COMMERCIAL OUTPUT
PROGRAM UNDERWRITING CONSIDERATIONS
(July 2025)
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 restrict
coverage to property at a scheduled location, as it is blanket coverage with a
single limit applying to all buildings and property. As a result, the
underwriter must be confident that the information provided by the applicant is
thorough, accurate, and complete, or coverage may be provided in excess of the rated
exposure.
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 all
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 their contents, and
then writes the policy. A loss subsequently occurred at the
original Johnson building, which was neither listed on the ACORD form nor
covered under the previous policy. Johnson had no intention of covering the
building, but after seeing the cost required to demolish it, he submitted the
claim on the COP and was surprised when it 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 them to be excluded and written on
a separate policy.
Once all locations are
identified, basic property underwriting can begin, which involves evaluating
C.O.P.E. This acronym stands 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.
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 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 tornadoes, 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 withstand the damage likely to result from an
earthquake?
Another
important element of any type of construction is the building's age and the dates
when 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 they
may 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 has a certification, the added cost must be
included in the valuation. Any vegetative roof landscaping must also be
considered.
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 concern. An important question to consider is whether the typical business
operations use stock and business personal property attractive to criminals.
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?
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.
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.
Is
a fire that starts difficult to extinguish? A fire involving scrap tires is
difficult to extinguish, and it can 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).
The
two areas of concern in this category are public protection and private
protection.
When considering fire as the cause of loss, the nature and extent
of the protection available, the water supply, and the fire department's
response time are the most important factors. Public protection in the form of
fire departments can range from volunteer fire departments, whose availability
and equipment are often questionable, to fully paid and well-equipped services
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 is in place to grade
and evaluate 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.
It
is important to understand the various types of private protection available
and how they interact with 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?
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 to adjacent or surrounding occupancies and
operations. This issue affects the tenants within a building and the building
itself.
A
clothing store located next to a restaurant is considerably different from one
located next to an office supply store. Exposure evaluation must also include an
analysis of firewalls, fire doors, the construction of each structure,
vegetation that grows between buildings, and differences in building height,
among other factors.
Another
major consideration in risk evaluation and underwriting is the risk's
geographic location and the corresponding increase in certain hazards resulting
from 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.
Since the form has no
coinsurance requirements, there is no coinsurance penalty as an incentive to
maintain proper insurance to value. Therefore, the underwriter must be even
more diligent than with other forms 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 a specific 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 feet of
the building, either in the open or in or on a vehicle. Since 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 clearly understand exactly
what property is included in the risk so that coverage is adequate and
eliminates duplicate coverage.
Loss
history is another issue that needs to be addressed. 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 provide a more comprehensive 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 crucial factors in evaluating an overall loss experience.
Complete
and accurate loss information is essential to forge
the relationship between the agent, the insured, and the insurance company. It
is needed to establish and implement an effective and affordable insurance
program.
The
named insured's financial condition can lead to moral and morale hazards and
issues that can destroy an operation. When continuing operations 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 can mean dirty carpets and overflowing trash, but in
a manufacturing plant, it means an accumulation of greasy rags, lint, and dust,
as well as haphazard filter cleaning. Major losses can and do occur once an
insured is no longer actively concerned about the business's continued
operation.
The Commercial Output
Program is extremely flexible, allowing 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 crucial to
consider the implications of transitioning an account from a standard property
form to a COP, as it can be challenging to revert a customer back to a standard
property form. Since the COP is extremely broad, the insurance agent
recommending the change must list and explain the reductions in coverage that
result from making such a change.
If the agent simply changes a COP back
to a standard policy without providing an explanation to the insured, and an
excluded loss occurs that would have been covered under the COP, the agent
could be involved in a significant errors
and omissions claim.