THE PATTON REPORT
Annual fire losses in the United States result in over
12,000 deaths and possibly a half million serious inju-
ries. Our accounting procedures list the annual property
damage loss at approximately two and a half billion, but
as great as this figure is it does not truly reflect the total
financial cost of fire. It does not include the true cost of
lost businesses (it is estimated that 50% of the businesses
suffering a major fire never recover), the loss of salaries,
taxes, medical costs, and many other reflections of the
devastation of fire.
There has been great interest in recent years in reducing
this fire waste, especially on the - part of the Federal
Government. But, regardless of good intentions, the fire
problem in the United States will not be brought under
control until there is recognition of the basic problems
involved.
There are aberrations in the field of fire science today
that play a large part in our failure to bring fire under
control, and until these aberrations are recognized and
corrected fire will successfully withstand our attacks.
The present fire protection situation could be likened to
the status of medical science before the discovery of
microbes. So long as the true cause of certain illnesses
were unknown efforts to cure the illnesses were doomed
to failure. In fact, we now know that some of the pre-
sumed cures for mans ills, based on faulty assumptions,
were actually harmful. It is interesting to note, too,
incidently, that the greatest resistance to the findings of
the early microbe hunters was mounted by the medical
profession itself.
One of the more serious aberrations of fire science today
is the preference for subdivision of a fire risk rather than
elimination or cure of the fire risk.
But perhaps I am getting ahead of the story at this point.
To explain the difference between solving a fire problem
as opposed to dividing it into small parts it is necessary
to start with insurance concepts because fire science as
we know it today, is a byproduct of the fire insurance
industry.
Insurance is a system of making profits based on finan-
cial science. It is predicated on an ability to predict loss-
es with reasonable accuracy. To accomplish this, detailed
loss records are maintained and insurance rates are deter-
mined by statistical analyses.
Profits are assured provided the statistical analyses are
accurate, the spread of risk is large (large number of
similar insured items) and there are no unforseen cata-
strophic exposures to upset the acturarial evaluations.
The validity of this system is not dependent upon the
insured properties being "good" risks. For example, a
successful life insurance business is not dependent upon
an average age at death of 65. The life insurance concept
would be equally valid if the average age at death was
50, or 40, or even 25. All that is needed is that the
acturarial table that determines the premiums be accu-
rately keyed to the TRUE LIFE EXPECTANCY.
Many people have the mistaken impression that a fire
insurance organization must prevent losses to achieve
profits. As a general rule this is not true. As a matter of
fact, high loss business that is predictable is very profit-
able business. A high ratio of losses means that insurance
rates will be high and this in turn means that the total
cash flow thru the insurance system will be great. The
profit from a high cash flow will usually be much greater
than from a low cash flow. For example, a $3.00 fire
rate applied against ten billion dollars of insured risk is
three hundred million dollars in premiums. But a 5 cent
rate applied against the same base is only five million in
premiums. If we assume a 10% profit on premiums, in
the first instance the profits are thirty million and in the
second a relatively poor $500,000.00. Further, the aver-
age loss will be paid at least six months later than the
premium is collected. This means premiums are available
for investment for six months on the average, and often
under a different designation for much longer periods.
High insurance rates and high premium costs produce
very large sums of money for investment. In short, the
backbone of the insurance industry IS LOSS. Without
loss the insurance industry would cease to exist.
(Incidently, fire insurance rates DO vary from. five cents
up to five dollars and more.)
It is clear from the above that a high rate of loss actually
is more profitable to an insurer than a low rate, provided
the rating accurately fits the situation. There are excep-
tions, however. A gradually increasing loss ratio is bad
for the insurer when he is unable to adjust rates prompt-
ly. When he is basing his rates on last years experience,
and paying on this years losses, he is in trouble if losses
are increasing.
Also, a loss ratio that produces rates so high that the
average person or organization is unable to buy insur-
ance is undesirable. Generally, however, it is an extreme
condition that prices insurance out of the market.
Another bad situation, from the insurance viewpoint, is
the potential for catastrophic loss. Note that a cata-
strophic loss such as an earthquake, flood, tidal wave or
war is not subject to satisfactory actuarial analysis and
rate adjustment. The frequency and the consequences of
such events are not clearly predicatable. Coverage for
such events can move out of the certainty of insurance
financing into the area of true risk taking which the
insurance industry considers to be gambling.
Summarizing, from an insurance profit taking viewpoint
loss is bad:
A —If it is excessive to the point of pricing insur-
ance out of the market.
B —If it is increasing and proper rate adjustments
cannot be made in time.
C — Where it is of catastrophic nature.
Otherwise loss is advantageous to the insurance industry.
As a general rule, the insurance industry solves its prob-
lems thru financial or legal means. If losses increase,
rates are adjusted accordingly. This is a financial or actu-
arial solution. Where there is a catastrophic potential, a
moral risk, or other risk that cannot be covered within
the framework of the law of averages, legal solutions are
sought. This means that the insurance contract is written
so as to exclude the risk or limit the liability for any one
loss. Thru carefully worded policies or other means an
insurer attempts to eliminate all catastrophic loss po-
tential because systematic funding for a catastrophe
usually is impractical.
Not all insurance risk problems are solvable thru actu-
arial and legal means however. For example, in the later
part of the 19th. century, with the industrial revolution
in full swing, factories became so large that they repre-
sented a catastrophic exposure to insurers. The settle-
ment of one loss could very adversely effect an insurers
profit picture. In other words, one major loss could eat
up the profits from insuring thousands of small proper-
ties. The volume (number) of large plants was inade-
quate for full application of the law of averages. Also,
the hazards were multiplying as electricity, flammable
liquids, chemicals, and machinery increased in use and
complexity. Factories were burning down at an EXCES-
SIVE FREQUENCY. But — the potential profits were so
great that insurers did not wish to abandon the industrial
market.
Another problem the insurers faced was the conflagra-
tion menace. During the 18th. and 19th. centuries entire
cities burned. When any one building within a communi-
ty was insured it was on the assumption it would burn
individually. Conflagrations definately upset the ac-
tunes.
Note that the factory fire and the urban conflagration
were not serious problems to the insurer for the simple
reason they were fires — fires are the business of the
insurer — they were serious problems to the insurer be-
cause they fell OUTSIDE THE SCOPE OF THE INSUR-
ANCE SYSTEM. They represented a disruption of the
actuarial tables.
Gradually, over a period of many years, two broad ave-
nues for resolving these catastrophic fire problems
evolved.
One solution was to reduce or eliminate the fire poten-
tial. Fire prevention practices and sprinkler protection
are examples. This reduced the number of large indus-
trial fires that were disruptive to the system.
The second solution was the subdividing of large fire risks
into small fire risks.
For example, codes that require each building to have
exterior fireproof (masonry) walls prevented the urban
fire from spreading from building to building, and there-
fore prevented major conflagrations. Note that this sec-
- 2-
ond solution does little to control th ;ire hazard within
the individual unit. What it does do is to make each unit
a fire entity. Buildings burn individually, but do not
initiate conflagrations. This puts the law of average back
into insuring the urban risk.
The concept of subdivision of the fire risk also works
well (for the insurer) when applied to factories. Dividing
a large plant into many small units with fireproof con-
struction results in a containment of the fire and there-
fore a limitation of the amount subject to loss. Thru
subdivision a large (catastrophic) risk can be divided into
small risks that fall within the insuring system.
Now note that these two fire protection concepts,
sprinklers and prevention on the one hand, and fire resis-
tive construction and containment on the other hand,
produce siginificantly different results.
From the fire insurance viewpoint, subidvision of risk
usually is more profitable than elimination of loss poten-
tial, for two reasons. First, the reduction of loss poten-
tial thru the application of sprinkler protection reduces
the insurance rate, and this reduces the total cash flow
and retention. Subdivision of risk, on the other hand,
often will increase cash flow rather than decrease it.
Four 50,000 square foot buildings can have the same
high "unprotected" fire rate as one 200,000 square foot
building. Therefore, dividing a big property into small
properties can accomplish the purpose of the insurer; to
reduce risks to a size that can be handled by the insur-
ance system without reducing the insurance rate and po-
tential cash flow. Actually, the cash flow is likely to be
increased because massive fire resistive construction and
subdivision of the building into many units greatly adds
to the cost of construction. Therefore the fire-rate is
applied against a higher base.
It is no wonder that fireproof construction, firewalls,
and excessive compartmentation have been built into
our fire technology far beyond reasonable levels.
On the other hand sprinkler systems have been artifically
priced to excessive levels. This is accomplished thru regu-
lations that call for huge and unnecessary water supplies,
a redundancy of equipment, the close spacing of small
orifice sprinklers where wide spacing of large orifice
sprinkler would suffice, inefficient distribution systems,
and many other costly items. Thus, a sprinkler system is
a fire solution that is usually reserved for the large plant
that cannot be adequately subdivided and that repre-
sents an excessive risk to the insurer. The artificially high
price of the sprinkler system makes it a seldom used tool
for the protection of the small building (which is not a
problem with the insurance system). The small property
is more profitable as a NON PROTECTED united within
the system.
For example, I once made a survey of a paint plant near
Philadelphia that was a typical example of the applica-
tion of the principal of subdivision in preference to risk
reduction thru sprinkler protection. The plant consisted
of approximately sixteen small buildings, each building
constructed of reinforced concrete walls and roof, each
separated from the other by distance. The entire layout
was planned with the help of the insurance broker and
insurer. Although the facility adjoined a steam contain-
ing many times the quantity of water that was realisti-
cally needed to control a fire, the owner was advised
that sprinklers would be too costly. However, the solution
developed, in terms of total cost going in, was undoubtly
far in excess of the cost of sprinklers (even when grossly
overpriced) because the Irinuinerable exterior fire resis-
tive walls for the many small units represented an ex-
tremely expensive way to build a plant. This also, of
course, added to maintenance cost, heating bills, and
plant inefficiency, as well as to the tax rate. The prob-
ability of fire was not decreased, in fact it might have
been slightly increased; but the amount of any one loss
was well within the Insurance system limits. Because the
plant was a straight line production operation loss of one
unit could result in business interruption and loss of
sales (which were only partially insured). Thus, although
the solution was an excellent solution from an insurance
company and insurance broker viewpoint, the owner was
subjected to excessive costs and did not receive a satis-
factory solution to his own fire problem.
This is a typical type of fire protection solution which
emphasizes sub-division, compartmentation and exces-
sively costly constructions; and ignores the potential of
automatic fire suppression.
The fire insurance industry, to date, has been the main
motivating force behind the development of loss preven-
tion techniques, fire protection standards, and building
codes. A study of loss prevention, as it has evolved, will
demonstrate that the development of loss prevention has
been consistent with the needs of the fire insurer. That
is, loss prevention techniques have developed to prevent
the losses that hurt the fire insurance business; but there
has been little progress in loss prevention with respect to
the type of losses that do not hurt the industry (and in
fact may help the industry).
I do not..imply here . that there has been an intentional
effort on the part of the fire insurers to create an infer-
ior loss prevention technology. Undoubtly the vast ma-
jority of insurance executives and insurance engineers
are sincere in their effort and desires for safety. How-
ever, there is very little accomplished in this world that
is not the result of economic motivation. While the fire
insurance industry talks loss prevention in total, in real-
ity the problems that have received funding for research
and have received the attention of the engineers are
those problems that hurt insurance companies, and there
has been little researching of systems that could greatly
reduce the fire problem for ALL properties.
Thus, loss prevention technology has been strongly moti-
vated in the following directions:
A —Control of the runaway loss situations.
B — Bringing risks that fall outside of the insurance
system back into the system.
C —Protecting major properties that represent an
excessive loss potential.
Restaurants are a good example of loss control efforts
essentially aimed ONLY at the runaway loss potential.
Restaurants have a variety of fire problems virtually all
of which could be solved inexpensively and with a very
high degree of reliability. Yet, there has never been an
effort made to develop a practical fire system to virtu-
ally eliminate the fire problem in restaurants. Instead,
fire control efforts are primarily aimed at the hoods,
ducts and deep fat fryers, which today represent less
than 20% of the restaurants fires. Thus, having brought
the runaway loss potential (hood and ducts) under ade-
quate — but not good — control the then remaining 80%
of the total fire problem is very largely ingnored. The
result is high insurance rates, high cash flow, predicable
losses, and high profits.
The one family dwelling is an example of the type of
property that falls within the system with no special
protection requirements at all. The one family dwelling
fits all of the basic requirements for the insuring system.
Individually it has a low value and is reasonably homo-
geneous. Dwellings burn individually and randomly. It is
possible to eliminate catastrophic loss potentials such as
earthquake, flood, tidal wave, and war risks by writing
them out of the insuring contract. As a consequence, the
one family dwelling has been all but ignored by fire
science. The almost complete abandonment of the single
family dwelling as a subject for fire protection research
and studies is a primary reason for the fact that more
than half of the people who are killed by fire each year
die in fires in the home, and for the fact that almost
one-third of our annual dollar fire loss in buildings is
from fires in the home.
Another cruel aberration of fire science is the carry over
of the preference for subdividing properties (rather than
solving the basic fire problem) into the area of life safe-
ty. The compartmentation concept (which is subdivision
carried to an extreme degree) became the PRIMARY
method of protecting life in hospitals, nursing homes,
institutional buildings and similar properties.
This has happened in spite of the fact that a rational
analysis of the compartmentation plan for life safety will
reveal it as a somewhat incredulous scheme (see Patton
Reports 10, 11, 12, 13). This aberration is also the un-
derlying cause of our present problems with the high rise
building.
Another aberration of protection is that sometimes pro-
tection costs are unrealistically high as a deterant to the
construction of facilites of a nature that are considered
undesirable. Sprinkler and water supply requirements,
roof venting requirements and many other requirements
that were developed as a presumed fire protection solu-
tion for high storage arrangements (in excess of 20 or 25
ft.) actually discourge the construction of very high stor-
age facilities. Some of the requirements were imposed
with no evidence to support their need; the test data
that clearly points to far less costly ways of designing
protection have been ignored.
The lock-in on insurance concepts of fire safety is very
strong. Insurance philosophies have found their way into
building codes and Federal, state and local laws. Insur-
ance testing laboratories have been established to "ap-
prove" fire protection equipment. The decision of the
insurance testing laboratories have generally had the
backing and full weight of legal authorities. Thus, a fail-
ure to conform to insurance standards will result in a
manufacturer being denied access to a market for his
products.
New equipment representing better fire protection is
very often "locked out" of the market.
Legal authorities frequently require approval by insur-
ance companies before legal approvals are granted. For
example, almost invariably sprinkler drawings must be
approved by an insurer before a legal entity (Fire_pe-
partment, Building Authority) will approve the sprinkler
design.
Finally, thru state tire Rating Bureaus, backed by state
regulation, the insurance industry is able to mold protec-
tion concepts to meet their own specific needs thru in-
surance rate penalties levied against the non compliers.
All of this provides one private industry with a unique
and extremely powerful ability to REGULATE ALL
OTHER PRIVATE INDUSTRIES. This ability to regu-
late other industries — legally as well as insurance rate
wise — is not confined to insurance matters. To a large
degree insurers decide how buildings will be constructed.
It is a tortous path indeed, but for those who wish to
trace it there is a direct path from the insurance concept
of "subdivision of risk," thru various standards and
codes, to the "winged design" of hospitals (a fireproof
corridor running down the center of the wing and the
fireproof rooms off the corridor). This "winged" con-
cept of building design for hospitals may be adding 20%
to the construction cost, which is reflected in patient
care costs; and in addition it is a generally poor fire
protection plan.
It will not be easy at this time to break loose from the
tight confines of our existing fire protection technology,
but we will not make a significant reduction in our an-
nual fire losses until we do. And, there are some good
reasons to believe that we have a better chance for
change today, then previously. These are the reasons.
1. With multiple line insurers and packaged policies
coming into the picture today, fire insurance is but a
piece of the overall program. Insurers are becoming
more concerned about the human life catastrophic po-
tential in buildings (under the workman's compensation
and liability covers). They are beginning to realize that
what was good for the old line fire insurer, with his
narrow interests and limited liability, is not good for the
modern multiple peril insurer who could become in-
volved in a twenty million dollar law suit in a compart-
mented fireproof building where a fire that causes per-
haps twenty thousand dollars in property damage could
readily kill 200 occupants.
2. The fire services are becoming strongly involved in
the technical aspects of fire protection and these men
are no longer fooled by "fireproof" labels and technical
jargon. There is no group more serious about develop-
ing good fire protection than the fire services.
3. Building code officials are no longer content to
"follow the book." They want practical solutions and
real fire safety.
4. It is still slow, but there are signs that American
industry is beginning to wake up to the realities of fire
protection.
5. The Federal Government appears on the verge of
initiating new research programs on fire safety (lets hope
they are innovative and don't follow past patterns of fire
protection).
Richard M. Patton, President
PATTON FIRE PROTECTION &I RESEARCH, INC.
647 Colts Neck Road
Freehold, N. 3.07728