How can you ensure your business is covered correctly for fire?

Recent wildfires in Los Angeles have starkly highlighted the devastating impact of fire on communities, businesses, and properties, with insurance industry losses estimated to exceed $30 billion.¹  While the UK faces different climate-related challenges such as major flooding events, storms and heatwaves, fire risk remains a significant concern for business insurance worldwide.

Regulatory changes, evolving insurer requirements, and the complexities of a hard insurance market make it critical for businesses to adopt a proactive approach to managing fire risk effectively.

In this article, we explore how to ensure your business is properly protected in the event of a fire. We’ll also discuss how to navigate upcoming changes in the risk landscape and how we can continue to support you every step of the way.

Key takeaways

1. Proactive fire risk management: Businesses must adopt a proactive approach to fire risk, ensuring accurate information disclosure and compliance with insurer requirements to avoid claim repudiations.
2. Hard market navigation: Higher premiums and stricter policy interpretations in the current hard market make broker collaboration and regular reviews essential for securing adequate coverage.
3. Regulatory compliance: Staying updated on evolving fire safety regulations is vital for meeting legal obligations and maintaining effective risk management strategies.

The hard insurance market: challenges for businesses

The current hard insurance market has created a more restrictive environment for obtaining coverage. Insurers’ appetite for underwriting higher-risk assets has reduced, resulting in higher premiums, reduced limits of indemnity, and narrower coverage options.

This trend also increases the likelihood of claims being rejected, as insurers now interpret policy wordings more strictly. To navigate this, businesses should maintain regular contact with their brokers, stay informed about market trends, and take steps to mitigate emerging risks.

Key areas where businesses must disclose fire risks

In the context of business insurance, accurately presenting fire risks is crucial. Insurers require detailed disclosures across four critical areas:

1. Construction: Materials and design features that impact combustibility must be clearly described. The Grenfell tower fire has heightened scrutiny, particularly around features like compartmentation and insulation materials. Detailed surveys or reinstatement valuations should capture this information.

2. Occupation: Businesses must provide accurate details of their activities, especially in industrial or commercial spaces. High-risk activities like hot works, waste handling, or storage of flammable materials significantly affect risk assessments. Regular inspections are key to ensuring activities align with declared use.

3. Protection: Fire safety measures, such as alarms, sprinklers, and emergency protocols, must be fully operational and regularly tested. Insurers will expect an accurate appraisal of these protections at renewal.

4. Exposures: The rebuilding cost of properties is often underestimated, leading to underinsurance. Declaring appropriate reinstatement costs, factoring in rising material and labour prices, is essential to avoid penalties under the average clause.

‘Fair presentation’

Failing to make a ‘fair presentation of the risk’ is one of the most common reasons for claim repudiation in business insurance. This requirement obligates businesses to disclose all material facts that might influence an insurer’s decision to provide coverage. The duty applies throughout the policy term, including at renewal.

Businesses should collaborate closely with their brokers to ensure all relevant information is captured and presented effectively.

Regulatory changes: how your business has a responsibility to keep up to date

The regulatory landscape in the UK is evolving significantly following Grenfell, with legislation like the Fire Safety Act 2021 and updates to the Building Safety Act having already come into force in October 2023.² These changes aim to enhance accountability and improve fire safety standards, particularly in high-risk properties.

The Building Safety Act introduces new requirements for residential and mixed-use buildings, including appointing an accountable person to manage fire safety. While this directly affects residential buildings, commercial properties must also adhere to stricter fire safety obligations under health and safety legislation.

As your adviser, NFP will be on hand to help pinpoint where these changes may apply to your business.

Post-renewal compliance: mitigating business risks

The work to protect your business shouldn’t stop at policy renewal. Ongoing policy compliance is critical to avoiding claim repudiations. Businesses should focus on:

• Fire safety protocols: Regularly updating fire risk assessments, ensuring fire safety systems are maintained, and conducting staff training.
• Tenant and contractor management: Implementing procedures for managing changes in tenants and refurbishment projects, particularly those involving high-risk activities like hot works.
• Ongoing monitoring: Maintaining accurate records of inspections, safety measures, and compliance activities to provide evidence if required by insurers.

Learning from global events

While the UK is not prone to wildfires like those in Los Angeles, these events underscore the importance of preparedness and risk mitigation. Businesses must evaluate their own fire risks, taking into account local factors such as building design, tenant activities, and regulatory requirements.

The impact of such events highlights the growing risk faced by cities worldwide from major climate disasters like flooding, earthquakes and wildfires. Such challenges are driving up costs and contributing to higher levels of claim repudiation amid hard market conditions. Now more than ever, it is crucial for policyholders to disclose and accurately present all risks while implementing robust safety measures to minimise potential damage and meet insurer requirements.