Summary: According to statistics published by the National Fire Protection Association (http:www.nfpa.org), in 2009 there were 362,500 home fires in the United States, resulting in many deaths and $7.6 billion in direct property damage. Although the dollar cost of major natural disasters (Hurricane Andrew—$15.5 billion) appears greater, fires occur on a regular basis, unlike hurricanes which may or may not come ashore in a given year. Therefore, the continuing cost of home fires is an ongoing concern. Cooking is the leading cause of home fires, although smoking-related fires are the leading cause of home-fire deaths. Not surprisingly, December, January and February are the peak house-fire months.
Construction and location (that is, access to a fire suppression organization) are two factors that greatly impact insurance premium rates. Some working knowledge of these may help an agent to explain to a homeowner why a solid brick home in the city may cost less to insure than a solid brick home in the country, or help an underwriter explain why he or she is really not interested in insuring a frame dwelling in protection class ten.
Following is a discussion of construction types, fire protection classifications, and their impact on homeowners rates.
Topics covered:
Fire protection classifications
Introduction
Two of the factors having the most impact on any particular home's insurance rates are construction type and fire protection class; that is, where the dwelling is located in relation to a fire department that will respond, and what type of firefighting equipment that department has. Fire has always presented the greatest chance for loss for the typical homeowner. Although we might remember the television coverage of the May, 2003 tornadoes leveling parts of Oklahoma City, or the collapsed buildings and buckled freeways following the October, 1994 Northridge earthquake, still, for most people the greatest risk to their homes remains fire. And, unfortunately, loss of life frequently accompanies home fires.
Remember that there are three things necessary for a fire: oxygen; fuel; and an initial source of heat. (See What Is Fire? for more information.) Because oxygen and fuel are readily available in a dwelling, it takes only the source of heat to begin a fire. A lightning strike, a candle left unattended, a worn extension cord, a carelessly disposed-of cigarette, or a child playing with matches—any can provide the necessary heat source.
Therefore, the method of construction of the dwelling, the primary source of fuel, and the availability of fire suppression remain as primary rating factors.
In the following article, we look at construction and its importance, and at the methodology behind assigning a fire protection class.
Types of Construction
The Insurance Services Office (ISO) homeowners manual contains five types of construction. These are:
Frame: Defined as “exterior wall of wood or other combustible construction, including wood iron-clad, stucco on wood or plaster on combustible supports, or aluminum or plastic siding over frame.”
Masonry Veneer: Defined as “exterior walls of combustible construction veneered with brick or stone.” For fire protection purposes, this type of construction is rated as masonry. However, because masonry veneer is susceptible to falling off in event of an earthquake, this type construction must be noted on an application for insurance (and if earthquake coverage is desired, then the appropriate box checked on the endorsement schedule of the HO 04 54 10 00 ). (For information on common ISO homeowners endorsements, see Standard Homeowners Endorsements.)
Masonry: Defined as “exterior walls constructed of masonry materials such as adobe, brick, concrete, gypsum block, hollow concrete block, stone, tile or similar materials and floors and roof of combustible construction (disregarding floors resting directly on the ground.)”
Superior Construction: There are three sub-categories of construction here. The first is noncombustible, which has “exterior walls and floors and roof constructed of, and supported by metal, asbestos, gypsum, or other non-combustible materials.” The second is masonry noncombustible, which has “exterior walls constructed of masonry materials (as described in [masonry]) and floors and roof of metal or other non-combustible materials.” The third of these is fire resistive, which has “exterior walls and floors and roof constructed of masonry or other fire resistive materials.”
Mixed (Masonry/Frame): For this type of construction, the rules state that: “a combination of both frame and masonry construction shall be classed as frame when the exterior walls of frame construction (including gables) exceed 33-1/3 percent of the total exterior wall area; otherwise class as masonry.”
One type of construction is often open to discussion, and that is milled log. Homes built of these are often very fire resistant, and some insurers will classify these as masonry rather than frame in recognition of that fact. However, be sure to check with a carrier before assigning a construction classification.
Fire Protection Classifications
Realtors are fond of saying “location, location, location.” It is true that a dwelling of a particular construction may fetch a certain price in one location, while the identically-constructed home in a different location will sell for only a fraction of that price.
The same is true for fire protection rating. A dwelling in class two will have a premium discount, while a similarly constructed dwelling in class ten will pay a surcharge for insurance.
What accounts for this? What are these “classes”?
The Insurance Services Office (ISO) Public Protection Class (PPC) rating system originated with the National Board of Fire Underwriters in the early 1900s. The Board evaluated fire potential and response in many cities, and as a result the cities improved their public fire protection systems. Both insurers and the public benefited from this. ISO now collects and analyzes information about the more than 45,000 fire districts in the United States, and assigns a Public Protection Class code—a number from one to ten—to each. Class one indicates commendable protection, while class ten means that not even minimum standards are met.
Each fire district is rated on three things: 1) communication, which includes telephone system, staffing, and dispatch; 2) the fire department itself, which includes equipment, personnel, training, and geographic distribution of fire companies within the district; and 3) water supply system, which includes a survey of hydrants as well as amount of water necessary. Each of these does not carry the same weight. The fire alarm system accounts for 10 percent, the department itself accounts for 50 percent, and the water supply system accounts for 40 percent in the total evaluation.
A class ten rating means that not even minimal standards have been met. Minimal standards require a permanently organized fire department (which may be volunteer) serving a definite area, with at least four personnel responding to fires. Training must be given at least two hours every two months. The department must have a fire truck meeting the National Fire Protection Association's standards, which is housed so as to protect it from the weather (a fire station). The alarm system must function so that there is no delay in responding to an alarm. To obtain a class nine rating, additional equipment must be available, record keeping must be accurate as to department staff, fires, responding personnel, training given, and maintenance of equipment and fire apparatus. Additionally, the department must have a tanker capable of delivering fifty gallons of water per minute at one hundred fifty pounds per square inch.
A class eight rating means that the department, in addition to the class nine criteria, has a minimum water supply of two hundred fifty gallons per minute for two-hour duration. If the available water comes from a tanker, large diameter hose, or alternative water supply, it must be available within five minutes of arrival of the first apparatus.
ISO has added a new class 8B rating. In this instance, all criteria except the water supply have been met. However, to offset the water availability requirement, the class 8B rating means that additional staffing and training are in place. This is not to say that there is no water; a minimum flow of two hundred gallons per minute for twenty minutes must be available within five minutes of the first arriving engine company. This minimum flow must be available to at least 85 percent of the built-upon areas of the city requesting class 8B status.
Protection classes one through seven do not have any minimum requirements, but ISO assigns points from its Fire Suppression Rating Schedule to each evaluated component: receiving and handling of fire alarms; fire department (including personnel, equipment, apparatus, and training); and water supply. For more information, see ISO's Web site: ISO Mitigation Online.
Building Code Effectiveness Grading
ISO's Building Code Effectiveness Grading system is relatively new. Grades of one to ten are issued to a community based on the adequacy of its building code, and the effectiveness of enforcement of that code. Where applicable, the code factor applies in addition to the public protection (fire) factor. The codes are intended to be used specifically for communities subject to the perils of windstorm or hail, or earthquake.
Similar to fire protection, the building code effectiveness schedule uses a scale of 1 to 10 for communities. In some communities there might be two grades. One will apply to one and two family dwellings and/or personal property contained in such dwellings; another grade will apply to all other buildings occupied for residential, commercial, or manufacturing purposes, as well as personal or business property contained therein.
While most risks will be assigned the rating based upon the applicable community rating, it is possible that a building may be rated based upon exception rating procedures. For information on the grading, and premium computation, see the appropriate manual; the ISO Homeowners Policy Program Manual, for example. ISO also publishes the Public Protection Classification Manual.
Most agents and underwriters now have computerized rating systems in place. However, as noted earlier, being able to explain why rates are what they are to insureds is a plus for an agent. Underwriters referring to the ISO criteria on water availability can explain to an agent asking to rate a class 10 property as a class 8 why a nearby farm pond does not meet the water criteria. (Ponds rarely can produce the minimum flow of water for the time required to meet criteria. Further, they might freeze in winter and dry up in summer.)
Occasionally, a property may be given two protection classes, for example, 6/9. When this is the case, follow the manual's instructions. For example, in Ohio a dwelling with a distance of five or less road miles to a fire station that will respond and a hydrant within 1,000 feet takes the first protection class. If the dwelling is over five but not more than six miles to the fire station, with a hydrant within 1,000 feet, then the protection class is nine. If the dwelling is over six road miles, it takes a protection class ten.
The examples below assume a one family, $200,000 dwelling located in Ohio and insured on an HO 00 03 10 00; the company base class premium for $200,000 is $300.00. We are following the ISO manual's steps for rating a homeowners policy (rules 301 and 401, but be sure to check your state exception pages for the form factors (for example, the form factor for an HO 00 02 10 00 is .85) and protection/construction factors.
Example one:
Step one. Assume the base class premium in territory 04 (an “A” territory in the Ohio exception pages) is $300 for a $200,000 dwelling.
Step two. The form factor for an HO 00 03 is 1. The factor for a frame dwelling located in protection class 2 is .97.
Step three. The base class premium is multiplied by the form factor ($300 x 1) and this in turn is multiplied by the protection-construction factor ($300 x .97 = $291). The key premium is $291.
Step four. The key factor is selected from the key factor table in the manual for $200,000. In this example, it is 1.365. This amount is then multiplied by the key premium ($300 x 1.365) to arrive at the base premium of $397.215. Under ISO rules this amount is rounded to the nearest dollar, so the base premium is $397.
Now let's see the impact of masonry construction. Steps one and two are the same.
Example two:
Step three. The base class premium is multiplied by the form factor ($300 x 1 = $300) and this in turn is multiplied by the protection-construction factor ($300 x .87 = $261). The key premium is $261.
Step four. The key factor for $200,000 is 1.365, so we multiply that times the key premium to arrive at the base premium. The product of ($261 x 1.365) is $356.26, so the base premium for masonry construction is $356.
We gave the definition of superior construction earlier (see Types of Construction). If the masonry dwelling in the second example were built of superior construction, the base premium of $356 would be multiplied by a factor of .85, so the final premium would be $303.
The importance of protection class and construction is readily apparent in protection class 10 properties. In the next two examples, we use the same dwelling amount, form, and base class premium. The territory is changed to reflect a different rating territory.
Example three:
Step one. Assume the base class premium in territory 43 (a “B” territory in the Ohio exception pages) is $300 for a $200,000 frame dwelling.
Step two. The form factor for an HO 00 03 is 1. The factor for a frame dwelling located in protection class 10 is 3.
Step three. The base class premium is multiplied by the form factor ($300 x 1) and this in turn is multiplied by the protection-construction factor ($300 x 3) which gives us $900 for the key premium.
Step four. The key factor is selected from the key factor table in the manual for $200,000. In this example, it is 1.705. This amount is then multiplied by the key premium (1.705 x $900) to arrive at the base premium of $1534.50, which is rounded up to $1535.
As in the earlier example, a masonry dwelling will generate a lesser premium, and a superior construction dwelling, lesser still. Steps one and two are the same.
Example four:
Step three. The base class premium is multiplied by the form factor ($300 x 1) and this in turn is multiplied by the protection-construction factor ($300 x 1.6) to arrive at a key premium of $480.
Step four. The key factor for $200,000 is 1.365, so we multiply that times the key premium to arrive at the base premium ($480 x 1.365), or $818.40, which is rounded to $818.
If the dwelling were of superior construction, then a .85 factor is applied for a base premium of $695.30 or $695.
The community grading factors are applied to the base premium. So, for example, when the base premium for territory 4 is arrived at, the windstorm or hail community factor of .03 is then applied (in example one, .03 x 397 = 11.91). The final premium is $385. The earthquake grade factor of .1 would be applied if the policy was endorsed for earthquake coverage.