Managing Construction Risks and Losses From Fire
By Jill Dalton, Kevin Madden, Construction Executive
Whether caused by arson, lightning strike or natural disaster, an epidemic of fires has been affecting scores of apartment and wood-frame construction projects in all parts of the U.S.
This year alone, construction fires have resulted in more than $300 million in insurance claims nationally. And the National Fire Protection Association reports that fire departments respond to some 3,750 fires in structures under construction each year.
Although insurable, these events typically result in tens of millions of dollars in property losses, lengthy investigations and costly rebuilds. Further, major fire damage to structures under construction can cause substantial delays in project completion, as well as potential financial and legal issues for contractors and large revenue losses for builders and owners.
To help reduce the likelihood of fire events, contractors can follow a number of best practices to safeguard construction sites against arson and catastrophic exposures. At the same time, they can take steps before and in the immediate aftermath of a major construction loss to help speed insurance recoveries and get projects back on track.
ELEVATED RISKS FROM FIRE
Low costs make wood-frame construction of new complexes attractive to builders and owners, so these projects are growing in number as well as size. When they undertake projects involving wood-frame construction, contractors should be aware of the various issues that have resulted in greater frequency of fire events and large-scale losses. They include:
- Increased likelihood of total loss. Because of frame construction and limited protection during construction, once a small fire starts it can spread quickly and become a total loss.
- Security issues. The use of 24-hour guard services, once considered a priority best practice, has proven to be ineffective due to human errors.
- Inadequate disaster planning. Lack of awareness of threats posed by natural catastrophes and related preparation has led to increased vulnerability during the construction phase.
- Poor project coordination. Lack of coordination and accountability among the general contractor and various subcontractors on a project can exacerbate exposures associated with wood-frame construction.
- Absence of civic notification. Failure to work effectively with local authorities and administrators can leave projects more vulnerable to significant loss due to fire or natural disaster.
IMPLEMENTING EFFECTIVE LOSS CONTROL
Contractors can mitigate many of these challenges by adhering to a number of proven pre-loss loss control best practices.
For starters, have loss-handling procedures in place with all stakeholders to be prepared in the event of a loss. Instead of waiting for a loss event to occur, engage with restoration companies and claims professionals – in advance of any problem. This will help ensure a fast response to get the project back on track.
As part of their preparation, contractors should develop a detailed emergency response plan that outlines the sequence of all actions to be taken, as well as individuals responsible and, as practical, their backups. The plan should be reassessed as the project progresses to make sure it accounts for any new project participants or previously unforeseen developments that might add new wrinkles to the plan. Further, any plan should be rehearsed and tested as practical to make sure everyone understands their respective roles and responsibilities, and any gaps can be identified and corrected.
A significant percentage of recent construction fires have been the result of arson. So, site security and control measures can provide valuable protection. These include: installation of a surveillance system; contracted security with active documented rounds to ensure alertness; signage, fencing and adequate lighting, and the prompt removal of refuse and scrap materials that might be used to start a fire. In addition, be sure to require all workers to secure valuable building materials and tools to avoid theft.
Meanwhile, accidental fires continue to be an issue as well. To reduce the risks of unintentional fires, have designated smoking areas and establish and enforce a strict hot work permit system. Be sure these are communicated to all contractors and workers on site and reinforced in safety discussion and training.
Make sure there are adequate fire extinguishers on site from the beginning of the project, and that sprinkler systems are installed and in service as soon as practical. Another preventive measure is to be sure materials and temporary buildings are located a safe distance away from the structure.
Before beginning construction, review all potential exposures to natural catastrophes and develop a plan to respond to the event. As part of this planning, consider establishing tornado shelters and installing a severe weather monitoring system.
A key element of any natural disaster planning involves careful coordination with first responders, including the fire and police departments. They should be aware of the site and understand how to approach it should an incident occur. It’s also often helpful to meet with these authorities in advance so fire officials can prepare more effectively and police may be encouraged to increase their presence in the area.
During the construction phase, designate a supervisor to monitor fire safety and look for potential hazards. For instance, this might include conducting routine inspections as the end of the shift to check temporary electrical and heating, flammable liquids and other potential issues such as debris and unsecured building materials. Individuals with these responsibilities should be accountable and their compliance should be part of their annual performance review.
INSIGHTS FROM RECENT CLAIMS
In the aftermath the numerous recent construction fires, here are some key factors that have contributed to larger claim amounts, longer delays and impeded recoveries:
- Stricter oversight of code enforcement by the local authorities (e.g., mayors and building departments), creating unanticipated delays in the rebuild time, increasing indemnity period and adding to the size of the claim with higher loss of rents and business interruption costs.
- As rebuild takes place and repairs are made, local authorities are preventing owners from allowing partial lease of completed units prior to the completion of an entire complex.
- Local authorities often require the entire complex have sprinklers, drywall and fire-protection installed prior to leasing.
- Local authorities often require a third engineer to inspect the structure for code compliance – increasing costs and resulting in longer indemnity.
- Local authorities are more often restricting delivery times and use of containers for transport of debris.
Thus, builders and contractors should anticipate greater oversight by local authorities following a loss than what is typical during the normal course of construction.
FOLLOWING POST-LOSS BEST PRACTICES
In the face of these issues, contractors need to focus on effective post-loss measures and claim management. This work begins well before any loss occurs and, as mentioned, starts with assembling a team of experts to help assess and manage the loss.
As soon as a loss occurs, establish and manage the flow of communication with all experts on the team and the stakeholders with an interest in the claim. These include:
- owner/risk manager;
- CEO/board members;
- insurance broker/advisor;
- news media;
- insurance company;
- industrial hygiene;
- building contractor;
- loss adjusters;
- restoration contractor;
- roofing consultant; and
- other third parties, such as local authorities.
Follow established loss-handling procedures, but make any appropriate adjustments in certain measures as the situation dictates. The process typically involves the following measures:
- Report the claim to insurers as soon as possible. On a positive side, insurers can be helpful resources in managing a loss. That stated, most insurance policies define timeframes within which an incident or claim must be reported. Be sure the policy’s requirements are understood and adhered to.
- Take steps to mitigate the loss. Unfortunately, with respect to fires at these types of sites, this often may not apply as they are usually a total loss.
- Cooperate with local authorities and be sure to include them in communications regarding the recovery process and rebuild.
- Ensure that claims-related accounting systems are in place and functioning. Notably, in the event of a partial loss, take steps to separate accounts and contractor time assigned to repairs and rebuild vs. the normal course of construction.
- Document and provide insurers with a well-organized and complete claim. This should include a narrative describing the damages, the causes of the damages and when the damages occurred. It should also show each element of the claim with appropriate tables and all supporting documentation.
- Provide all necessary schedule analyses to support a claim for any and all damages associated with any loss attributable to project delay if applicable.
As the use of wood-frame construction continues to proliferate in a widening range of projects throughout the U.S., contractors should be keenly aware of potential fire-related risks and take appropriate measures to prevent these events or to minimize their impact. Effective and thorough planning remains a key for managing this serious exposure.