7-commercial real-estate ideas by jimmy stepanian

COMMERCIAL REAL ESTATE

By Jimmy Stepanian

Our Market

• Individuals or business organizations that own premises, buildings and related structures for the principal purpose of leasing or rental of space for occupancy as offices, retail, service, light manufacturing or industrial and warehouse uses.

Eligible Risks

• This classification is broadly described as “Owners of non-residential buildings primarily engaged in the leasing and/or rental of buildings to others.” SIC Code 6512. This SIC code includes a wide range of business. Farmers is only interested in the non-residential buildings found on the next screen.

Eligible Building Types

• Office Buildings• Retail Shopping Centers• Manufacturing, Industrial,

Assembly, Processing or Service Buildings

• Warehouses, Private Commercial• Mixed Occupancies – Office,

Retail, Light Manufacturing, Industrial, Assembly, Processing, or Service Buildings

Office Buildings

• Office Buildings are usually divided into smaller units which are rented or leased to a tenant(s) or lessee(s) for their occupancy and use as private offices or work areas including lobbies, conference rooms, storage and restrooms. A snack bar, sandwich shop, or cafeteria may be present.

Retail Shopping Centers• We are interested in:• Buildings leased or rented to,

and occupied by one or more retail stores and/or shops each of which sell a single product line.

• Restaurant buildings or service type occupancies.

• Adjacent parking lots maintained for the exclusive use of the customers and employees.

Light Manufacturing, Industrial, Assembly, Processing or Service

Buildings

• Farmers desires buildings leased and occupied by one or more businesses engaged in light manufacturing, industrial, assembly, or processing activities. Service type occupancies are also permitted.

Light Manufacturing Means:

• Light manufacturing is defined as those manufacturing, industrial, assembly or processing operations that do not require open flame, high heat, furnace, foundry, or smelting processes to cast, mold, form or extrude metals or plastics.(Low temperature plastic extrusion or molding is acceptable.)

Mixed Occupancies• Farmers is interested in the

following types of occupancies/operations:

• Buildings leased or rented and occupied by two or more businesses for office, retail store, or for manufacturing, industrial, assembly, processing or service purposes.

• The occupancies must qualify under the rules of the individual industry profiles shown on previous slides, otherwise they are not eligible.

Warehouses, Private Commercial

• These buildings are leased to a single business entity for warehousing or storage of their non-hazardous business property. These warehouses will typically have a small office area, restrooms, a receiving and loading dock, freight elevators, and open storage areas.

Desirable Characteristics

• The Commercial Real Estate program is designed to attract and retain potentially profitable quality accounts that will continue to renew over a long period of time. These accounts share the following characteristics:– Experience in this type business– Financially successful– A concern for loss prevention and

safety.

Desirable Characteristics (Continued)

• A well-maintained premises

• Low turnover of tenants

• Low hazard tenant operations

Insurance To Value

• Your customer must maintain a minimum amount of insurance which is at least 80% of the current replacement cost of the building and contents values to be eligible for coverage under this program.

Maximum Insurable Value

• The maximum value Farmers will write on one building is $10,000,000.

Maximum (PML)

• The Probable Maximum Loss (PML) for any one policy cannot exceed $40,000,000.

Ineligible Characteristics

• Buildings more than seven stories in height.

• Building(s) at a location in which less than 70% of the total combined square footage is occupied. Area pertaining to service or maintenance of the building such as

heating/air conditioning, electrical, mechanical, elevator, janitorial, lobby and security station rooms may be disregarded.

Ineligible Characteristics (Continued)

• Newly constructed building(s) at a location in which less than 70% of the total combined area of the insured buildings are occupied, are Submit for Approval (SFA).

• Detached smoke stacks, radio or TV Towers or Remote

Transmission Stations• Risks located in Town Class 9 or 10.


• Buildings known to have asbestos or plastic foam insulation, such as polyurethane or polystyrene.

• Buildings and premises that are not well maintained or in compliance with all critical loss control recommendations.


• Buildings over 40 years of age that have not been renovated.

• Note: “Renovated” indicates the building has been substantially reconstructed. This means that all new wiring, plumbing, heating, air-conditioning systems, and roofing materials have been replaced meeting all current building codes for the type of occupancy. Buildings which meet this description can be considered a new building for determining building age using the renovation completion date.

Inherently Hazardous Occupancy or Operations• The following occupancies are

considered inherently hazardous and are not eligible:– Handling, storing, producing, or using

significant quantities of combustible or flammable liquids, gases, dust, explosive, or use of urethane foams, fiberglass, pyroxylin, or combustible fillers, glues or laminates. • Examples of these occupancies would be

chemical manufacturers or dealers and tire recapping.

Inherently Hazardous Occupancy or Operations

• Premises where large numbers of persons assemble or reside, such as schools, hotels, motels, theaters, lodges or resorts, recreational facilities, auditoriums or playhouses, bars and nightclubs.

Submit for Approval• The following risks are not to be

bound and must be submitted for approval. A loss control survey or inspection will be ordered by the underwriter as part of the procedure.– Buildings more than 30 years of age

unless completely renovated to current building codes. Note: Buildings over 40 years old that have not been renovated are ineligible.

Submit for Approval (Continued)

• Risks which within the past three years have had their insurance coverage canceled or non-renewed, or were without insurance coverage for a substantial period.

Submit for Approval (Continued)

• Building Owners who require tenants to maintain the boiler, heating, plumbing and electrical systems.

• Inexperienced Building Owners with less than one (1) year of ownership, unless management of the property is contracted to a professional property management company.


• Manufacturing, industrial or fabrication industries producing primary metals or plastics that require the use of open flame, high heat, extensive welding, foundry

molding, forming or extrusion processing.

Inherently Hazardous Occupancy or Operations• Storage or processing operations

involving electroplating, fusion, thermal coating or concentrations of combustible, toxic, flammable, explosive, corrosive or other such materials, such as with wood working or refinishing, lumberyards, feed, hay or grain, boat marinas, diesel truck repairs, dismantling, salvage or junk, public or freight handling warehouses.


• Occupancies located near highly controversial businesses or organizations such as abortion clinics, trade unions or halls, or political or campaign offices.

Submit for Approval

• Business operations conducted on the premises by the Insured. A complete description of the these business operations is required in the remarks section of the application or attached with the new business submission. Evidence of insurance for the other business operations must be included.

Submit for Approval

• Buildings occupied for any manufacturing purposes. Full description of the

activities, operations and products must accompany the submission.

• Newly constructed building(s) at a location at which the total occupied area is less than 70% can be submitted for approval (SFA).

Submit for Approval

• Buildings with highly unusual construction characteristics.

• Requests for coverage in heavy windstorm or coastal areas

• Requests for earthquake coverage

Coverage/Contract

• Farmers Commercial Real Estate policy is based on the Standard ISO Businessowners contract which you studied earlier. If you desire to review that contract, refer to the Retail/Service materials.

Primary and Premier Options

• Farmers offers both a Primary and a Premier coverage option to commercial real estate owners.

• Each of these packages includes property and liability coverages. The Primary coverage package is included on all policies. The Premier coverage package is an extra cost option.

Coverage Differences

• Most of the differences between the Primary and Premier coverage options relate to coverage limits. For example, the Premier coverage option provides $25,000 in Money and Securities coverage. The Primary coverage option provides only $10,000.

Coverage Differences

• In addition, the Premier coverage package offers four coverages not available on the Primary coverage program. These are:– Equipment Breakdown Coverage– Extended Replacement Cost Coverage– Tenant’s Move Back Coverage– Extended Premises Boundary

Limits Differences• Coverage Primary Premier

Pollution $10,000 $25,000 Clean-upOutdoor Signs $10,000 $25,000Premises Boundary Definition 100 feet 1000 feet

Limits Differences• Coverage Primary Premier

Accounts Receivable $5000 $10,000Valuable Papers $5,000 $10,000Money & Securities $10,000 $25,000

Limit Differences• Coverage Primary Premier

Employee Dishonesty $10,000 $25,000Fire Extinguisher Recharge $2,500 $5,000Lock Replacement $100 per lock $100 per lock $5,000 total $10,000 totalComputer Coverage $10,000 $25,000

Optional Coverage Summary

• Earthquake Coverage• Earthquake sprinkler leakage• Building Ordinance or Law

Coverages• Mine Subsidence (Indiana or

Illinois)


• Outdoor Fences and Walls• Non-owned and/or Hired Auto

coverage if not included with insured’s Business Auto Coverage

• Glass Deductible Buyback


• Employee Benefits Liability• Employers Liability (Stop Gap)• Fine Arts Coverage


• Aggregate Limits Per Owned Location

• Additional Insured Endorsement• Owned Auto

Coverage Descriptions

• In this section we will discuss some special coverages which have been included in the Commercial Real Estate program, but are not found in the ISO Businessowners policies. These unique coverages add value to our contracts and distinguish them from our competitors.

Extended Replacement Cost• Up to 125% of the Property

Coverage Limits of Insurance is provided by the Premier Package Endorsement to pay the repair or replacement of the building(s) at the described premises if the buildings(s) were insured to 100% of their replacement cost.

Extended Replacement Cost

• The insured must accept each annual adjustment in the building(s) limits and notify us within 90 days of the start of any physical changes, additions or remodeling to the building(s). This coverage does not apply to earthquake, outdoor signs and other outdoor property, or enforcement of ordinance or law.

Back-up of Sewers and Drains

• The Primary Package Endorsement will pay up to $1,000 per occurrence at each described premises for loss or damage caused by water backing up or overflowing from a sewer or drain, or from sump pump or other systems designed to remove subsurface water. Limits up to $5,000 are available under the Premier Coverage endorsement.

Tenant’s Move Back Coverage

• Will pay up to $10,000 per occurrence for expenses the insured incurs to move displaced tenants back to the described premises after completion of repairs made necessary because of loss or damage by a covered cause of loss to the building. This coverage is a part of the Commercial Real Estate Premier Package Endorsement.

Employers Liability-Stop Gap• This endorsement may be attached for those

policyholders who have employees located in states where private carriers cannot write Workers’ Compensation. This insurance pays damages the insured is legally obligated to pay up to the limits of insurance from bodily injury by an accident to an employee of the insured. The bodily injury must arise out of and in the course of employment during the policy period in the state listed in the schedule.

• Bodily injury includes disease if it results from an accident or is caused by conditions of the employee’s employment during the policy period.

Employee Benefits Liability• This coverage form will pay damages because of any

negligent act, error or omission committed by the insured in the administration of the employee benefit program (as an example, failure to enroll an eligible employee). The occurrence must be after the retroactive date shown in the Declarations and before the expiration of the policy. Expenses and costs in connection with claims or suits, judgment and prejudgment interest will also be paid. An automatic extended reporting period of 60 days is allowed after expiration of the policy, if no subsequent policy is purchased.

Non-Owned and Hired Auto• Non-Owned Auto Coverage provides

Bodily Injury and Property Damage protection to the named insured arising out of the use by others of any non-owned autos in the course of the business. This includes autos owned by employees or members of their households. Note:This coverage does not apply to use of the auto by the named insured, nor does it benefit the owner or operator of the auto.

Aggregate Limits of Insurance

• Applies the aggregate limits of insurance for business liability and medical expenses separately to each of the owned locations.

Company Placement

• This plan has eligibility requirements which determine proper placement of the risk in either Mid-Century Insurance Company, Truck Insurance Exchange or Farmers Insurance Exchange. Refer to the Three Company Marketing Plan Placement Guide.

Mid Century Insurance Company

• Risks that represent the lowest potential for severe losses and the highest probability of underwriting gain will be eligible for placement in Mid-Century Insurance Company. In order to attract these Ultra-Preferred accounts, pricing will reflect Ultra-Preferred underwriting characteristics.

Truck Insurance Exchange• Preferred policyholders that do not

meet the Underwriting Rules for Ultra-Preferred placement may be eligible to be written in the Preferred Program in the Truck Insurance Exchange.

Farmers Insurance Exchange• For those acceptable quality risks

that do not meet the guidelines of the Preferred or Ultra-Preferred programs, but otherwise meet Underwriting eligibility requirements, coverage will be available under the Standard Program. Risks acceptable to the Standard Program will be issued in the Farmers Insurance Exchange, but must be eligible and meet quality standards. The Standard program does not accept substandard risks.

Mid Century Quality Criteria

• All risks accepted for placement under this plan will be graded using quality criteria which looks at the following:– Building Age (Non-Modified) --15

years or less Actual age– Age of roof--10 years or less– SIC of Occupancy (Tenant’s

occupation)--All tenants are eligible for Farmers placement

Mid Century Quality Criteria (Continued)

• Supporting Business (Product Density)-- Other Farmers commercial policies written, or three years of personal lines for client

• Premier endorsement-- Purchases Premier endorsement

• Professional Management Company -- Professional management company

Mid Century Sizing Criteria

• Property Value (Building & Contents) ($1,000,000 or more)

• Number of locations (Three or more)

Truck Quality Criteria

• All risks accepted for placement under this plan will be graded using quality criteria which looks at the following:– Building Age (Non-Modified) -30 years or

less Actual age– Age of roof-20 years or less– SIC of Occupancy (Tenant’s

occupation)All eligible occupancies as defined in Real Estate Business Guide

Truck Quality Criteria (Continued)

• Supporting Business (Product Density)-Other Farmers commercial policies written, or three years of personal lines for client

• Premier endorsement- Purchases Premier endorsement

• Professional Management Company - Professional management company

Truck Sizing Criteria

• Property Value (Building & Contents)- $500,000 or more

• Number of locations (Two or more)

Farmers Placement Criteria

• Must meet minimum underwriting requirements for risk quality. No other criteria apply.

Premium Modification Plans

• Premium Modification plans are filed with state regulatory authorities to recognize characteristics of individual risks based on their loss experience, premium size, management, employees, dispersal of the risk and type of operations.

Premium Modification Plans Available

• Premium Size Credits• Individual Risk Premium

Modifications (IRPMs)• Commercial Automobile Package

Discount• Profitability Discount

Premium Size Credit• This plan automatically applies a

credit (in states where permitted) based on the total premium developed for a Commercial Real Estate policy. The greater the premium, over a minimum level, the larger the percentage credit applied. See the Rules, Rates and Territories, or the AIMs On-Line Reference program, for premium size percentage credits.

Premium Size Credit

• Example:– In one state, the premium size credit

starts at 1% at $750 in premium. It grows to 20% when the premium reaches $24,001. (Please refer to the premium size credit table applicable to your state ).

Individual Premium Modification Plans

• Underwriters have overall final responsibility for assigning the modification. However, those agents with Commercial Real Estate Field Underwriting authority will be authorized to determine the modifications to be applied on the new business policies that are rated and bound by the agent in the field. The Individual Risk Premium Modification Plan Worksheet–Commercial Real Estate (Worksheet #1 for 25% States 31-3096 or Worksheet #2 for 40% States 31-3096) must be completed and submitted with the application.

Individual Risk Premium Modification Plan

When the IRPM worksheet is used to evaluate a Commercial Real Estate account, you will use the following sections:–Management– Premises– Protection– Building Features

Management

When evaluating the management of a Commercial Real Estate account, we consider:– Safety Activities – Business Experience–Management Experience– Loss Prevention Attitude

Premises

When evaluating the premises of a Commercial Real Estate account, we consider:– Extent of Hazards (Compared to

hazards expected for the class) – Housekeeping (Interior and exterior)– Lighting (Interior and exterior)– Traffic Control (Vehicles and

pedestrians)

Protection

When evaluating the premises of a Commercial Real Estate account, we consider:– Control of Hazards (Guarding or

reduction of hazards) – Fire Protection (Extinguishers) – Safety Self Inspections (Extent &

frequency– Security Hardware, Alarms &

Watchmen

Building Features

When evaluating the building features we consider:– Construction Materials Used –Workmanship – Comparison to Current Building Codes– Intended Occupancy Use

Profitability Discount

• New business and renewal policies for policyholders who have owned the buildings 3 full years and who provide verified prior insurance loss history for that period, are eligible for a Profitability Discount.

Profitability Discount

• The Factor shown in the table on the next screen will be applied to policies with premium of $2,000 or more (prior to application of this credit and the Individual Risk Premium Modification), except premium from:– Earthquake– Auto– Mine Subsidence – Employers Liability

Profitability Discount TableAccounts producing the following loss ratios would receive these discounts3-Year Loss Ratio** Factor

• 0 - 10% 0.85• 11% - 20% 0.90• 21% - 35% 0.95• 36% & Over 1.00**Loss Ratio includes all paid and

reserved losses including allocated loss expense during past 3 years.

Auto Package Discount

• A 5% package discount applies to commercial automobiles written in conjunction with any Commercial Real Estate policy.

IRPM Worksheet Guidelines

• The proper application of the premium modification plans is an extremely important aspect of pricing a risk. Each risk characteristic applicable must be evaluated and a debit or credit applied as warranted. Debit and credit factors are then totaled and may result in an increase or decrease in the premium.

IRPM Worksheet Guidelines

• Each characteristic must be documented and retained as a permanent part of the underwriting file. Improper or arbitrary application of credits or debits could result in serious penalties for violations of state regulations on discriminatory pricing. It is important that the modifications not be applied as a competitive rating tool.

Marketing Support Materials

• Farmers has developed a number of marketing materials for your use in rating and producing Commercial Real Estate Business. As you proceed with your solicitation and presentation efforts, please refer to the following materials.


• A Premier Program Designed for Commercial Office Building Owners

• Visual 33-1152• Folder 33-0152


• Farmers Insurance for the Retail Center Building

• Visual 33-1154• Folder 33-0154


• A Premier Insurance Program Designed for the Industrial Building Owner

• Visual 33-1153• Folder 33-0153

Self-Inspection Check Lists

• The Office Building-A Property Owners Loss Prevention Program (51-0690)

• The Retail Center- A Property Owners Loss Prevention Program (51-0689)

• The Light Industrial Park- A Property Owners Loss Prevention Program (51-0691)

• The Hidden Cost of Loss (33-0139)