Deepening Drought Highlights Fire Risks for Commercial Operations

Can your business rise from the ashes?

Clayton Ellary

With drought conditions deepening in South Africa, fire risks increase, demanding more stringent fire risk mitigation and planning. A recent review of commercial fire claims and business shutdowns by authorities due to non-compliance with regulations suggests that business operators are not heeding this call seriously enough.

According to Clayton Ellary, a Senior Account Executive at Aon South Africa, fire is an underrated risk, particularly in South Africa. “Failure to comply with the statutory requirements and codes of practice for fire protection can leave business stakeholders in severe financial crisis and with potential legal implications. The costs arising out of the loss of life, assets and business interruption can amount to millions of Rand in damages and liability claims. Despite the risk to business continuity, financial security and brand reputation, many business owners remain indifferent to the domino effect that a fire poses to their business sustainability,” says Ellary.

A comprehensive fire prevention strategy linked to an insurance program that fully addresses the needs of a business is critical. “A clear description of a business and its operational environment is central to the drafting of a well-conceived insurance schedule as the type of materials that are kept on the premises greatly affect the associated fire risks. A comprehensive fire risk assessment will greatly aid in identifying fire hazards and reduce the risk, in addition to determining what physical precautions and management processes should be in place. It’s also very important to have an accurate assessment of the replacement costs of buildings, contents, vehicles, IT, stock and other assets, particularly in the event of a catastrophic loss,” says Ellary. 

The consequential costs of fire are underestimated. “Damage to the structure of the building is one thing, but a fire often damages contents such as raw materials, machinery and completed stock awaiting delivery. It disrupts the entire distribution chain and has far reaching consequences for your clients, who may have to source alternative suppliers if you’re unable to deliver on time,” Ellary illustrates.

The Business Interruption (BI) aspects of fire need careful consideration. It is crucial to ask the right questions such as how long it would take to get the business up and fully operational if the building burns to the ground? How do you cover staff salaries and overhead costs while the business is not generating income? How does a business replace raw materials, stock and completed orders that were damaged or destroyed in a fire? What associated costs will be incurred for keeping, maintaining and recovering your market share after a catastrophic event? 

“With the assistance of professional partners, Aon assists clients with practical knowledge of building codes, fire codes as promoted by various specialist bodies, as well as knowledge of construction materials, manufacturing processes and storage practices and the relevant hazards involved therein. By linking this to an aligned insurance program that covers virtually all the what if scenarios of not only the physical damage but the knock-on implications for business continuity, clients get to experience the real value of a comprehensive fire risk analysis,” explains Clayton. 

It is of great importance to thoroughly interrogate the terms of business insurance covers, especially when it comes to fire risk. “Ensure that the premises are covered for the replacement cost of the building and that the contents and stock are stipulated and valuated on an annual basis. If the business makes use of specialised machinery, consider the cost of having to replace these items and the time delays if these items are imported, not to mention any import duty, taxes and fluctuating exchange rates. Also, consider hidden costs such as the demolition of the building, removal of rubble, engineering costs and the prospect of having to complete a geological report before any reconstruction work can commence,” says Ellary.

Remember to keep your insurer or broker informed of any additions or changes to the business, such as alterations or additions to the building, a change in processes or materials used in production and any other aspects that would have a material impact on the terms of cover for the business.

An experienced broker’s advice is invaluable when it comes to having the right insurance covers in place, both regarding assets protection and business interruption. “Underinsurance should be avoided at all costs otherwise the business stakeholders could find that the law of average will see them paid out significantly less than what the business premises and insured equipment is worth. It is recommended to have an independent professional valuation carried out on buildings, plant and machinery at least every three years, with plant and machinery considered from the perspective of fluctuating exchange rates and inflationary pressures on replacement costs,” concludes Ellary.