What Is Construction Occupancy Protection Exposure (COPE)?
Construction Occupancy Protection Exposure (COPE) is a set of risks that property insurance underwriters review when determining whether to offer an insurance policy. COPE allows the insurer to evaluate the risks of insuring a piece of real estate, which will ultimately determine whether a policy is created or not.
- COPE stands for construction, occupancy, protection, exposure. These are the main areas that an insurance underwriter must evaluate when writing an insurance policy for a property.
- Each of the factors in COPE proposes a different type of risk and will therefore alter a valuation model in different ways.
- Construction relates to how a building was made, occupancy relates to what the building is used for, protection relates to how the building is protected, and exposure relates to external factors near the building that may pose a threat.
Understanding Construction Occupancy Protection Exposure (COPE)
The insurance underwriting process involves the identification, classification, and analysis of risks. COPE is used to identify the factors that could cause an insurance company to experience a loss. Insurers build these data elements into their valuation models when predicting the likelihood of a loss. The following is a detailed account of each of the components that insurance companies need to analyze when writing an insurance policy for a property.
Analyzing the location of a building, the materials it was constructed with, the building’s age, and the quality of the systems within the structure help the insurer determine the likelihood of the building or structure being damaged.
For example, a wood-framed building is more likely to catch fire. Buildings constructed in areas prone to hurricanes need to be constructed out of materials that can withstand strong winds. If they are not, that increases the likelihood of damage or loss. Older buildings have experienced long periods of structural stress and may have outdated electrical and plumbing systems. For insurance underwriters, it's important to evaluate every aspect of how a building was made in order to factor in those variables into the insurance policy.
Insurers examine who occupies a building and how the building is used. For example, a warehouse occupied by a few dozen workers will have different risks than an apartment complex with hundreds of residents. Also noting if the occupancy consists primarily of homeowners or renters. If it is a commercial property, is it for offices, restaurants, or a specific type of manufacturing? The type of activity that goes on inside a property proposes varying types of risk.
An insurer may consider a multi-family residential building riskier than a commercial building if a fire department is not located nearby, or if city infrastructure makes it more difficult to obtain adequate water pressure to fight a fire. It is critical to identify any services that reduce the risk to the property.
Strong water pressure can mean more adequate firefighting, both from in-building sprinklers and fire hydrants. Protection features can also reduce risk to nearby stores, homes, and the general public. The importance of protection depends on the other two previous factors: construction and occupancy. Properties that are low-risk in these areas may require fewer features that fall under the protection category.
Insurers may also examine the area surrounding a building. This concern extends to outside the building and the occupant to more uncontrollable hazards. A property in a flood zone is one example of such an exposure. A building in a high-risk wildfire area is also an increased exposure. Buildings located near petrochemical plants or facilities that handle combustible materials would also be considered risky.
Example of Construction Occupancy Protection Exposure (COPE)
A property owner owns a building and is looking to purchase insurance on his building. He speaks with an insurance company that begins the process of evaluating his property to determine the type of insurance policy it will provide and the cost of that policy.
The building is an old building that is made up of wood. It is also in an old neighborhood that consists primarily of wooden homes and other wooden buildings. The building will be occupied by two tenants on different floors. The first floor will consist of a woodworker, who builds furniture and trinkets out of wood. The second floor will be occupied by a glassblower who uses intense heat and flames to design glassware. The building has no sprinkler system installed and the nearest fire station is far away.
It's safe to say when the insurance underwriter evaluates this building using the parameters of COPE, the building will be high risk. The construction is of material that is easily flammable, the occupancy is of an individual that makes flammable products and the other works with fire. The protection is low in that there is no sprinkler system to put out any fires and the fire department is far away in case a fire catches. The exposure is high as well as the buildings surrounding this property are easily flammable and if they catch it could spread to the property.
Using COPE in this example would allow the insurance underwriter to evaluate the riskiness of this business and write a policy that is suited for a high-risk property, given the circumstances.