Hidden Losses from Fire Can Outweigh Actual Loss from Fire Itself

Hidden Losses from Fire Can Outweigh Actual Loss from Fire Itself


Industrial Fire Safety

THOSE OF US who are actively engaged in the various phases of fire protection are fully convinced that fire, like crime, doesn’t pay. But often it is difficult to convince others. Most people carry fire insurance on their homes, and on the contents, but they fail to recognize the hidden losses resulting from fires. So, let us consider some practical examples.

W. E. Rossnagel

A small factory manufacturing sub-assemblies for a corporation which is supplying instruments for the Air Force had about 100 employees. The gross income from sales amounted to $50,000 per month. A fire occurred in a department in which one of the important parts for the suh-assembly was made, destroying the special machinery required for its manufacture. The direct fire, smoke and water damage loss was $100,000, which was paid by the fire insurance company. Yes, there is “use and occupancy” insurance obtainable, but many businesses fail to carry it. Even this does not cover all the indirect losses.

So let us look into some of the financial problems which resulted from this fire. The fire completely stopped the output of the plant, for the sub-assemblies minus one part could not be shipped to the purchaser. Thus the income from sales stopped. Most of the employees had to be temporarily laid off, resulting in a serious financial loss to their families and to the local merchants with whom they dealt. Foreseeing a long period of idleness, the most skilled workers obtained employment elsewhere. Most became happy in their new jobs, and decided not to return when the burned-out factory reopened.

Replacement machinery had to be ordered, but due to its special design it required many months for its delivery. The new machines were finally delivered, but time was required to install them, to tool them up, and to get them in proper working order. As the trained former employees did not return, new and inexperienced help had to be hired and trained. This training took many months, and during this period much material was damaged, resulting in high cost. Some defective parts were inadvertently shipped to those customers who remained loyal to this unfortunate manufacturer, and these parts all had to be returned to the manufacturer for replacement. Additional orders from these dissatisfied customers are unlikely. Other former customers had been unable to wait, and had to cancel their orders and make their purchases elsewhere. They may never make any more purchases from this company.

Although the fire insurance company paid the claim, this amounted to only a fraction of the costs to this manufacturer resulting from the fire which might have been prevented. In fact, in many such instances the company ends up in bankruptcy.

Now let us consider another hypothetical case. A public utility company was having a giant boiler and turbo-generator unit installed in one of its several large power plants. A large vacant building on the property was being used for the temporary storage of electrical apparatus such as motors, transformers, switchboards, meters, cable, insulators, etc. prior to their installation in the station. One night a fire destroyed the building and much of its contents.

The total fire loss of about $500,000 was paid by the insurance company. For many years the power company had had a very fine fire record which was indicated by the low “loss-ratio.” This figure is the ratio of the annual loss claims to the annual premium paid, based upon a fiveyear average. Consequently the company enjoyed a 15 percent credit or discount on all of its fire insurance premiums. In this instance we will assume that the annual premium amounted to $250,000, so the discount was about $37,500. But as a result of this fire the credit due to this low loss-ratio was lost, probably for the next five years. So this may cost the power company 5 X $37,500, or $187,500.

In the loss of so much valuable equipment there were the necessary investigations by company officials and supervisors. All of the equipment in the building had to be inventoried, and sorted so as to separate those pieces which had to be scrapped and those which could be reconditioned. The purchasing department had to order the replacement apparatus. Then company expediters had to strive to get these replacements delivered as soon as possible. All of this work was paid for at prevailing salary rates.

As the new equipment began to arrive, a vacant building in the neighborhood was rented for its storage until it could be installed. And this also meant additional trucking costs.

The burned-out building had to be demolished, and the rubbish carted away. Pipe lines which passed through this building were relocated at considerable cost.

But the largest single item was yet to come. Due to the loss of this important electrical apparatus, and the delay in its replacement, the start-up date for the new boiler and generator was delayed about a month. This new generator will be more efficient (can produce electric power at less cost) than the very old generators in another power plant which it is going to replace. So when this generator of 300,000 kilowatts capacity is placed in service a number, of old generators totalling 300,000 kw will be taken out of service, and kept as stand-by emergency ; equipment.

The new generator can produce electricity for about 1/2 cent per kilowatt hour less than can the older generators. In other words, for each hour the new generator replaces the old generators, there is a saving to the power company of S cent multiplied by 300,000 kw. or $1500. The fire causer! a delay of one month in getting the new generator into service, so the savings in that month would have been $1500 X 24 hours X 30 days which amounts to more than a million dollars. This saving was sacrificed as a direct result of the fire.

So the total cost of the fire was:

… to which must be added the labor and clerical costs indicated above, or a total approaching two million dollars. Of this loss only the direct fire loss of one-half million dolars was covered by insurance.

Again, let us convince ourselves that fires do not pay.

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