, semi-protected, or fully protected area? Water supplies, water pressure, professional or volunteer fire departments, distance from nearest fire hall, and distance from nearest fire hydrant.
Ø Does the dwelling have sprinklers? More common in multi unit dwellings and condos than in detached homes.
Ø Does the dwelling have fire alarms? Fire alarms are usually part of security systems. Are the alarm local or monitored, if monitored who is doing the monitoring and how reputable is the service.
Exposure
Ø Is the dwelling detached, semi-detached, or part of row housing? If it is detached, how far is it from its neighbors? Determines how likely a loss in one dwelling will affect other dwellings close by.
Ø Is the dwelling located in an area that is prone to natural hazards? Parts of BC and Quebec are prone to earthquakes, tornados in Ontario and Alberta as well as flooding and hail. Floods in Manitoba and severe blizzards in the Atlantic Provinces. U/w should know the region.
Ø Is the dwelling located in a flood plain? Laws prevent new construction in flood plains but some dwellings still remain.
Ø Does the insurer’s policy cover sewer backup? Generally excluded from HO’s policies but can be added by endorsement and usually an additional premium.
Questions and u/w may ask using COPE and a Commercial Bakery
- Problems facing commercial business are often heightened because:
- They are often larger than dwellings
- They often have more than one occupant
- The occupant’s activities are usually varied and more dangerous
- Exposures from surrounding buildings tend to be less predictable and more severe
Construction
Ø Is there anything unusual about the building’s age or location? Concerns regarding the condition of the wiring, the structural members and the roof are an issue. They may be in areas that have little traffic outside of business hours making them more susceptible to break-ins and vandalism.
Ø Are there any municipal by-laws that might affect the u/w’s assessment of the risk? Building may not meet current zoning requirements but have been grand fathered in. U/w may ask what is it about the area that led to the change in zoning and how would this affect the risk. See example on page 18.
Ø Does the building construction feature any large open spaces? Open spaces heighten the potential for fire to spread along with the severity.
Ø How is the building constructed? Construction of commercial buildings vary more than that of personal dwellings. Differences of construction have more far-reaching effects on the likelihood and amount of loss. See example on page 19.
Ø How is the building heated? How is it supplied with electricity? And how are these utilities used? Sizes and shapes of buildings greatly vary. Heating and electricity are often generated by boilers and related machinery. Heated by boiler or by unit heaters on the ceiling or by natural gas. Is baking done on the premises, are ovens gas or electric? Are there proper combustion controls in place on the ovens?
Ø Have contingency plans been made to maintain heating and electricity in the event of a business interruption caused by a loss? A back up generator would be a good idea. Business interruption should be planned for.
Occupancy
Ø Is this bakery a true retail occupancy? Is baking done on premises or are the baked goods baked elsewhere and then shipped to the retail store that calls itself a bakery. If baking done on premises the risk is higher.
Ø What are the bakery’s hours of operations? The longer the hours of operation the greater the risk. If the bakery has a drive through window the hours of operation are increased and therefore the risk of theft, vandalism or other perils associated with customers outside the building is greater. Exposures with bakeries tend to start before business hours, as bakers are generally there early to do the day’s baking.
Ø What are the storage arrangements? How are flour, plans, records and other items stored? Is the space inadequate, doorway and aisles blocked, concentration of materials in too small of an area or impairment of the sprinkler system.
Ø How good are the housekeeping and maintenance? This is of special concern if the area is not kept clean.
Ø Is there a delivery service, or does the business serve only walk in customers? Determines how much traffic is in and out of the business. The more members of the public the risk serves the greater the hazards of theft, vandalism and other related perils.
Ø Does the business operate only during certain times of the year? A seasonal nature of a business is not always obvious. Vacancy or unoccupancy affect the character of the risk. See the example on page 21.
Ø Are there any special hazards associated with the occupancy? The general concern is regarding the handling and movement and are to be expected for any given risk. See example on page 22.
Ø Does this business use any flammable liquids? Exposures should be looked at even if it does not seem to be obvious with that type of business. See page 23 for example and definition of flash point. U/w will want to know about any incidental amounts of flammable liquids used and stored safely, even if use may be of flammable solvents for cleaning purposes.
Protection
Ø Same protection assessment for commercial as personal risks. Private protection is often better in commercial risks, as they are more likely to have sprinkler systems or other private types of protection.
Ø Is the risk protected by an automatic sprinkler system? Is the design of the sprinkler system adequate to the severity of the fire hazard? Sprinkler systems should be appropriate to the process or operations the bakery is engaged in. The system should have approved shut off valves, alarm devices, and a proper pumper connection for the fire dept to pump additional water into the system in the event of a fire. Sprinkler heads, which detect fire and distribute water evenly to the areas they protect, should be appropriate to the occupancy.
Ø Definition of an automatic sprinkler system for fire protection is a network of specially designed piping on which automatic valves are located, together with a suitable water supply and alarm devices so designed and assembled that, in the case of a fire in the area covered by the system, the fire is automatically detected and controlled while at the same time an alarm is sounded.
Ø A sprinkler system can itself represent a hazard if its design is inappropriate to the exposure. Such as a wet pipe sprinkler system in a computer room.
Ø Does the risk have fire alarms? Are they appropriate to the exposure? There are two types of fire alarms the u/w should be concerned with. First being the alarm built into the sprinkler system, alarm can be local or centrally monitored. The second is tied to the automatic smoke and heat detection system. U/w will want to establish that the risk has smoke or heat detectors or both.
Ø The four stages of fire:
· Incipient stage – invisible products of combustion are produced, no visible smoke or flame or any significant heat.
· Smoldering stage – the quantity of combustion particles have increased to the point where they are visible as smoke
· Flame stage – actual fire exists, significant heat still not present but follows almost instantaneously.
· Heat stage – large amounts of heat, flame, smoke and toxic gases are produced.
- The detection system should match the risk. Can employees respond to local alarms?
Ø Is the risk equipped with the proper type and number of portable fire extinguishers? All commercial occupancies should have portable fire extinguishers. There must be enough of them on hand and enough extinguishing agent to be effective in at least controlling or containing a fire.
Ø Extinguisher must be appropriate for the kind of fire it may have to fight. Extinguishers also must be regularly serviced to remain functional.
Ø What about the human element? The best fire protection equipment may not prevent a loss if the people involved in the business are poorly trained, unskilled, careless, or indifferent. How prepared are the employees in fire or other emergency situations. Preparation varies between risks in the extent and sophistication. Attitude is critical; there should be a demonstrated consciousness about and concern for fire safety on part of the operation’s management.
Exposure
- Like personal risks, commercial risk exposures are underwritten much the same.
Ø Is the business the sole occupant of a detached structure? Is it a tenant in a mall or plaza? Is it connected to other risks in any way? The closer the risk to other occupants the greater the risk of a loss. If the unit next door is occupied by a welding shop there is a greater chance a loss than if it is occupied by a real estate office.
Ø Does the occupancy have any bearing on the exposures? The occupancy of a commercial risk has a special bearing on the exposures the risk faces.
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