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Look up at the ceiling.

Chances are, if you are a risk management or insurance executive of some sort, you're reading this magazine sitting at your desk in your office. And chances are, you are doing so completely oblivious of the tiny metal device--smaller than the palm of your hand--affixed to the ceiling over your head. It is a silent, imperceptible lifesaver.

Fire losses have gone through the roof in the past couple years, according to Tom Lawson, senior vice president of engineering and research at FM Global. Coincidentally, or not, globalization and expansion of U.S. companies overseas have also been on the rise.

"All the time I've been doing this (job), this is really the first time I've seen such a dramatic increase in the fire risk for North American companies, and I think that's because of their acquisition activities overseas," says Lawson.

Here's how it works: As North American companies acquire locations outside the United States, the vast majority do not have sprinklers installed, he says. That's quite a change from stateside, where sprinklers are a common component of building or fire codes.

"In the losses that we see, the average sprinkler fire damages are around $600,000," says Lawson. "The average damage in an unsprinklered fire is a little over $3 million. Sprinkler fires have about five times less damage than your average unsprinklered fire."

Those numbers are compelling enough. So why is this risk being overlooked?

Lawson says it's a combination of factors. Sprinklers simply aren't a priority for everyone. They might think there are better alternatives out there--gas systems, foams, or everyone's good, oldfashioned superhero, the firefighter. And, of course, if the building or fire codes don't require sprinklers, it just isn't something companies frequently seek to do voluntarily.

"The real key is that it helps when the codes support it, but it's really important for people to understand what the risks are of not having sprinklers, and that's really why they're often overlooked," says Lawson. "It may not be part of the code, it may not be a priority, but the key is that people don't understand the risks that they are facing."

Sprinklers are really the best defense against fire. They're always there, ready to strike when needed, directly over the fire. Damage is greatly minimized, as 90 percent of fires are controlled by six sprinklers or fewer, he says.

"The common misconception is that the fire department can really get there very quickly," Lawson says. "But even 'very quickly' sometimes is five minutes or more, and by that time the fire can already be headed out of control. The key with fire is to get the wet stuff on the hot stuff as soon as you can."

GLOBAL WARMING

Many countries over the years have adopted different methods of fire protection, and building and safety codes vary greatly around the world in terms of reliance on sprinklers. Whether a country relies on foam systems, gas systems, or a combination of fire prevention and fire-department response, Lawson says differences have cultural as well as economic influences. The United States wasn't so pro-sprinkler in its own codes as recently as 30 years ago.

"Loss prevention is great," he says. "You have to have that anyway, but sometimes there is a heavy reliance on prevention and people can misunderstand that that eliminates the need for protection."

As companies integrate and go outside the United States, they are exposing more and more of their supply chain. They have outsourced or put offshore a lot of what they used to do in North America because of globalization and the lower cost of labor. But at the same time, what they've done is they have exposed their supply chain, often with an unprotected property. While their facility in Georgia is protected with sprinklers, that property in China might not be.

And sprinklers are not often looked at during a business' due-diligence process, Lawson says. They look at cash flow and the barriers to entry and how hard it is going to be to break into that market. They probably don't look at whether the building is sprinklered or not. As a result, they are exposing their supply chain to some significant risks.

Businesses could simply be unaware that their newly acquired overseas location has no sprinklers, or perhaps they recognize the need but installation takes a while for whatever reason. But Lawson says the resources are there. Several international manufacturers in the fire-protection industry make sprinklers and other equipment available worldwide.

"That's the good part," he says. "The solutions are all readily available, and they're pretty basic. But the consequences of ignoring those solutions can be dire."

When will the point finally hit home?

"I think you have to point out the exposure to a company's bottom line," says Lawson. "The fact that sprinklers not only minimize the damage to their building, but also their business interruption and down time, that really has a huge impact."

ERIN FOGG is associate editor of Risk & Insurance®.

May 1, 2007

Copyright 2007© LRP Publications