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| How Commercial Property Rates Are Determined |
Fire risk is typically the primary factor that determines a policy’s premium. Accordingly, a business with neat, orderly grounds and good fire protection will likely have a lower premium than a business with debris piled next to buildings and little or no fire protection. The type of business also is an important factor. For example, an explosives factory would almost certainly be deemed a higher fire risk than a travel agency.
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Fire Risk
Fire risk is assessed according to a formula to determine the structure’s "fire rating." The formula is complex, and a typical structure will have many factors weighing both for and against a favorable rating, with the overall balance largely determining the property’s premium rate.
The fire rating is determined through a physical inspection of the property by a state-licensed fire inspector. Fire inspectors are typically contracted by insurance companies to perform inspections as part of the underwriting process. Inspectors are required to use a standard rating system to determine fire ratings.
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The five criteria used are:
- Location. Buildings located in cities or towns with good fire protection, as assessed by the Michigan Commission on Fire Protection, typically cost less to insure than buildings outside of a city, where fire protection may be limited.
- Occupancy. The nature of a building’s use also impacts its fire rating. An office facility will likely rate favorably, provided that it contains little equipment that could start or feed a fire. A restaurant – with grills and ovens – or an auto repair shop will likely rate less favorably than an office. It’s important to remember that one relatively hazardous occupant will negatively impact the fire rating of an entire building, not just for its own section. If your business shares space with a more hazardous occupant, your premiums will be higher than they would be for your business alone.
- Exposure. Nearby hazards increase a building’s fire risk. Proximity to external fire hazards such as a lumber yard or oil storage tank will negatively impact a fire rating to an even greater degree. Internal exposure risks might include cluttered building grounds, hazards posed by certain types of mechanical or electrical equipment, or on-site storage of volatile materials.
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- Construction materials. Buildings made of potentially combustible construction materials will likely warrant higher premiums, while those made of fire-resistant materials could earn a discount. Building additions to an existing structure may negatively impact a fire rating, so it’s a good idea to consult with your agent or insurer before remodeling. Internal structural elements can also impact a fire rating. Using wood partitions, floors, and stairways in an otherwise fire-resistant building will likely nullify any rate reduction, whereas fire-resistant interior walls, floors, and doors can help preserve a good fire rating.
- Fire protection measures. Automatic sprinklers can reduce a building’s fire rating by as much as 50 percent. Buildings with sufficient placement of fire extinguishers and automatic alarms and those in areas with good fire protection will also generally have lower ratings. Buildings located more than 500 feet from a standard fire hydrant will generally be deemed a higher risk.
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To learn the fire ratings of the individual structures on your business´ premises, ask your insurance agent. Your agent can access a statewide database of the ratings for all commercial properties.
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