FIRE LOSS MANAGEMENT
FIRE PROTECTION
SFPE
Part 17: INSURANCE INTERESTS
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Many people categorize the entire nongovernmental fire protection field by one vague term—the underwriters. They say, “The underwriters approved this” or “The underwriters didn’t approve that” or “Since the underwriters approved this, why are you concerned?” or “The insurance company is in business to not have losses, and they approved this, so it should be no problem for you.” In order to refute these statements, you should know who’s who in the insurance business.
Insurance companies can lose money underwriting as long as they make money by investing premium income. An article in The Washington Post (April 3, 1990) on the present Japanese economic problems says about Japanese insurance companies: “Insurance companies have been hardhit. They have been offering very low premiums in many cases while counting on large gains on their stock, bond, and real estate investments to boost profits. Now they have seen the value of their investments plummet.”
The temptation is always to reduce the premium charged for the insurance in order to get more business. In England recently there was an insurance scandal involving the collapse of an insurance company that offered automobile insurance at half the normal rates. Some form of regulation had to be devised to ensure that insurance companies competed equally and that some did not have an unfair advantage by offering the product at too-low prices.
This is a controversial economic-governmental issue. The free enterprise system, in which people compete in the marketplace for business, is a basic principle in the United States. A buyer can compare tangible products—for example, the apple pies offered by Company A with those offered by Company B. Me can buy one or the other and then compare his experience with his cost. But when he buys insurance, he can only buy the assurance that his losses will be paid if and when they occur.
HIGHLY PROTECTED RISKS
There was a movement by the textile mills in New England to improve their risks by having buildings of above-average fire protection. The mill owners began to question why they should buy insurance from a company that also insured less-desirable risks. Obviously, companies must charge a premium to all purchasers sufficient to cover their losses. Thus Factory Mutual companies were formed. In a mutual insurance company, the policyholders are also the owners. The basic concept is that they accept only highly protected risks (HPR).
Even though a particular risk is covered by an insurance company that specializes in HPR, do not assume that the risk is unlikely to be a problem to the fire department. It is a fact that if the insured has a number of good properties to offer, he can get insurance on a bad risk by packaging it with the good properties. The same function can be performed by an independent insurance agent for people insured by capital stock companies.
Most risks can be insured. Hopefully the premiums will be sufficient to cover the expense of handling the insurance business and covering the losses. This is the underwriting side of the insurance business. An underwriting ratio of 102 percent means that the cost of handling the insurance plus the losses amounts to 102 percent of the insurance company’s policy income for the period indicated. The insurance company can stay solvent, however, because the policy income is invested and the investment income is often sufficient to overcome the underwriting loss.
The following are highly protected risk companies:
The Associated Factory Mutual Insurance Companies. This association groups together the principal insurance companies that grew out of the textile mills in New England. Factory Mutual Laboratories was organized as a support function for the Factory Mutual Insurance Companies to help devise ways to minimize fire risks. Factory Mutual Laboratories has been reorganized as the Factory Mutual Research Corporation so that it can take work independently of Factory Mutual Insurance Companies.
Some useful literature the association publishes includes a monthly publication called Factory Mutual Record and The Handbook of Industrial Loss Prevention. Factory Mutual recently developed a program for fighting fires in sprinklered buildings.
Industrial Risk Insurers. IRI is the successor to Factory Insurance Association. It was organized by a group of capital stock fire insurance companies to provide capital stock fire insurance and engineering services to owners of manufacturing plants with superior protection. IRI generally competes for the same sort of business as Factory Mutual. It publishes the IRI Sentinel. (Both the Record and the Sentinel carry disclaimers saying that as property insurance organizations, they do not discuss life safety issues.) Because they are dedicated to the principles of “highly protected risk,” Factory Mutual and IRI are responsible for much of the progress that has been made in industrial fire safety in the United States and the rest of the insurance world.
American Insurance Association. This organization combines the old National Board of Fire Underwriters and the Association of Casualty and Surety Companies. It reflects the joining of the fire and casualty interests in the insurance field and a desire for efficiency without overlapping.
The organization maintains records on fire losses and other losses of capital stock fire insurance companies. Since the capital stock companies conduct a substantial portion of the fire insurance business in the United States, their loss figures are indicative of the trend of fire losses in the country as a whole.
ISO Commercial Risk Services Inc. This organization provides rating and underwriting insurance information to certain insurance companies in many states. The insurance rates on certain structures that are similar and that do not represent any great variation in risk, such as dwellings, are said to be “class rated” —a rate is assigned to the particular class of building. The rate is determined within such broad factors as whether there is a fire department, the type of roof, and so on. It would not be cost-effective to attempt to individually rate each single-family residential property.
The larger properties must be individually rated. A systematic procedure is necessary to ensure that this individual rating of properties does not result in a competitive situation that would be detrimental to the property owner, the insurance industry, and the economy.
One of the ISO’s chief functions is to evaluate the fire defenses of every community in the United States. Communities are graded against the Fire Suppression Rating Schedule, a scale from 1 to 10 (10 being the lowest score) in which credits are given in three areas: fire alarm (weighted 10 percent of the total credits), water supply (weighted 40 percent), and the fire department (weighted 50 percent). Factors examined include engine companies, ladder companies, staffing, pump capacity, and training. The heavy thrust of the schedule is toward suppression of major fires.
LARGE OR UNDESIRABLE RISKS
Just as a bookmaker lays off bets when he is overloaded with too many bets on one horse, insurance companies “reinsure” part or even all of a risk they do not wish to keep.
The insurer can make suggestions to the insured but cannot require anything of him. If the risk situation is unsatisfactory, the insurer has three recourses: raise the premium, reinsure all or part of the risk, or cancel the policy. The common solution is one of the first two—because the solution to many situations that decrease fire safety is financial rather than technical. However common it may be, this is not necessarily the best solution for the insurer.
FIRE DEPARTMENT RELATIONS
The relationship between the insurer and the insured is confidential. The insurer cannot disclose defects to anyone without the consent of the insured. However, it is wise to maintain good relationships with insurance engineers: They can convey valuable information and cause damage indirectly through such unspoken methods as body language.
If the insurance inspector recommends any procedure that is counter to the practices of the fire department, it is best to get the recommendation in writing. Long after the fire is out, some insurance executive might judge the department incompetent, and a serious lawsuit might result.
SUBROGATION
Say, for example, that your home is destroyed by fire due to the negligence of your neighbor, who burned trash on a windy day. You have a right to sue him for his negligence. This might take a long time and might prove unsuccessful. You have a fire insurance policy on the house. Your insurance company pays your loss, receiving in return the right to sue the negligent neighbor. The suit is brought in your name, not the insurance company’s. This practice is call subrogation.
With varying degrees of success, insurance companies in recent years have sued fire departments for negligent or incompetent firefighting. I believe that it is improper for the insurance company to make the taxpayers pay for its disbursement. The underwriter, in determining the premium, takes into account the fact that the fire department might not, for whatever reason, be successful in suppressing the fire. Therefore the insurance company already has been paid for assuming this risk.
After the 1947 Texas City ammonium nitrate explosion, in which almost 500 people were killed including the entire fire department, the courts held that the federal government, which was shipping the ammonium nitrate to Europe, was not liable because this was a “Ministerial Act.” Congress then passed legislation to reimburse those who suffered losses, with the proviso that no money was to go to reimburse property insurance companies. The reasoning was that it was the business of insurance companies to assume such risks.
There are many people, including members and former members of the fire service, who hold that all fires must be fought aggressively and that injury and death are unfortunate but necessary consequences. It is therefore important for the fire department to document any unusual circumstances, particularly life safety considerations for firefighters, that were significant in any substantial losses. Adequate fire department documentation prepared as soon after the fire as possible might be crucial to a later court case.
