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Selling Risk Management.

Seton Hall University doesn't have a risk management program. The university has even given up offering courses for the ARM and CPCU examinations. But that doesn't mean it can't teach risk managers a valuable lesson or two. Unfortunately, proving that took a tragedy that made the network news. When a small fire struck Boland Hall, a dormitory on campus, all the fire protection systems performed precisely as intended. Still, three students died. The Seton Hall fire isn't really about property risk management, but it can teach risk managers an important lesson about selling the property loss control measures you know are needed.

Just a few days before fire swept the dormitory and only a few miles away, a candle factory had burned to the ground. Students living, in Boland Hall could easily see the smoke and hear the fire engines.

What the two properties shared was a fire protection system composed of automatic fire alarms and manually operated fire extinguishers. What the two fires made clear was that each building needed an automatic fire sprinkler system.

In each instance somebody had looked at the idea of fitting the buildings with sprinklers and rejected it. Both management teams had used the same reasoning, and neither saw the flaw in their logic until it was too late. The savings in fire insurance premiums for the proposed sprinkler systems were not enough to justify them, and the reduced fire insurance rate was the only factor in both decisions.

This scenario ought to sound familiar to any risk manager who has tried to convince higher management to install a sprinkler system or any other property loss-control measure. Conventional wisdom has always maintained that property loss control systems have to generate sufficient savings to pay back the investment in a relatively short period of time. The candle factory presented a high enough risk of loss by fire that a sprinkler system would have generated substantial savings in property insurance premiums. Because the business used insurance to finance all its losses, they didn't look past the reduction in property insurance premiums to make the decision. The premium savings weren't enough to pay for a sprinkler system in five years, so the number crunchers decided a sprinkler system was a poor investment.

At the time, it seemed hard to fault management for the decision because they had applied the same financial analysis as thousands of other businesses. Twenty-twenty hindsight, however, opened up a whole new vista, one that can give risk managers a valuable insight into effective techniques for selling property protection. While the fire was still burning, the owner of the candle factory admitted the error of his ways to a reporter. His comments give risk managers a clue to the magic word that can convince top management to install the property loss-control systems the risk manager knows the business needs. The factory owner would have paid for sprinklers at the drop of a hat, he said, if he had realized the potential for employee injury and loss of life in a fire. Fortunately, there wasn't even a serious injury at the candle factory, but realizing how lucky the business was sold the owner on the value of automatic fire sprinklers.

One of the principal advantages of sprinkler systems has nothing to do with property protection, but it can make a powerful argument when protecting property is your goal. The heaviest loss of life to fire in a building with sprinklers in the United States is one. Better yet, as Casey Stengel was fond of saying, "Youse can look it up." The National Fire Protection Association and the National Fire Sprinkler Association will both be more than happy to point you to the figures.

The moral of this story is that getting the property protection you know your business needs can be as simple as uttering a single mystical incantation, but you have to think outside the box. The magic word isn't property, it's liability.

Joseph F. Mangan is a consultant in Scotch Plains, N.J.
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Publication:Risk & Insurance
Date:Jun 1, 2000
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