THE PATTON REPORT

ce Richard M. Patton 1969

No 6
*
A Less Control Publication August, 1969

INSURANCE AND PROTECTION

WHAT YOU DON'T KNOW WON'T HURT YOU?

They tell me that you can't be harmed, "You're protected now", the broker said.
By what you do not know. "Your fully insured for fire",
But I say the unexpected, Insured he was but protected not,
Sure brings its share of woe. For he died within the pyre.

A happy soldier wrote his Mom, "Do not worry, Dear", she said,
"I leave for home tomorrow". "I am safe, I take the pill".
But he did not know the sniper's aim. Neither lover knew the druggest,
Or that he'd bring home only sorrow. Did the wrong prescription fill.

"We plan to wed, the young girl said", So listen now and listen well,
As she introduced her be. As you choose your path and struggle
Of his plans to flee the country, toward a goal.
Oh, how little did she know. Do not let your worries act as blinders,
To canceal that deep and deadly hole.
"These legal terms I do not understand".
"I'm confused", said Mr. Sawyer. Your worries are your perils known,
But he signed his name on dotted line. And your worries seldom bloom.
He should have brought a lawyer. But cock an eye for hidden danger,
Or the unforeseenwill be your doom.
"He looks well bred, I'm sure he's safe",
Thought the lady of the stranger.
Jack the Ripper was his name. R.M. Patton
If she'd only known the danger.

Yes, what we don't know can hurt us. The man who didn't know the difference between insurance and protection, for instance,
was no unusual case. Many men have suffered for lack of the same knowledge.

There is a widespread misconception on the matters of insurance and protection. In the broadest sense it is typified by the
comment, "Don't worry, I'm insured". The businessman coming from a three martini luncheon who assures his pals that there is
nothing to worry about, he's insured as he climbs behind the wheel is reflecting an attitude as well as making a joke.

When Mr. Jones finds that his automobile policy has lapsed driving becomes a fearful thing. If drive he must, he does, but with
caution and temerity, and he sighs a great sigh of relief when the car is once again safely parked. Next day, having called his
broker, and having only his life at stake, he drives the speedway like a madman.
Similarly, the man who would never oh, heavens no, never — be without fire insurance on his home nonchalantly squirts the
starter fluid onto glowing charcoals in the barbecue, pours gasoline into his still hot lawnmower, smokes in bed, and otherwise
gambles with his own well being on a daily basis.

Why the inconsistency? Probably there is no single answer. But part ot it no doubt, is due to the fact that worries are
uncomfortable. We all have worries, call them hazards if you will. How pleasant it is to buy an insurance policy, say to yourself,
"Well, that problem is solved", and promptly go on to more pleasant matters.
Another factor is conditioning. For all of our lives we have to be conditioned by the advertising of the mammoth insurance
industry to believe that the solution to risk lies in the purchase of insurance. There is, of course, much merit to the concept of
insurance, and the insurance industry has every right to advertise; but we who are executives, engineers, businessmen, or just
plain citizens, should know and understand the risks that insurance solves, and the risks it does not.
Insurance provides two services:
a) Partial financial recovery for a loss.
b) Loss prevention advice.

Both services have limitations. The businessman, especially the small businessman, should be cognizant of the limitations.
 One of the measures of the limitation of insurance is the fact that 40% of the businesses that suffer a major' fire disaster go out
of business within three years even though most are insured. The majority of these are small businesses that depend almost
entirely upon insurance to bail them out when trouble strikes. Many of the businesses that do not fail are larger, diversified
companies. They survive primarily because of their own assets and diversification. In between are many companies where
insurance is the difference between continuity and failure.

Why do many insured businesses fail? The simple answer is that insurance is a very partial transfer of risk. Whether the insured
knows it or not, most of the risk remains with him.
I have seen estimates that the hidden (often uninsured or not insurable) costs of a loss averages four times the direct damage.
This is a generalization that is probably wrong more often than right But there is no doubt that the true loss invariable greatly
exceeds the recovery. The gap between loss and reimbursement is often so great that there is no survival for the injured party.
The problem can perhaps be best illustrated by a hypothetical case. Let us assume that Mr. Jenkins, age 55, is the owner of "The
Captains Cabin", a prospering seafood restaurant, with a net annual profit of $50,000 per year. Mr. Jenkins built up his-business
to its present fine level after many years of effort. He now has savings, stocks and other assets totaling $150,000 in addition to
the restaurant which has a replacement cost of $350,000. Mr. Jenkins is looking forward to semi retirement in a few years and
some world traveling while he's still young enough to enjoy it. Then fire strikes.

After many weeks of delay, frustration, inventory, adjusting, and negotiation, Mr. Jenkins finds that he has recovered $260,000
based on the depreciated value of the building and contents. After many more weeks of frustration an architect submits plans
for the new construction which he estimates will cost $350,000. tie advises prompt construction as prices are going up daily.
The construction takes months, the architect is proven right as the prices do rise; but in addition there must have been some
initial miscalculation as the final price turns out to be $395,000. Other, unforeseen expenses have eroded Mr. Jenkins savings
during the construction time and finds he must finance heavily to get back into business.

A year and two months after the fire Mr. Jenkins has a new restaurant, but he also has a big dent in his savings and a mortgage.
His former chef is now packing them in down the street at "Davey Jones", his experienced waitresses are scattered, and his
customers have acquired new dining out habits.
You know the story. Two years later Mr. Jenkins is not only broke, he is financially devastated, in poor health, and a defeated
man.
Having faithfully paid his insurance premiums for many years it came as a hard blow toMr. Jenkins to learn that there is a gap
between insurance and protection.
Note that the events described can occur with or without business interruption insurance. With a B. I. cover it is less likely, but
still quite possible.
What is the solution? On the financial side there is no complete solution as the insurance industry desires a gap between true
value and recovery to discourage fraud, and rightfully so. And, there are facets of the financial loss that do not fit into the
insurance concept and therefore are excluded from the policy or simply not made part of the policy. There are ways to improve
the total insurance picture with little or no additional cost. The total insurance protection can be substantially improved by
going to all risk type coverages, expanding protection at the higher levels and taking deductables at the lower end to keep costs
in line. This means that the businessman absorbes his small losses but obtains better overall security. Unfortunately, the small
businessman who is most in need of this type of help is least likely to get it.
Even with the finest financial recovery plan available, however, loss settlement has to be a very poor substitute for business
continuity. The only true solution to the problem is loss prevention.
The insurance industry provides loss control services but in a very broad "hit the high points" manner. The insurance inspectors
use standards and requirements that are applicable to all in a class. Also there has been a tendency to ride with tradition and
resist change. Research and progress are rare in fire protection.
The research picture in fire protection was summed up best,I feel, by Mac Donald Curless of Boeing in his talk at the NFPA
annual convention in New York this last May. The Aerospace industry invests 20% of its total budget in research, he reported,
and results are apparant. Even the ladies undergarments industry budgets approximately 2.5% of its expenditures to research.
Progress is there even if it is not always visable. But in fire protection the research allocation is approximately 1/2 of one
percent. The sprinkler system that was developed 75 years ago remains almost completely unchanged today.
It can take longer to get one good fire protection development thru the laboratories and past the "authorities" than it takes to
develop a space technology capable of putting man on the moon, he advises.
Lets look at the problem of lack of fire research and slow progress in protection in terms of Mr. Jenkin's restaurant, and Mr.
Jenkin's peace of mind.
Fire records show that ignition of grease on cooking surfaces is the number one cause of restaurant fires. Often, this boils down
to overheating and flashing of deep fat fryers and spread of the fire to the exhaust duct that passes thru concealed combustible
ceiling and roof spaces. Extensive damage by a rapid spreading and difficult to get at fire is the result.
 This cause of restaurant fires has been well known for at least 50 years, probably more like 100. What has been done in the way
of research and control of this problem in these 50 to 100 years?
"%two

There are at least five "approved", or at least partially recognized "solutions" to the problem, depending on the "authority" you
happen to be talking with. They are:

1.Install a CO2 system to protect the hood and fryers (or dry powder, or steam)

2.Install sprinklers — except that this is usually in connection with sprinklered buildings, and most restaurants are not
sprinklered, and some feel that water discharge on boiling fat is dangerous.

3.Install a back up thermostat on the deep fat fryer to prevent ignition.

4.Make the exhaust duct out of heavy gauge steel and provide clearances to combustibles so that fire within the duct can burn
out without causing serious damage.

5.Install a fine water spray system that will be less explosive when water hits the fat.

Now which of these solutions are reliable? Which are not? Which solution gives the restaurant industry the best protection for
the dollar spent? Ask any fire expert how to protect the fryers and duct work and you will get an immediate and very
authoritative answer. But, is the answer any good?

Lets analyze one solution and see the ramifications. Many hoods are protected by a CO2 system. Many, or most, fryer fires are
the result of thermostat failure and heating of the oil to a temperature above the autoignition temperature. When the oil reaches
this temperature it flashes. No spark or ignition source is necessary. The CO2 system operates and estinguishes the fire. Shortly,
the CO2 dissipates. Now what happens if the oil is still above the autoignition temperature. It flashes. Sometimes there is back
up CO2 protection (second shot). After it dissipates what happens if the oil is still above its autoignition temperature? You
guessed it.

Will CO2 cool the fryer sufficiently to drop its temperature and prevent reignition. It may. Then again it may not. Any gas,
including CO2 has very limited cooling ability even though it may feel cool to the hand. The insurance industry can not go
wrong in giving a 10 or 15% rate credit for CO2, but where does this leave Mr. Jenkins? Is CO2 reliable protection for the
kitchen, or is it a false security that can lead the small businessman to disaster?

Would you believe that there are no fire loss statistics in the United States that will tell us the reliability factor of CO2 in the
kitchen? Would you believe, after listening to all that talk over all those many years about "Reliability of protection;' that the
computation of reliability is not a part of the existing "science" of fire protection.

Now what's the point here? The point is this. Each industry has special problems. Many of these problems could be solved with
modest research efforts directly aimed at the specific industry problem. But the research that is needed is not being done.
Instead, broad based generalized solutions are being applied across the spectrum of all industry. These broadly applicable
solutions are based on standards developed for all industries. They are developed by legislative action — by committees — and
the research that should form the foundation of fire science usually is not conducted.

Note that generalized solutions will suffice for an insurance industry that covers thousands of different properties and can adjust
rates to fit fire experience; but this approach does not provide a high level of security to the individual businessman.

There not only is a gap between insurance (financial recovery) and protection (prevention of loss); there is a gap between
insurance protection (protection in accordance with insurance recommendations which are intended to protect the insurance
company) and business protection (which is protection that provides a high level of security to the individual businessman).
What is the solution? The solution lies in industry action. When businessmen who have common problems and common goals
unite to solve their loss problems they will:

a)Be in a position to custom fit insurance to the needs of their industry and obtain broader financial (recovery) protection.
b)Find superior solutions to their loss prevention problems which will reduce insurance rates as well as losses.
c)Reduce business failures due to unexpected loss.

Note that the concept recommended is not in opposition to the concept of insurance. Improved industry loss control will be a
stabilizing factor for the insurers.

Richard M. Patton, Loss Control Consultant, 647 Colts Neck Road, Freehold, New Jersey 07728 — Telephone No. (201)
— 431-2752