Avoiding Property Risks

• Risk Control measures that may be applied in

the management of property risks include risk
avoidance and risk reduction.
• The opportunities for avoiding property risks is
limited by the organization’s need for assets
required to achieve its objectives.
• The organization requires assets to achieve its
goals and while the cost of risk associated with
these assets can be reduced, it can rarely be
avoided.

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 Avoiding Property Risks

• It is sometimes suggested that the risks

associated with the ownership of property can
be avoided by the simple expedient of leasing
rather than owning property.
• Although this is true in principle, it is an
oversimplification.
• Leasing avoids the risk of property loss, but the
costs associated with such risks will not
usually be avoided through this strategy.

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 Leasing and Risk Avoidance

• Whether they purchase insurance or self-insure

the risk of loss to their property, lessors
invariably include in the charge for a lease an
element that reflects the long-run expected cost
of physical damage to the leased property.

• This means that the lessee ends up paying the

costs associated with possible damage to
property even when the ownership of property
is avoided.

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 Noninsurance Transfers

Noninsurance transfers—usually under the terms of

a lease—represent a common method of managing
property risks. For example, a common provision in
property leases states that

At the termination of this lease, lessee shall

return the property to the lessor in the same
condition as at the commencement of the
lease, natural wear and tear only excepted.

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 Noninsurance Transfers

• By agreeing to return the premises in the same

condition as at the commencement of the lease,
the lessee has, in effect, taken on the risk of
damage from all perils.

• Responsibility for insuring the property (or

otherwise financing the risk of damage) is
shifted from the lessor to the lessee.

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 Analyzing Fire Hazards

• Because fire is the major hazard affecting

buildings and other property, loss prevention in
the property area should begin with proper fire
protection.

• Fire prevention and control measures illustrate

the principles of property loss prevention and
control that may be applied to other areas.

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 Factors in Fire Losses

• A fire is combustion or oxidization proceeding

at a rate rapid enough to generate a flame.

• A fire occurs when the heat applied to a fuel

equals or exceeds the ignition point of that fuel.

• In general, three things are required to have a

fire: a source of heat, oxygen, and fuel.

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 Counteracting Fire

Once a fire has occurred, it is counteracted by

1. Removing the fuel

2. Removing the heat

3. Removing the oxygen

4. Breaking the chain reaction

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 Fire Insurance Rating Systems

There are two basic types of rates in the field of fire

insurance: class rates and schedule rates.
• Class rates apply to risks so similar in character
that it would be an unnecessary expense to
differentiate among the various exposure units
on the basis of their differing characteristics.
• Schedule rates are computed individually for
each structure, with each building having its
own rate, which reflects the hazards of the
building.

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 Schedule Rates

• The specific rates for each building are

computed from a schedule of charges and
credits after a rating survey of the features of
the building.

• Engineers who have been trained for this

specialized field inspect each building and
evaluate its hazards, using a standard rate
survey form on which the data relating to the
specific features of the building are recorded.

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 Fire Rate Make-up

• The report of this rating survey, which is

contained in a document known as the fire rate
make-up, is the official basis for the specific
rate on the building.

• Because the hazards inherent in a property

affect the probability of loss, fire rating
schedules seek to identify those risks so the
rate may be modified to reflect the hazards they
represent.

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 Factors Considered in Fire Rate

Experience has shown that most fire hazards can

be grouped under four major building
characteristics:

1. Construction

2. Occupancy

3. Protection

4. Exposure
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 Construction

The loss potential of buildings is measured in

terms of their combustibility, as determined by
the quantity of burnable material used in their
construction.
Class 1: Frame Construction.
Class 2: Joisted Masonry Construction.
Class 3: Non-Combustible Construction.
Class 4: Masonry Non-Combustible Construction.

Class 5: Modified Fire Resistive Construction.

Class 6: Fire Resistive Construction.
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 Schedule Rating Process

• Schedule rating begins with a base rate for the

particular type of construction under
consideration.

• This base rate is then surcharged to reflect

construction deficiencies or negative features
of the building.

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 Structural Deficiencies

Structural deficiencies may be concerned with

such features as
unbroken floor areas
vertical and horizontal openings
roof features
structure and arrangement of exterior walls
partition or division walls
skylights
the amount and location of concealed space.

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 Area

• Large undivided areas are known to contribute to

the spread of fire.
• More important, they make it difficult to
extinguish a fire once it has begun.
• Firemen attempting to extinguish a fire in large
open areas cannot reach the center of the fire
with water.
• One way to avoid fire rate surcharges—and to
reduce the hazard associated with such areas—is
by creating separate fire divisions.

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 Fire Divisions

• A "fire division" is a structure whose

characteristics justify its treatment as a
separate building for rating purposes.
• In general, this means a structure physically
separated from other buildings by space.
• When not separated by space, a structure is
considered a separate fire division if it is
separated from other structures by a
continuous fire wall.

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 Occupancy

• Virtually all fire rating systems recognize that the

activities that are conducted in the premises have
an important influence on the fire hazard.
• Some occupancies are more hazardous than
others, and have a greater likelihood of causing a
fire.
• In addition, contents differ in their tendency to
ignite, to burn once they are ignited, and in their
susceptibility to damage.

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 Occupancy

• The type of occupancy is not the only factor

considered, since hazards may vary considerably
from one building to another, even when the
occupants are performing the same function.

• Occupancy charges may reflect variations in

hazard based on the way in which equipment is
installed, its proximity to combustible surfaces,
and so on.

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 Protection

Fire protection is of two types:

• Public, or municipal protection, provided by

towns and cities, and

• Private, or internal protection, provided by the

property owner.

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 Elements in Protection Systems

Private and public protection alike consist of

three elements:

(1) prevention,

(2) detection, and

(3) extinguishment.

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 Public Protection

• Public protection refers to the fire-fighting

capabilities and certain other factors in the
community in which the insured property is
located.

• Communities are graded by the Insurance

Services Office and divided into ten categories
according to the quality of the fire department,
water supply, building code, and other factors
that bear on the fire hazard.

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 Municipal Fire Ratings

• Cities are rated into categories numbered 1

through 10, with 1 designating cities with the
lowest exposure and 10 designating
"unprotected" exposures.

• A municipality without rateable protection is

classified as Class 10.

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 Municipal Fire Ratings

Factors considered in evaluating the fire

department include
(1) the number of engine companies
(2) equipment of the engine companies
(3) the number of ladder companies
(4) equipment of ladder companies
(5) geographic distribution of fire stations relative
to the built-up areas of the municipality
(6) personnel training.

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 Municipal Fire Ratings

The factors that are considered in rating the water

supply are
(1) the part of the city protected by fire hydrants
(2) maximum daily water consumption
(3) fire flow and duration
(4) the ability of the water system to deliver the
needed fire flow throughout the city
(5) the condition of fire hydrants.

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 Private Protection

The types of protective features for which rate

credits may be allowed include fire protection
appliances, such as
approved portable extinguishers
stand pipe hose systems
automatic sprinklers
fire doors
alarm systems
outside fire escapes
heat from outside the building.
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 Portable Extinguishers

Class A water paper, wood

Class B foam oil, grease,

combustible liquids

Class C CO2 electrical fires

dry chemicals

Class D dry chemicals metal fires

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 Detection Systems

The major detection systems include:

(1) private patrol service,

(2) guard service with clock,

(3) smoke and heat detectors,

(4) automatic local alarm, and

(5) central station alarm or remote station system.

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 Alarm Systems

• A local alarm system sounds a bell on the outside

of the building and relies on passersby to report
the alarm to fire or police officials.
• A central station system is a private service with
personnel who monitor the systems of a number
of commercial concerns and notify the fire
department in the event of an alarm.
• A remote station system is similar to a central
station, except that the mechanical and electrical
detection devices are connected directly to the
local police and fire stations.
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 Exposure

• The "exposure hazard" measures the likelihood

that the building may be ignited from outside its
own walls.

• Since the risk to the building (and to its

contents) is increased by the possibility of a
spread of fire from surrounding buildings the
rate is modified to reflect the hazards in
neighboring properties.

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 Faults of Management

• "Faults of Management" also called "after

charges," are those penalties assessed for poor
housekeeping and temporary deficiencies.

• Usually, they are hazards in a risk that lend

themselves readily to correction, and hence are
regarded as temporary.

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 Faults of Management

Among the hazards specifically mentioned in the

schedule are
improper handling or storage of flammables
hazardous conditions resulting from poor
housekeeping practices
unsafe or inadequate electrical wiring
nonstandard electrical extensions.

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 Fire Rate Makeup Analysis

• Knowing how schedule rates are determined

can provide guidance in eliminating hazards
reflected in the rate.

• The document that summarizes and reports the

fire rating engineer’s analysis is called a Fire
Rate Survey.

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 Pre-Construction Analysis

• In addition to the analysis of the fire rate for

existing structures, fire rate analysis is also
useful--perhaps even more so in the case of
new buildings.

• Measures should be taken when planning to

erect new buildings to have the plans and
blueprints checked by the rating bureau prior to
the commencement of construction.

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 Class Rated Substandard Conditions
Surcharge

• Rating data on class-rated properties can also

provide guidance on loss prevention and control
measures.
• In those situations in which a substandard
condition exists in class rated properties, a
charge is added to the loss costs obtained from
the manual.
• Substandard Condition Charges are expressed in
dollars and cents, and are added to the class loss
cost as appropriate.

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 Class Substandard Condition Charges

Fire
Substandard Condition Frame Masonry Resistive

Heating and Cooking .50 .25 .12

Wiring .25 .12 .06

Subdivided with
Overcrowded Occupancy .50 .25 .12

Physical condition and

housekeeping .50 .25 .12

Exposure .25 .12 .06

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 Automatic Sprinkler Systems

There are five types of sprinkler systems in

common use today.
Wet Pipe Sprinkler Systems
Dry Pipe Systems
Pre-Action Sprinkler Systems
Deluge Systems
Combined Dry Pipe and Pre-Action Systems

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 Other Fire Suppression Systems

• A carbon dioxide system extinguishes fires by

reducing the concentration of oxygen. Such a
system is not recommended for structures with
human occupants, since it makes breathing
difficult if activated when people are present.
• A Halon 1301 system, on the other hand,
interferes with the chemical reaction in a fire. It
leaves little residue but dissipates into the
atmosphere. If it works correctly, it suppresses a
fire immediately and is less toxic to humans than
other gases.

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 Highly Protected Risks (HPR)

• HPR refers both to a specialized approach in the

property insurance field and to the types of
property that are eligible for this approach.
• HPR property is property that, because of its
superior construction, fire protection, and
management’s commitment to loss prevention is
considered to have an extremely low fire hazard.
• Insurers that specialize in providing coverage on
such property are known as HPR insurers.

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 HPR Insurers

Three types of companies dominate this market.

They include the companies in the
Factory Mutual System,
the Industrial Risk Insurers (IRI),
Kemper Insurance Group.

A number of the largest property and liability

insurers are members of IRI and participate in the
HPR through this organization.

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 HPR Risks

A HPR property is defined by its characteristics.

These include an
• automatic sprinkler system monitored by a
central station supervisory service,
• superior construction with fire doors and walls
to contain fire within a limited area,
• an adequate water supply and good local fire
protection.
• a managerial commitment to property loss
prevention.
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 HPR Risks

Usually, the values involved in HPR property are

substantial. The significant value qualification
results from two factors.
• First, it was the need for capacity to insure large
and high-valued complexes that led to the
creation of HPR insurers.
• Because the rates for HPR property are
extremely low, the values must be extremely
large to cover the insurer’s costs.

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 HPR Insurer Operations

• HPR insurers operate as direct writers and do not

pay commissions to agents or brokers.
• The distinguishing feature of HPR insurers is the
broad range of loss prevention and control
engineering services they provide to insureds.
• These include a variety of supporting services,
such as consulting on fire protection facilities,
loss control training courses, and inspection
services.

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 Loss Control Measures for Other Perils

• Although not all perils are susceptible to loss

prevention and control to the same extent as fire,
the risks associated with most perils can be
reduced.
• Often, the most important loss control strategies
are the post-event control measures aimed at
minimizing the loss resulting from damage.
• Disaster planning can help to guarantee that
appropriate measures are taken and can
conceivably prevent the loss of life.

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 Windstorm and Hail

• Although windstorm is not preventable, there are

measures that can reduce the amount of loss.
• In addition to the obvious strategy of locating
away from areas with frequent severe storms,
wind resistive structures represent the most
effective strategy.
• Buildings with large areas of glass or
inadequately anchored roofs are more
susceptible to windstorm damage than structures
without these vulnerabilities.

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 Explosions

• For the steam boiler exposure, scheduled

inspections are the most effective loss control
technique.
• Other explosions—which are basically rapid
combustion—are susceptible to control
measures similar to those used for fire.
• Explosion suppression equipment resembles an
automatic fire extinguishing system. It detects a
sudden abnormal increase in pressure and
automatically floods the incipient explosion with
a suppressing agent.
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 Water Damage

• Inspection and maintenance of plumbing

systems and the roofs, windows, and doors
represent obvious control measures.

• In addition, property that is susceptible to

damage by water may be protected by
coverings and by skidding.

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 Sprinkler Leakage

• Inspection and maintenance are standard loss

control methods.

• If the system is located in an area where no

freezing weather is anticipated, then a wet
system may be used with water at the sprinkler
head.

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 Vandalism and Malicious Mischief

Measures that can prevent or reduce loss include

Security personnel

Barriers, such as fences

Graffiti-resistant coverings on
exterior of structures

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 Earthquake

• Avoiding earthquake prone areas is one option.

• Earthquake resistant construction is another

option.

• When an earthquake occurs, emergency action

to prevent fires and explosions (such as
shutting off gas lines and electricity) can
minimize the damage sustained.

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 Boiler Explosion and Machinery Hazards

• The conventional loss prevention method for

boilers and machinery is inspection and
maintenance.
• In 1995, 43 states and 28 cities had laws that
require periodic inspection of boilers.
• In some states, all boilers of the type specified
are subject to the law, while other states exempt
the boilers of public service companies,
refineries, and canneries.

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 Boiler Explosion and Machinery Hazards

• One of the major reasons for the purchase of

boiler and machinery insurance is to obtain the
inspection services provided the insurer.
• All state laws accept the inspection service
provided by an insurance company as meeting
the requirements of the law.
• As an alternative, the inspection may be
performed by state inspectors for a fee.

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 Salvage Operations

• The term salvage refers to the residual value of

property that has been damaged.

• It may be used to mean the property that escaped

destruction in a fire or other casualty that caused
loss, or the amount of money received from the
sale of the undamaged property.

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 Professional Salvors

• Except in the case of small losses, insurance

company adjusters generally avoid taking over
and selling salvage or personally conducting
salvage operations.

• Normally, this function is performed by a

professional salvor. The term salvor refers to a
person or an organization equipped to save,
protect, inventory, recondition, and sell damaged
property.

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 Services Performed by Salvors

• Protecting and Preserving Property

• Preparing Inventories
• Verifying Value and Assessing Degree of Damage
• Removing Part or All of Stock for Sale

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