Most businesses are more worried about terrorism risks than arson, but fire is more likely to affect them. Jessica McCallen reports

Terrorism and reputation damage top the list of insurance concerns at the moment. The World Trade Centre tragedy and the Enron scandal have convinced companies that the worst could be just around the corner. But a somewhat mundane and far less sexy risk is more likely to take insurers and their clients by surprise - fire.

According to the Association of British Insurers (ABI), fire topped the list of UK insurance claims in 2001, costing £1.05bn in insured damage. It would have topped the list in 2000 as well, had it not been for unusually bad weather and large flood losses. There is a widespread perception among the public and business community that fire is just an inevitable part of life. To a certain extent this is true - there are three main causes of fire, joked one insurer: men, women and children. But it doesn't mean risks can't be reduced and losses contained.

"Companies are apathetic and lazy about fire," says Philip West, managing partner at Davies Lavery. "Many don't do fire assessment, but even the ones that do often just file them and forget about them. They don't think the recommendations are necessary or they are simply unwilling to put up the required money."

More awareness of how fires start is vital as a first step to good risk management, say insurers. A scaffolding company, for example, will be very concerned about staff injuring themselves through falls. Fires probably aren't top of the risk management list. Yet the metal grinders that volley the scaffolders up and down a building can overheat if overused, causing sparks and fires. And what about light bulbs? When Windsor Castle burned down it was because the lights used in the restoration work had overheated and started a fire. Lighting is often ignored as a source of fires.

Until recently, concerns about fire risks were raised by the fire brigade when it inspected commercial premises, whose owners needed to get a fire safety certificate. Now, the emphasis has moved to self-regulation, with the authorities carrying out a policing role. Many companies will fully inform themselves of fire risks, but just as many will not and, without the fire brigade visit, may neither recognise what the risks are nor how they affect them.

Knowledge of the three main causes of fire - hot works, arson and electrics - and where the potential dangers arise show why proper risk assessment from the outset can help.

Hot works - work done with welding equipment and blowtorches - and arson are the top two causes of fires. The risk lies in the fact that companies rarely need hot work. They can go decades without needing anything welded, so when hot work companies do enter their premises, managers are very unsure about what the risks are and don't do enough to protect their property.

Arson season
Arson is unpredictable. It takes only one person to start a fire in any location and at any time. Schools and churches are the most vulnerable to arson, becauise they may not be able to totally prevent it. They can derive some protection from knowing, for example, that the school summer holidays tend to coincide with the arson season, when there is an increase in attacks. But schools and churches are usually chronically short of cash and most fire prevention measures are expensive. For example, schools are always recommended to install sprinklers. This may be fine in new school buildings, but installing them in old premises can be extremely expensive.

Electrical devices and power distribution systems are the third most common cause of fires, but with the continued increase in the number of computers and telecommunications equipment, these could soon take that place. Floor and ceiling cables are the main problem. They have a protective covering so are unlikely to be seen smoking or glowing until it's too late. Building guidelines stipulate how big the holes for the cables should be and how they should be checked, but in reality these are rarely followed and many wiring systems go decades without being inspected by an electrician.

Mark Newton is property technical manager, risk control of UK commercial at Royal & SunAlliance. He says: "Finding the right balance between the risk posed by fire and the amount of money required to contain that risk will remain the problem.

"At the very least companies should get a risk assessment. Most insurers provide it free of charge. Just a small change may provide a lot of protection. Sadly, most companies wait until disaster has struck and a fire has wreaked havoc before really considering fire risks."

Insurers are understanding about the cost of making a business premises fire safe, but say that until a fire assessment has been carried out, businesses don't know what the cost will be. They could be pleasantly surprised. It all depends on the type of business. Some companies, for example, would fall apart if their computer and telecommunications systems were destroyed. Yet this equipment may all be kept in one room, which could be fitted with extra fire safety measures to protect it.

The problem will always remain one of simple business economics, balancing the need to make a profit against the risk of fire.

Hospitals, insurers say, are the only operations with impeccable fire protection, but only because they have no choice. Other businesses have a choice and should take it. N

Yarl's Wood - a costly loss
The fire at the Yarl's Wood detention centre in Bedfordshire earlier this year raised some difficult issues about risk management. It is not known if there was a risk assessment done at the centre at any time. If it were done it cannot be established whether it would have helped to stem the damage, currently running at around £70m.

The centre is still classified as a crime scene while police try to establish whether any detainees perished in the fire. This means the insurer, DJ Pye Syndicate 962 of Lloyd's, has had only limited access to the site and, as such, cannot say definitively whether risk management procedures were followed or not. Certainly the centre had no sprinklers and legitimate questions have been raised about whether a place that housed around 500 people should have had better protection. But it seems unlikely that sprinklers would have provided the right solution.

"Sprinklers are only good when the fire is accidental," says DJ Pye claims manager Peter May. "At Yarl's Wood it was started deliberately. At least three different fires were started at once and a sprinkler system wouldn't have been able to cope.

"What this case shows is that if people are really determined to start a fire, even the best risk management and fire prevention systems may fall short."

It's still tough on the insurer, but DJ Pye is hoping to recover some, if not all, of the claim by having the fire classified as a riot. The Riot Prevention Act [1886] states that parties who lost money and property during a riot are entitled to police compensation.

The syndicate is expecting some resistance from the local police authority, which will have to reimburse the insurer. It says the sheer size of the loss and claim will mean lawyers are likely to get deeply involved, quibbling over legal definitions of a riot in a bid to reduce crown responsibility for the damage cost.

Perhaps the real damage, however, is that insurers will become much more wary of insuring detention centres. Insurers say they would be crazy not to learn from Yarl's Wood, especially given the size of the claim, and the future will likely see these detention centres denied insurance or offered it with very high premiums.