It was fire that ushered in the modern property insurance industry and more than three centuries later fire is still a key risk for many businesses.
Although losses from fire are relatively rare – accounting for just 3% of all insurance claims in the past four years, according to Insurance Statistics Australia – they have the potential to be catastrophic. In fact, fire accounts for up to 20% of the value of all claims paid.
Brokers can play a key role in ensuring their clients adopt adequate fire prevention and detection strategies. They are often the linchpin between the insurer and its fire engineer and the client when it comes to putting in place policies that provide cover for fire risk.
This is why it’s essential to understand how fire prevention is regulated in Australia and what clients can do to help reduce the risk of a fire damaging or destroying their premises.
Nathan White, Fire Safety Engineering Team Leader at CSIRO, explains that the Building Code of Australia is the main mechanism regulating the way fire prevention and detection systems operate in buildings, with the lion’s share of the code related to fire.
Fire accounts for just 3% of all claims in the past four years but 20% of the value of all claims paid.
He says the main components of a fire safety system should support a building’s ability to maintain its structure in the event of a fire and contain the fire to a small area. The system should also take into account the flammability of materials used in a building, the ability of people to easily leave the building, as well as active systems to suppress and detect fire, and deal with smoke.
“The fire safety system will be influenced by a building’s architectural design. For instance, if there is a large atrium, a smoke exhaust system is more likely to be needed.”
Certain buildings are required to meet specific standards; for instance, buildings with very large fire compartments (typical for warehouses) or a height above 25 metres are required to install sprinkler systems. But White says it is absolutely essential to ensure fire systems are regularly maintained.
Where trouble lies
Dale Garbett, Vero’s Risk Engineering Client Services Leader, says that outside of bushfires, the most common cause of damaging fires are electrical faults.
“Old, poorly maintained, overloaded or inappropriately used electrical infrastructure and appliances can cause overheating, arcing or sparking, which can in turn ignite nearby combustible material,” Garbett says.
He says fire related to hot work is often caused by having poor controls in place – or none at all. “Some of the largest insured losses have been attributable to poor hot work controls,” he says. “Making matters worse, many of these fires are caused by contractors who aren’t following formal procedures and do not have their own public liability insurance.”
Tough sandwich to swallow
Other causes include arson, smoking, cooking and comfort heating for staff. “We are also seeing the emergence of fires caused by portable liquefied petroleum gas heaters used outside in bars and restaurants during winter months.”
There are a number of steps brokers can take to help their customers understand their risks and what can be done to mitigate them.
Garbett says to prevent electrical fires, it’s critical to have fail-safe mechanisms like power circuit breakers, uninterruptible power supplies, overvoltage, surge and spike protection, and earthing and bonding protection against static electrical sparks. Extra care is required in hazardous areas like flammable or explosive atmospheres, water, and wherever there are large amounts of combustible materials, such as stock, packaging, equipment, or combustible building construction.
Paul May, Engineering Manager for specialist insurer FM Global says the technology around fire protection has made continued advances, such as using thermal imaging for prevention.
“Thermal imaging is very powerful – it enables clients to identify hotspots at their premises without having to shut down the entire plant,” he says. Hotspots might include overloaded circuits or a poor electrical connection, which could cause a circuit failure or generate enough heat to ignite.
“It’s an incredibly powerful tool clients love because they don’t have to shut down their electrical supply to conduct the test. We encourage all clients with a sizeable electrical load to do this.”
Thermoscan’s Kelly Miller says current thermal imaging technology is accurate to a tenth of a degree and is invaluable in detecting faults that would not otherwise be apparent, by identifying which components are running under higher heat loads than expected.
“It can pinpoint the exact location of faults and allow componentry to be replaced before a problem occurs,” she says. “Without this service, unidentified equipment faults can lead to equipment failure, loss in electricity supply or electrical fire. It is often recommended by insurance companies that thermal imaging is undertaken on an annual basis to reduce risk.”
Another relatively recent advance is water mist systems. Originally developed for marine use, water mist systems spray a fine mist of water onto fires, dropping the temperature and starving the fire of oxygen to suppress it.
Compared to traditional sprinkler systems, water mist systems are generally cheaper to install, use far less water and can cause less water damage when deployed, but their efficacy has not been tested as thoroughly as established sprinker systems.
Flames of change
FM Global’s Paul May says the biggest challenge in fire insurance is keeping up with changes in clients’ businesses. He uses aerosol cans as an example.
“Aerosols are always a challenge from a fire protection perspective,” he says. “When they are on fire they can rocket around a warehouse. Aerosol cans used to be packed inside cardboard boxes and placed on a pallet. This cardboard packaging played an important role in the fire protection strategy. In a fire event, the sprinklers operating directly over the fire would wet the surrounding cardboard boxes. This kept the aerosol cans cool and prevented them from becoming involved.”
But as clients attempted to minimise packaging material, cardboard cartons were replaced with thin plastic wrapping. May says this had a dramatic impact on how the aerosols behaved in a fire.
“We needed to come up with a solution and conducted a number of full-scale fire tests at our research campus on Rhode Island in the US to find an adequate fire protection solution. So ideally, we want to partner with clients to ensure fire protection strategies keep up with what clients are doing,” he adds.
IAG Senior Risk Engineer Alan Rutherford says it is essential to understand potential exposures. He suggests adopting a riskmanagement process aligned to the Australian Risk Management Standard, AS31000. “Customers who understand the effects of management controls and their impact will actively reduce the likelihood of a major loss,” he says.
Some additional risk mitigation may be required where risks are identified that sit outside the customer or insurer’s risk tolerance level. The aim is to reduce the risk exposure to an acceptable level. This might include installing sprinkler protection, undertaking routine property inspections, implementing ignition source controls such as restricting smoking to specific areas and ensuring fire exits are kept clear. “This is simple stuff the customer needs to be continually on top of. In a well-managed business, this should be routine.”
“Proactive controls should also be put in place such as routine testing of electrical switchgear, the testing and tagging of portable appliances, and thermographic scanning of switchboards,” he says.
In some instances, the risk level can only be reduced to an acceptable level through the installation of physical protection systems such as fire detection and sprinkler systems. In these cases, it is recommended the insurer is consulted to ensure the system is appropriate.
Work with clients
Rutherford says broker input in a customer’s adoption of effective fire prevention strategies is essential. “Working collaboratively with the insurer’s risk engineer, the broker is well placed to provide more than just a price-driven service to their customer – they are adding substantial additional value to the relationship.”
He says recommendations are discussed with the customer on the day the insurer’s risk engineer visits. Insurers then work with the broker to formalise any recommendations.
“By taking the time to gain a deep understanding of the risks that have been identified and the proposed mitigation strategy, the proactive broker has an opportunity to better engage with the customer and help deliver risk management strategies that work for the customer, broker and insurer,” Rutherford says.
When aerosol cans are on fire they can rocket around a warehouse.
“This engagement should include advice on the insurable and uninsured exposures that may arise and include discussion on the cost/benefit ratio. When discussing this, it’s important to remember property and business interruption insurance don’t always put the insured back in the pre-loss position.”
As to the difference this makes to the premium, Rutherford says underwriters consider many factors when making an insurance offer, including the level of risk management controls and physical features such as construction and fire protection systems. “Insurers also prefer customers to be proactively managing and mitigating risk, as opposed to simply viewing insurance as a risk-transfer mechanism,” he says.
“It is a logical assumption then that a well-managed business would achieve a better premium outcome than a poorly managed business.”