Commercial property insurance is essential for commercial building owners, just as home insurance is for homeowners. Which is why it’s important to know the criteria that affects the premium. The basic premium calculation is to multiply the loss rate estimated by the insurance company by the insured building limit.


Although it differs among insurance companies, exposure to fire hazard is the most important factor in commercial building risk rating. For example, a building with explosive manufacturing will have a higher premium compared to a travel agency office. Well-maintained buildings with fire preventive measures have a lower premium than those that are not.


Many variables are used to calculate the fire risk rate. Among them, building materials and construction types account for the largest portion. Fire hazard ratings are determined through state-licensed inspectors. They typically sign contracts with insurance companies to rate buildings’ structures. Below are five standardized rating systems that determine fire hazard ratings:


  1. Construction Materials

The materials used to build the building affects your insurance costs. Flammable materials, are considered high risk. On the contrary, buildings with fireproof materials may receive discount benefits. New Buildings that are built on existing structure may negatively impact your fire rating. Therefore, it’s important to consult with your insurance company or agent before remodeling. Fire hazard rating can also be affected by the materials used for the interior. A building built with non-combustible materials but with wooden walls, stairs, and floors would receive a lower safety rating. The higher the percentage of non-flammable materials, the better fire rating.



  1. Location

Buildings located in urban and large towns have a lower insurance rate compared to buildings located on the outskirts of the city. This is because putting out fire for rural locations are more difficult.



  1. Occupancy

The type of business that occupies the building also affects the fire rating. Office buildings which are low risk receive a favorable rate. On the other hand, restaurants that use ovens or grills every day or car body repair shop that use flammable paint or chemicals have poor fire ratings. Even if only one tenant runs a high-risk business in the building, it will affect the fire rating of the entire property.



  1. Fire Protection Measures

Buildings that have automatic sprinkler systems throughout the whole premises receive a significantly improved fire rating. In addition, installing fire extinguishers and automatic fire alarm systems in appropriate locations can improve the building’s fire rating. However, if the location of the building is more than 500 feet away from a fire hydrant on the side of the road, the insurance premium will be higher.



  1. Exposure

There are external and internal exposures that affect the fire rating. If your commercial property is next to a wood or oil storage, the level of risk becomes higher. As for internal exposures, flawed building foundations, exposed electrical or mechanical risks can also have a negative impact on insurance premiums. In addition, the building’s construction year may also have an indirect impact on its rating. Old buildings may have a higher insurance premium, compared to new ones.


Together with these five factors, an insured’s claim record also affects the insurance rate. The guidelines differ by each insurance company but, certain surcharges are added depending on the type of the claim and the amount paid out. If your commercial property does not have any factors that may negatively affect your rate but, has a high insurance premium, you may want to talk to an insurance expert to review your policy.


If you have any additional questions regarding commercial property insurance, or would like to speak to an agent for a quote, please contact us at 972-243-0108.


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