NO.
28
DON'T WORRY- I'M INSURED!
© 1973 Patton Fire Protection & Research, Inc.
I have often heard people remark, "Don't worry
about it, I'm insured". In the mind of the person
making the remark "insurance" and "safety" are
synonymous.
But does this mean that because Mrs. Jones'
husband buys an automobile insurance policy that
she won't feel any pain as her face smashes through
the windshield during a high speed crack-up?
Most of Mrs. Jones' hospital bills may be paid by
an insurance policy. But does this make her happy
with a face that now resembles the Frankenstein
monster?
If Mrs. Jones dies, does the insurance policy tuck
her children into bed at night, or teach them to be
good?
Insurance is a necessity to our way of life. Without
it, we would have chaos. Insurance helps to level
the financial peaks and valleys in commerce, and in
our own private lives. But insurance has its limita-
tions. The man who thinks insurance is a cure-all is
only fooling himself.
And yet, despite the obvious limitations to insur-
ance, there is much evidence to indicate that a
great many people are looking upon the insurance
policy the way the American Indian once looked
upon his great white father in Washington — as a
guarantor that all will be well.
Today, there is many a businessman who is plowing
full steam ahead into very deep water, oblivious to
the dangers because he has a lifeboat called insur-
ance. But what he doesn't know is that there are
some loopholes in that lifeboat!
In this Report I will discuss fire insurance, the
li mitations of fire insurance, and the need for
"fire safety" above and beyond the insurance level.
Fire insurance does not, by itself, provide adequate
protection against the risk of fire. Here are some of
the reasons why.
INSURED VALUE VS. REPLACEMENT COST
The first thing the businessman should know about
his fire insurance policy is that most insurance is
written on an "ACTUAL CASH VALUE" (depre-
ciated) basis. In our inflationary times the cost to
replace a destroyed property goes higher every year.
But much of the equipment and furnishings in an
existing facility are going down in value just as the
cash value of an automobile decreases with time.
Thus, the businessman's potential insurance re-
covery in event of loss may actually be decreasing
with time while the cost to replace his property is
skyrocketing. The result is an insurance payout
that is well below the cost to rebuild.
UNDERINSURANCE MEANS UNDERPAYMENT
Not long ago I talked to a man who was most
pleased with the fact that his fire insurance prem-
iums were quite reasonable. But investigation
showed that he actually had a rather high insur-
ance rate.The mystery was cleared up when I found
he was insuring his property at only a fraction of its
true value.
When I pointed this out to him he told me not to
worry about it. He explained, proudly, that he had
a 100% coinsurance clause.
In his mind the coinsurance clause meant he would
be paid in full for any loss. Actually, quite the
opposite was true. It meant that when a loss
occurred he'd be reimbursed for only a fraction of
it (in relation to the insurance carried compared to
the true value).
A man who thinks that he is getting a bargain in
insurance when he is underinsured has a big sur-
prise waiting for him when the fire occurs.
Any property owner that does not have business
interruption insurance as well as fire insurance on
the building and contents — at replacement cost
value is underinsured.
Even when full insurance is carried the loss payment
will fall far short of the full total loss because
there are many "hidden" costs to a loss that are
not covered (are excluded) from insurance policies.
ZONING LAW CHANGES
Frequently, building codes change. If fire destroys
a property the owner will have to build to the
new code, and this could be much more costly
construction.
Now let's take this one step further. Assume the
fire seriously damages, but does not level the
structure. The damaged building cannot be restored
because the new code requires that if a certain
percentage is damaged, the structure must be torn
down and fully rebuilt to the new code. The owner
not only has to pay for the new and more costly
building, but he has to pay for the demolition
costs as well.
These higher construction costs and demolition
costs fall outside the normal fire policy.
MORTGAGES
When fire destroys a property the bank holding
the mortgage is paid off first. Perhaps the owner
will get a new mortgage for new construction, but
maybe he won't. If a new mortgage is obtained
the interest rate may be higher.
EXCLUSIONS
A fire policy does not cover money (cash), accounts,
bills, deeds or securities. If the accounts receivables
records of a business are lost most of the money
owed to the business may not be collectable.
The destruction of records can be devastating to a
business.
VOIDING OF COVERAGE
An unreported increase in the hazards of an opera-
tion can be grounds for denial of coverage after
loss occurs. This is just one of the things that can
happen that can leave the business owner sitting
out there naked after the fire. Most property
owners are not familiar with the fine print of the
contract, the various exclusions to the coverage,
and the manner in which coverage can be voided
by their own actions.
BUSINESS INTERRUPTION
When the cash register stops ringing someone gets
hurt. Usually it's the fellow that owns the business.
First there is the salvage to worry about, then the
claim settlement. Architectural drawings must be
prepared. Financing must be obtained. The time
for reconstruciton usually seems like an eternity.
Meanwhile the profits from the business are inter-
rupted at a time when the expenses are magnified.
Business interruption insurance helps but it is no
panacea.
With business interruption insurance the owner is in
a race to rebuild and regain profits before he goes
completely broke. He is obligated to repair or
replace the property with due diligence and
dispatch. Business interruption payments will be
made only for that period of time that repairs
should normally take.
Once the premises and equipment are restored (or
could have been restored) the insurance payments
-2-
stop. There is no further compensation for a re-
duction in sales, loss of customers, loss of good
will, broken contracts, loss of future business that
had been booked in advance, loss of valuable
employees, or lack of profits.
So, a businessman that suffers a major fire loss
will find himself up to his eyebrows in legal and
financial problems. He will probably have to build
a much more costly facility for which he will be
only partially compensated by insurance. As he
struggles with contractors, banks, and insurance
adjustors he will be losing his customers to his
competitors. Most of his trained employees will
wander off to new jobs. When he finally gets back
into business he will usually be in a very shaky
financial position, desperately needing new cus-
tomers, and most of his trained help will be
working for his competitors down the street.
Note that this is his position if he has business
interruption insurance. If not — good-bye Charlie.
LIABILITY FOR INJURY TO OTHERS
There is another matter related to insurance that
the small businessman should consider. If a fire
starts on his premises and spreads to another
property — or if it kills one or more of his cus-
tomers, he can be held financially and legally
responsible for these events.
Small fires can sometimes cause major damage.
For example, a fire in a restaurant in a high rise
building could knock out important electrical
switchgear which could take months to replace.
Meanwhile all businesses within the building are
impaired. All of these impaired businesses, plus
the building owner, could sue the owner of the
operation that caused the fire.
Even worse, the fire could spread upward and
trap and kill many innocent people. Very few
businessmen carry the very high liability insurance
li mits that would be required in such circum-
stances. This means that the insurance company
pays off its limited obligation and walks away
from the situation. The businessman is then sitting
there with the axe hanging over his head.
Finally, there is a possibility that Mr. Businessman,
and/or his wife or children could be killed by the
fire.
THE REALITIES OF FIRE
Fire insurance was never intended to be a solution
to fire any more than it is a solution to death.
Because a man has a million dollar policy on his
life doesn't mean that he can jump off the Golden
Gate Bridge and survive.
Why is it then that the same man who refuses to
trade his life for the life insurance policy is often
so quick to trade his business for a fire insurance
policy? Why doesn't he realize that insured or not —
when fire strikes his business may be lost forever?
It is estimated that 50% of the small businesses
that suffer a major fire loss never recover.
Sure the insurance comapny pays off. But the
insurance recovery usually is only a fraction of the
true losses sustained.
This is by design. If the insurance company gave
full compensation for the loss it would make no
difference to the owner whether or not he had a
fire. If the insurance payment really equalled the
loss sustained a lot of property owners might be
tempted to burn their businesses. But insurance
companies don't play ball that way. Insurance
policies are written so that when the owner has a
fire he gets hurt! This keeps him honest. Some-
times it makes him honest and broke.
THERE IS NO "BIG BROTHER"
Insurance is not a humanitarian operation. It is a
serious business. Insurance is the business of
making profits from other people's losses.
However, there is nothing improper about this
insuring system. The insurer simply sells a given
level of financial compensation for a given insurance
premium payment. No insurance comapny is
i mplying or guaranteeing that the payoff when fire
occurs is going to magically restore everything to its
original condition.
The truth is — bluntly speaking — that the man
who looks upon an insurance company as being an
organization that's going to take him by the hand
and lead him through the pitfalls of a business
operation is a fool. No one is going to protect and
preserve a man's business but himself. If he doesn't
do it himself — no one will.
THE SOLUTION TO FIRE
There's only one real solution to fire. Don't have
one. The businessman who values his business will
take the necessary steps to reduce the probability
of a Major fire to near zero. There is only one
possible way to accomplish this. The only really
valid solution to fire is an automatic fire detection
and suppression system. The automatic fire sup-
pression system is the only system that has
achieved a fire control reliability of approximately
99.9%.
Fire prevention activities such as prohibiting smo-
king in certain areas, checking the premises before
closing, etc. are helpful. But the possibilities of
fire starting are almost infinite. There has never
been a fire prevention program that has been
perfect or even near perfect.
But it is now possible to obtain a modern fire
suppression system that comes close to providing
100% security from a major fire. This new system,
developed by Patton, offers these advantages:
1. Whereas conventional sprinklers have experi-
enced a failure rate close to 4%, the Patton
system is of an advanced design based on the
Australia sprinkler system that has produced a
99.78% reliability. The Patton system is an
improvement on the Australian system.
2. It is inconspicuous and can be installed in
-3-
existing buildings with a minimum of damage to
the structure and with a minimum "visibility".
3. It employs small copper tubing that blends into
ceiling architecture in buildings if complete
concealment is impossible.
4. It is economical, and has a long trouble free life
because copper tube resists corrosion.
5. It requires only modest water supplies.
COMPOSITE PROTECTION
While insurance is not in itself a satisfactory solution
to fire, a broad but low cost insurance program tied
to the Patton Fire Suppression System represents
the maximum attainable fire safety.
Note that the fire suppression system will reduce
the fire loss potential to near zero. This permits
insurers to offer broad form insurance coverages
to be marketed in conjunction with Patton systems
at low rates.
The ultimate fire safety is thus achieved through:
a. A fire suppression system that reduces loss
potential to near zero.
b. Special insurance programs that provide
broader and more liberal coverages — thus
greatly reducing the "hurt" if fire does occur.
THE RIGHT REASON FOR FIRE PROTECTION
Many businessmen judge the need for a fire sup-
pression system on whether or not the system can
be paid off through insurance savings. This is the
wrong reason for buying fire protection. The
business owner needs protection, not for the sake
of reducing insurance payments, but for the sake of
protecting his business from fire.
Is an automobile liability insurance policy a good
reason for a man to drive without brakes? Of course
not! In the same vein, a fire insurance policy is not
a good excuse for leaving a business exposed to
fire.
Incidentally, the man who is underinsured is most
in need of fire security. He is almost certain to
lose his business when fire occurs. But a fire
protection installation may not appear to be a
good buy to him if all he looks at is his insurance
savings. Because he has only a portion of the insur-
ance he needs, he pays only a fraction of the
premiums he should pay. Any savings in premiums
due to a reduced insurance rate will be small.
Thus, ironically, if a businessman judges his need
for fire protection solely on how much he will
save off his insurance premiums, the man who
needs protection the most may be the least inclined
to obtain it.
THE "MATCHING DOLLARS" PAYOUT
Despite the fact that a businessman should buy fire
safety for safety's sake, — many will continue to
relate protection need to insurance savings. So be it.
But it is very shortsighted of a property owner to
expect that the insurance company alone should
pay for the system.
It's true enough that the insurance company saves
money when a property is sprinklered because the
probability of making a payment for a fire loss is
reduced. So, the insurance company rightfully
forfeits part of its normal insurance premium to
pay for the protection. But the owner also stands
to gain when the fire risk is reduced. Therefore, for
every dollar of fire insurance premium that the
insurance company is willing to forgo, the owner
( who has more to lose from fire than the insurance
company does) should also put up a dollar.
Here's how the system works. Assume the following.
1. The cost of the fire suppression system is
$18,000.
2. a. The annual nonsprinklered fire insurance and
business interruption premiums are —$6,000.
b. The annual insurance premium after the
building is sprinklered is — $3,000.
c. The annual savings in insurance premiums
is — $3,000.
RICHARD M. PATTON
President
cPattorz,
4619 Auburn Blvd., Suite C
Sacramento, CA 95841
Telephone (916) 482-2839
3. The $3,000 savings in insurance premiums could
be considered the insurance company's "con-
tribution" to the cost of sprinklers.
4. The owner should "match" the insurer's "con-
tribution". The owner should pay an extra
$3,000 per year as his part of the cost. Note
that the value of the sprinkler system to the
owner is greater than it is to the insurance
company.
5. With this "matching dollars" plan the cost of
the system ($18,000) is paid off in three
years (at the rate of $6,000 per year).
6. After three years the system is fully paid for.
From this point on the owner not only enjoys
the peace of mind from knowing that his pro-
perty is protected from fire, he now enjoys
lower cost insurance, with broader coverages, for
all the remaining years of the business.
The owner comes out the big winner when
protection is installed.