The Risk of Fire - Statistical Data Included

If you've ever had an unhappy employee customer, competitor or neighbor, your business could be vulnerable to arson. Here's what you need to know to reduce your risk.

A few years back, in Massachusetts, a warehouse worker named William Jones set fire to the warehouse where his employer, Pacific Roofing, stored supplies. (This is, unfortunately, a true story, though the names of the parties have been changed.)

The reasons were varied. Jones was afraid that he might lose his job, and he was drunk. The combination of both made him angry. A temporary worker, Jones had been hired at minimum wage to perform odd jobs. But Pacific was busy and short-handed, so management had given him overtime and additional responsibilities. Jones had even been given a key to the warehouse and the code to disarm its alarm system.

Management didn't know about his personal history of frequent unemployment, petty theft, and drunk driving. Nevertheless, Jones now feared that he would be fired. As a part-time, nonunion employee, he wasn't entitled to work overtime. And he had learned that his union coworkers had complained about him.

On the night of Nov. 15, Jones let himself into the warehouse where he drank an entire six-pack of malt liquor. He then climbed onto a forklift and began to drive at high speed around the interior of the building until he collided with a support beam, which bent the axle of the forklift.

To conceal the damage, he siphoned gasoline from the company lawn mower, poured it over the lift and a pile of roofing panels, threw on a match and fled.

Jones was quickly apprehended. He wrecked his car while racing out of the parking lot and was caught at the scene when police and fire fighters responded to the blaze, which destroyed the warehouse and its contents.

An unusual case? Hardly.

The most unusual thing about this case is that Jones was caught so easily and quickly. The vast majority of arsonists are never caught--and never punished. Only 2 percent of 500,000 arson and suspected arson fires set annually result in a conviction.

In the United States, arson is the leading cause of nonresidential fires--accounting for 31 percent of all such fires and 37 percent of all dollars lost, according to the Insurance Industry Research Council. (Among home fires, it is the third-highest cause, behind cooking and heating.) Overall, arsonists are believed to set about 500,000 fires annually, destroying about $2 billion worth of property.

Little research has been done about arsonists' reasons for setting fires. According to a 1979 study--the most-recent available--by the Law Enforcement Assistance Administration (LEAA), 42 percent of arsons are vandalism or malicious mischief; 23 percent are acts of revenge; 14 percent are set by people suffering from pyromania or some other mental illness; 14 percent are deemed to be arson-for-profit; and 7 percent are set to cover up other crimes. In the case of William Jones--an angry, fearful drunk trying to cover up a misdeed--any one of several categories may be appropriate.

Of course, not all arsons are targeted at business. Nevertheless, those figures should concern business owners and risk managers.

Businesses are Vulnerable

Think about it. A business is a highly public enterprise and, therefore, much more likely to have "enemies" than a private homeowner. Given a typical quotient of dissatisfied customers, disgruntled former employees, frustrated competitors, and neighbors unhappy about your expansion plans, few businesses can be considered immune to this threat.

So, yes, you should have a Y2K plan in place and, perhaps, your business strategy could benefit from setting up a captive insurer. But arson is also a risk to every business. Like all risks, however, it can be mitigated.

Let's take another look at the Pacific Roofing fire. Could it have been prevented? Absolutely. Pacific Roofing failed at least three times to take appropriate measures to protect itself.

* First, of course, it hired William Jones. This wasn't an "accident." Hiring Jones was a management decision. After the fire, Jones was found to have (1) been frequently unemployed, (2) a history of petty theft, and (3) a record of driving under the influence of alcohol. Each of those factors could easily have been discovered with a cursory background check. And each should have been a red flag to whom-ever did Pacific's hiring.

* Second, Pacific violated its own workplace procedures. It was a union shop and gave overtime and full-time responsibilities to a temporary, nonunion worker.

* Third, it gave Jones a key and the building security code. Actually, Pacific gave keys to a lot of people. Post-fire investigation revealed 30 unaccounted-for keys to the warehouse that Jones torched. That's not exactly an engraved invitation for disaster, but it's close.

So, to summarize, Pacific's hiring procedures were sloppy. It violated its own workplace procedures. And its security procedures were lax, to say the least.

Reducing the Risk

Arson can't always be predicted, of course, but some risks usually seem obvious after a disaster. Mitigating those risks--indeed, the risk of all fire--is where good management comes in.

Is fire prevention a priority at your company? A quick review of the following issues may reveal a need to review internal procedures:

* Fire protection systems and alarms. Are they maintained regularly? By whom? And are those people properly trained for this work?

* Renovations. When your company plans renovations or changes its operating procedures, do those involved consider whether the effectiveness of fire protection systems is affected?

* Are new hires screened? Most applicants and new employees fill out forms. But is the information on these forms examined for a history of problems that might have an effect on company security? If a job candidate had a criminal history--in particular, a history of setting fires--wouldn't you like to know?

* Are new hires trained? Having security policies in place is of little value if employees aren't aware of them. Does your company have a program to train employees--particularly new hires--in safety practices and procedures? Many fires start because someone was using a piece of equipment improperly or performing a task for which he or she wasn't trained.

* Are policies obeyed? Enforcement of procedures can help ensure compliance. Does your company have controls in place to confirm employees' and visitors' regular compliance with good housekeeping, security, safety, and smoking controls?

Yes, it's a lot of work. The good news is that implementing such controls not only reduces the risk of fire and arson, but can lessen the insurance cost that such risks entail.

In addition, a good manager never forgets that an insurer is really a business partner. And the more an insurer (or its agent) knows about your company--about its history, growth, products and, yes, even its claims--the more understanding it will be of the company's insurance needs. And that understanding may be reflected in the insurance premiums your company is charged.

What Can be Done?

Why am I so concerned about fire? Well, it's an issue about which reinsurance companies such as mine have a special perspective.

Because we insure insurers, pools, risk retention groups and the like, we are more likely than an individual insurer to have a big picture perspective on industry issues.

In the case of fire, here's what our perspective reveals:

In the United States, fire annually kills 4,000 people, injures another 20,000 to 25,000 and destroys about $8 billion worth of property. Only Hungary and Finland have higher fire death rates.

About two million fires are reported annually. Of those, about 500,000 are arson or arson-related. Only 2 percent of these ever result in conviction.

Roughly a third of all fires go into the record books as undetermined, according to the National Fire Protection Association.

Our interest is simple: In addition to a tragic toll of death and injury, fires cost us and our clients a lot of money. We think solving more fires will lead to the prevention of more fires, thus saving lives, property, and premium dollars.

In particular, solving more arsons will mean prosecuting more arsonists. That's an important issue to insurers and reinsurers, particularly in the case of arson-for-profit schemes.

Unless such fires are officially determined to be arson and the perpetrator identified, insurers are frequently required to write checks--using policyholders' premium dollars--to pay people who really ought to be in jail.

This is why American Re is part of a massive national initiative to improve the fire investigation skills of the nation's fire fighters, police, and prosecutors, as well as the insurance industry. We've partnered with the Bureau of Alcohol, Tobacco and Firearms, NFPA and the U.S. Fire Administration to produce an interactive CDROM-based training program called interFIRE VR. This partnership has allowed each organization to specify its own best practices and to share information across disciplines. The benefits are significant. Some examples:

* Fire fighters learn that, in addition to saving lives and property, they may also be entering the scene of a crime. Evidence of how the fire started can be either destroyed or preserved depending on what they do.

* Law enforcement officials will discover the wealth of information contained in the insurers' underwriting and claim files. This information is available through existing immunity legislation in all 50 states. Investigators simply need to know how to ask for it.

We in the insurance industry know that it's about protecting people. In the case of commercial property and casualty insurance, it's about protecting the places where people spend most of their waking hours and the enterprises that feed and house them and their families.

With a responsibility like that, our industry has a duty to be a leader in this area. Sure, insurers must constantly develop better ways to select risk. But we also should help clients find ways to reduce their exposure to risk. In the case of fire, that means improving both the quality and quantity of knowledge about its causes.

Beyond that, we must get this information to the professionals (police, fire fighters, public and private investigators) who work a fire scene. When they are able to do a better job, everyone will benefit. Public safety will be enhanced. Better safety codes will be developed and safer products designed.

Insurers and policyholders will benefit because legitimate claims can be processed more quickly while fraudulent claims can be identified and, when necessary, litigated more effectively.

In the meantime, do you know where all your keys are?

Thomas E. Smith is senior vice president for claims for American Re-Insurance in Princeton, N.J.

COPYRIGHT 1999 Axon Group
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