It is the second top cause of loss for companies, according to insurance claims analysis, with the impact of the subsequent disruption to operations often outweighing that of the damage itself. But effective management of the fall-out from a fire can be used as a key business differentiator once the recovery process is complete, providing the lessons learned are put to good use.
On April 21 last year a fire broke out at Pace Industries’ die casting facility in Harrison, Arkansas, US. Fortunately, none of the 42 employees who were working in the building at the time of the fire were injured. However, when the smoke cleared, the damage was palpable. In total an area of around 10,000m2 had been affected by fire, direct heat, soot and smoke, approximately 28% of the facility’s square footage. More significantly, around 85% of Pace’s manufacturing equipment at the site was impacted.
In total Pace Industries operates across several sites in the US and two in Mexico, all specializing in die casting, primarily aluminum but also zinc and magnesium products. With 250 die cast presses in use over all sites, today, Pace is North America’s largest custom aluminum die caster, serving almost every industry segment – from aerospace to appliances to lawn and garden.
“For our corporation Harrison is the mothership,” Group President Doug Walker, who has been with the company for 23 years, tells Global Risk Dialogue.“ It was our original building [when the company was founded in 1970]. One of our top five customers has 100% of its business there. So, of course, our immediate concern [in the aftermath of the fire] was: ‘Are we going to lose a lot of customers? Are we going to lose that customer?’ We had to go into triage mode really quickly…”
According to a new study from AGCS, fire is now the second top cause of loss for businesses by total value, based on analysis of more than 11,000 large business insurance claims (each in excess of $136,000) between 2009 and 2013. In addition, it is the top cause of loss according to value in two of the seven lines of business analyzed in the AGCS study Global Claims Review 2014. In the energy and property sectors, fire accounts for 65% and 28% of the total value of insurance claims in excess of $1.36m (€1m) respectively.
Fire was the main cause of eight of the top 20 largest man-made insurance industry losses of 2013, collectively equating to almost $4bn – almost half of the total $8.1bn loss tab of these top 20 losses. And as of the end of August 2014, it was the primary cause of four of the top 10 major reported non-natural catastrophe-related insurance losses of this year, including the largest during this period – an incident at a refinery in Siberia, Russia, for which insured losses are currently estimated to be in the region of $800m.
But as Walker’s comments clearly demonstrate, in many cases it is not the cost of any damage from a fire that businesses fear most, more the uncertainties caused by a potentially long period of business interruption. For example, in the case of Pace Industries full production capacity at the Harrison site has now been impacted for over 18 months.
Therefore it is unsurprising that Walker and his Pace colleagues went into triage mode so quickly in those first few days after the fire. And now with production at the site currently back at 95% of capacity prior to the fire – and set to return to 100% during the first quarter of next year – it appears the Pace approach to mitigating the fall-out from the fire paid dividends. As Walker explains: “Something we are very proud of is that in the first 14 months following the fire we did not have to shut down one customer’s production line.”
Getting back into operation
In the days following the fire Pace’s recovery process began in earnest. Different teams were allocated to oversee various key tasks – such as the management and containment of the damaged area; maintaining production on site via undamaged equipment – 19 machines were destroyed in the fire but seven were in an unaffected location – which allowed Pace to keep running production; and moving the greater part of the production to Pace’s sister sites – including displacing 250 customer tools in just six weeks to other facilities – which was obviously a key mitigating factor in respect of business interruption.
As well as making good use of its own documented procedures in the aftermath of such a catastrophic event, Walker also acknowledges the vital role insurance support had to play in helping the company get back into business as quickly as possible. AGCS is the insurer of the Harrison site.
“We had never had to deal with an event like this before,” Walker explains. “Dealing with an insurance company, which brings in a SWAT team of adjusters and specialized people was totally foreign to us. That is not the world we live in. We are manufacturers. However, they were very patient and helped to coach and guide us through the process.”
Working collaboratively, Pace set up a weekly conference call, complete with an accompanying detailed recovery plan outlining the progress of the many different aspects of the rebuild after the fire, any challenges encountered and any customer issues. “Regular communication and a transparent exchange of information between all parties were key to speeding up the whole recovery process,” he adds.
However, according to Walker, insurance support did not just manifest itself in the form of prompt and timely allocation of monies.
Although the root cause of the fire was never officially determined, the company has increased its commitment to housekeeping, venting, and robust dust collection. During the reconstruction process, both insured and insurer worked together to ensure lessons learned were put to good use from a risk mitigation and future fire prevention standpoint.
“You have to ask yourself: what are we learning from what has happened here? And what are we doing in our other facilities to ensure that what happened here is not going to happen there,” Walker explains. “Rest assured, our executive team was already asking these questions the day after the fire but to have a third party provide counsel on future fire protection during reconstruction only gave even more credence to this.”
Prior to the fire occurring Walker says Pace was already placing an increasing emphasis on safety directives within the organization. However, since the incident he says this has been bolstered further by a heightened focus on the prevention of potential catastrophes and fires in particular.
“At Pace we have a weekly safety call for all of our operations. Now, during this call, all sites have to deliver a visual presentation – a kind of a show and tell – of a before and after section of their plant, where they have applied their set plan in this area,” he continues.
“Frankly, I went to a competitor’s plant just recently and I would say that we are now much more advanced then them when it comes to our housekeeping and cleanliness around fire prevention. And that is a result of the fire.”
A tried and tested contingency plan
According to Walker there has also been one unexpected benefit from the fire. The fact that Pace Industries has proved its resilience by coming through such an experience relatively unscathed is now proving to be something of a key business differentiator.
“Of course we hate that the fire happened,” he says. “But if you are talking about a selling point for us as a company right now then we can point to the fire as a real-life example of an effective response to a catastrophe.
“Since this has happened our sales department has had a number of positive results with our customer base by emphasizing the importance of having sister facilities and multiple locations in the event things don’t go accordingly to plan. When we talk about risk mitigation we can say ‘look at what we did, not what we can do’. That is a huge leverage for us.”
Successful claims settlement key to business continuity
Businesses need to be back in operation as quickly as possible following a fire and effective and efficient settlement of any subsequent insurance claim can be an important factor in ensuring this occurs.
Companies can’t wait months for their insurers to assess a claim, according to Raymond Hogendoorn, Head of Property & Engineering Claims at AGCS. “They want to know they are covered, start thinking about rebuilding and get back to business straight away,” he says.
The challenge for claims handlers therefore is to respond quickly and start communication immediately. “If we respond quickly we can help our clients with the best options to get their claim settled as quickly as possible,” Hogendoorn adds. “And by getting money to the client quickly, it helps build trust for the future.”
AGCS was the insurer for the Pace Industries fire claim resulting from the Harrison site incident and Hogendoorn says the settlement process was concluded successfully because both parties communicated regularly on a one-to-one basis, ensuring decisions and action plans could be taken, and executed, quickly as and when necessary.
“With crisis management decisiveness is key,” Hogendoorn explains. “Pace ensured its senior management were involved in the process from day one, not only on an information basis but on a hands-on basis – they were there, on-site, at the plant.”
“Be proactive and get the decision-makers together and talking as soon as possible,” he advises. In short fast claims settlement is all about good communication and relationship-building.
“It can sometimes be a real challenge to get all parties around the table. But once we have built a good relationship, clients are more inclined to spend the time explaining their risks and making sure we, as insurers, have the right information,” he concludes.