Protective Measures

The month of March proved to be a test of building owners’ ability to protect themselves against disaster. On March 14, as many as 14 tornadoes touched down in Georgia, including Downtown Atlanta and its surrounding communities. One person was killed and many of the submarket’s commercial buildings were damaged, including the Georgia World Congress Center. March also saw two deadly crane collapses: Seven people died when a crane broke away from a residential tower under construction in Midtown Manhattan, and 10 days later, a falling crane killed two people at a high-rise condominium project in Miami.The series of events—just the latest in a string of disasters both natural and manmade—highlighted the importance of building owners and businesses having adequate property insurance and taking other steps to guard against severe damage or lack of operability.Although natural disasters seem to be growing in numbers, the increase in property damage is due in larger part to natural residential movement. “Population has grown in coastal areas and industry has followed,” said Jeff Beauman, vice president of underwriting for insurance company FM Global. “This has led to an increase in the amount of physical assets exposed to natural disasters and often constrains the available insurance.” To protect their buildings against natural disasters, owners can take a number of property loss prevention measures that would both reduce the amount of damage that could be incurred and improve the owner’s own profile–and therefore premiums–with insurers. But too often, owners do not take the risk seriously until it is too late. Most office buildings in downtown Atlanta were adequately insured with some type of business insurance during March’s tornadoes, and the majority of the damage was constrained to broken windows from flying debris, reported A.J. Robinson, president of Central Atlanta Progress. On the other hand, South Florida saw a better quality of construction after 1991’s Hurricane Andrew, which marked the importance of code enforcement during the construction process and the expectation of a project being built to the blueprint. Some roofs had not been fastened securely, “and unfortunately, you only see those results after the loss,” said Dan Loris, senior vice president & property line of business director for Zurich North America’s technical center.FM Global has more than 1,500 loss prevention engineers working on-site with clients worldwide to help them understand and manage the unique property risks that can threaten their business operability. For hurricanes, maintaining the integrity of the building envelope is critical. The insurer recommends that roofing is properly installed, flashing is secure and shutters are installed over windows to withstand damaging winds and to protect the building’s contents. In earthquake-prone areas, it recommends that owners ensure equipment is adequately bolted down.Following such advice can really pay off. Beauman noted that FM Global clients who had facilities in the path of Hurricane Katrina and had followed the company’s recommendations reduced their average dollar loss by 85 percent. He asserted that the recommendations were inexpensive: A few thousand dollars per facility averted millions in property damages and the resulting disruption to tenant business. “Underwriters want to do business with those who have a better risk profile,” he added. “If you apply the principles of loss prevention, they will recognize that and price the risk accordingly.”Zurich North America, for its part, has spent the past several years evaluating its property insurance risk models in light of the physical realities of climate change, noted Lindene Patton, the company’s chief climate product officer. In addition to looking at the frequency and severity of weather events, Zurich is determining how it can structure its business products, including property coverage, to assist customers to better adapt to these realities, including evaluating:•    the ability to offer products that permit insured clients to rebuild green after a property loss;•    coverage that would recognize disaster-resilient buildings and their characteristics;•    the possibility of giving discounts for buildings with a disaster-resilient structure and materials, and seeing if it can develop products that would extend coverage to encourage adaptation.Of course, it is not possible to protect against all eventualities. When tornados hit Fort Worth, Texas, on March 28, 2000, many building owners’ policies did not cover wind, water and loss of income, according to Karen Simon, executive vice president & managing director of Bradford CORFAC International’s Fort Worth office. The result was an increase in premiums for an area she said is “a hail society, not a tornado society.” It took the city several years to mend the skyline, and some buildings never fully recovered from the damage, including the Bank One office tower, which has since been converted to a condominium project.Accidental manmade disasters, such as the crane collapses, on the other hand, can occur anywhere. They highlight the importance of wrap-up insurance, which is one policy that covers everybody on the site, including the owner, contractor and subcontractors, according to Elliot Kroll, chair of Herrick, Feinstein L.L.P.’s insurance and reinsurance practice group, noting his opinion and not that of his firm. Most projects over $100 million do have this type of insurance, but many under that cost point do not, he continued. “People should look into it,” he advised. The benefits are multiple. If a situation does arise and a building is not adequately covered, the owner could experience time-consuming litigation and possible questioning over rebuilding. And the incidence of successful criminal prosecution in the case of accidental disasters due to human failings has increased, in part thanks to the legal landscape focusing more on managerial accountability in light of Sarbanes-Oxley, increased media coverage of noteworthy criminal trials and public sophistication about the courts, noted Andrew Frisch, a partner with law firm LeClairRyan. He emphasized that contractors should not cut corners to save money. “Don’t be penny wise and pound foolish,” he warned. “And don’t believe that if a disaster hasn’t happened in a long time, it won’t happen tomorrow. Prosecutors will hammer you.”A Costly Storm(Top Ten Natural Disasters in the United States, as ranked by FEMA Relief Costs) EventStates AffectedYearFEMA FundingHurricane KatrinaAL, LA, MS2005$7.2BNorthridge EarthquakeCA1994$7.0BHurricane GeorgesAL, FL, LA, MS, Puerto Rico, Virgin Islands1998$2.3BHurricane IvanAL, FL, GA, LA, MS, NC, NJ, NY, PA, TN, WV2004$1.9BHurricane AndrewFL, LA1992$1.8BHurricane CharleyFL, SC2004$1.6BHurricane FrancesFL, GA, NC, NY, OH, PA, SC2004$1.4BHurricane JeanneDE, FL, VA, Puerto Rico, Virgin Islands2004$1.4BTropical Storm AllisonFL, LA, MS, PA, TX2001$1.4BHurricane HugoNC, SC, Puerto Rico, Virgin Islands1989$1.3BSource: FEMA