Local governments are looking to the private sector to help fund city services, but some employers are being made to shoulder the burden.
By JOEL BERG, a freelance journalist and college professor
Scenario: MIDVALE, Mich.--The group of homeless men and women camping out behind the empty storefront on Main Street mostly disappeared during the day.
Though no one was quite sure where they went, residents and business owners knew their homeless brethren didn't stray far. The same group would reappear at night.Owners of the neighboring buildings began to worry. One called the police department, but an officer said City Hall had slashed the public safety budget by 25 percent. Patrols dropped from once a night to once every three nights.
Fears were realized one night when fire spread to four small businesses on Main Street. The fire started in a former sundries store, which was recently vacated after the owner retired and moved to Florida.
Flames spread quickly. They engulfed an adjacent nail salon, then a meat market, then a movie theater, and finally Elio's, a favorite pizzeria, before firefighters brought the blaze under control. Midvale resident Jason Biggs, who suffered from smoke inhalation, was brought to Midvale Medical Center for observation.
Investigators traced the fire's origin to a torch wielded to cut copper pipes, presumably to sell for scrap.
"I knew this would eventually happen," said Paul Ortiz, owner of the Just Scraps diner across the street. "It's a real shame because I don't know if every owner was insured for the loss. We're all struggling as it is in this economy."
City Councilman Joe Drape called for an investigation into the fire. "This should never have happened," he said. "If the fire department had kept open Ladder 6 on Seventh Street two blocks away, there would have been a lot less damage."
Ladder 6 was closed in February after the City Council voted to close one firehouse and ordered a two-week furlough of all nonessential municipal workers.
"We, as business owners, can't help but wonder what would have happened if the police had come around more often--or if the fire department had not closed its station in the neighborhood," said Manuel Ramirez, president of the Midvale Chamber of Commerce.
Local insurance adjusters estimated the businesses of that size were each insured for between $1 million and $3 million, with deductibles ranging from an estimated $10,000 to $50,000.
The fire is the first to destroy commercial property since the Midvale City Council last fall voted to levy fees for the use of city services to help close a budget deficit of $500,000.
The business owners who suffered losses in yesterday's fire, Ramirez said, would be billed $1,000 apiece to help pay for firefighters who responded at the scene.
The business owners, he said, have temporarily lost their livelihoods. Yet they will still be expected to pay property taxes, and are now going to be levied a separate out-of-pocket fee to pay for firefighters.
Biggs, too, is going to be charged $500 for his four-mile trip from Main Street to Midvale Medical.
"It's really all a bit much," Biggs said, in a telephone interview. "Municipal governments are tacking on all sorts of extra fees to pay for services. How does the community expect to grow when private businesses and residents are doubly taxed to pay for services."
Mayor John Gasp said there were no plans to rescind the extra fees for now, but if the economy improved, he would "revisit the issue."
Analysis: Midvale is a hypothetical scenario representing wherever struggling towns and cities are slashing funds for fire, police and other services, and businesses are facing growing risks, according to insurance executives.
Reductions in police officers and firefighters are among the most visible signs of municipal distress. Camden, N.J., for example, laid off about half its police force and one-third of its firefighters in January, before rehiring a small portion.
Smaller forces translate into slower response times, which can lead to higher losses from fire and theft, said Stephen Clarke, an assistant vice president in the commercial multiline division of Jersey City, N.J.-based ISO.
Even if firefighters respond as quickly, there may be fewer on the scene initially, hampering their ability to contain a fire.
The result may be more total losses or just more losses in general, Clarke said. "I guess we'll see. Certainly there's an expectation for a much higher potential."
Vacant and unfinished buildings add to the risks, Clarke said. Empty structures invite unwelcome activity. Copper wiring and pipes are particularly tempting targets, particularly in an era of higher commodity prices.
Thieves soon learn if and where the police are patrolling less frequently, which allows them to take more time--and more stuff.
Roads are another noticeable hazard, especially in areas hit by heavy storms this winter. The snow and ice have melted, but they are leaving behind potholes that some local governments may struggle to patch.
General deterioration, worsened by lack of funding in municipal budgets for repair and maintenance, increases the risk of bad accidents, said Andy Robinson, chief underwriting officer for C.V. Starr & Company (California), a subsidiary of New York-based Starr Companies.
"That's a huge issue," Robinson said.
Even without the occasional bump in the road, fleets are generating more losses, Robinson said. Financial strains from the slow economy have led companies to cut budgets for vehicle maintenance, driver training and loss control.
"These are typically small- to medium-sized businesses, and there's not a lot of available capital," Robinson said. "That really has more of a bearing on the potential for losses than anything else."
The upward pressure on premiums could grow as cities and states slap so-called "response fees" on people and businesses involved in accidents. Municipalities view the fees as an alternative to raising taxes, and they are usually passed on to insurers, said Loretta Worters, a spokesperson for the New York-based Insurance Information Institute.
Some state legislatures have moved to ban the fees, and they are now illegal in 10 states, Worters said. But where the fees remain legal, insurers may boost automobile premiums to cover the added expense.
The less-visible impacts of financial distress include cutbacks in municipal services such as permitting and safety inspections, insurance executives said.
If fewer investigators are combing through restaurants, construction sites and other businesses, then accidents and other mishaps are more likely.
Several high-profile construction accidents have been traced to a shortage of inspectors, Robinson said. The same can be said of food-borne illnesses linked to restaurants.
"The less oversight you have, the higher the likelihood that you will have the potential for claims," Robinson said.
Even harder to see--until it breaks--is the infrastructure below the surface, such as pipes carrying gas, water and wastewater.
"Some of the gas lines and the water lines are very old and quite expensive to update," said Susan Kostro, a senior vice president and head of the public entity group at insurer Ironshore. Ownership may be public or private, she added. But, she said, "Certainly budgetary constraints can cause delays in updates to the hidden infrastructure that we're not really seeing."
Ruptures can be catastrophic, as was the case with a natural gas pipeline that exploded in 2010 in San Bruno, Calif. The blast and fire that followed killed eight people and leveled more than 30 houses.
Broken water mains cause less severe damage, Kostro said. But they're still hard to ignore. "Most companies can't stay open if there's no water all day," she said.
For businesses, the cumulative impact is likely to be higher insurance premiums, according to insurance executives. But companies can avoid losses by beefing up their risk management practices.
Building owners, for example, can make sure their properties are well-lit and ask employees to keep an eye out for suspicious activity, especially if there are empty structures nearby, said Clarke, the ISO executive.
Caution may not help companies predict where the next pothole will surface or when a pipe will burst. But they can come up with plans to ride out either situation. They may need to find new delivery routes or learn to live without flushing toilets for an extended period, Clarke said, noting that one town recently shut its wastewater treatment plant for 48 hours.
"You need those plans in place beforehand so should something happen, you can put that plan into place pretty quickly," Clarke said of a business operating contingency plan. "Of course, in addition to just having the plan, you have to test it. You have to make sure it's going to work."
Proper vehicle maintenance also is crucial, even if companies are inclined to cut back, Clarke said. Tires weakened after hitting a pothole should be replaced before they blow out. If not, he added, "You end up playing Russian roulette with your property."
Other vehicles may pose as much danger as the road itself. The sluggish economy has led to a spike in questionable and fraudulent accident claims, Clarke said. Post-accident investigations can eat up time and money for businesses ensnared in someone else's scheme.
Companies can emphasize defensive driving in their training programs, he said. And they can equip commercial drivers with crash kits stocked with disposable cameras, voice recorders, safety vests and a checklist of steps to follow after an accident, which can aid in the investigation and claims settlement.
"It's not a time to put your guard down," Clarke said. "It's a time to maybe refocus on the importance of risk management in the climate of heightened exposure that we have today."
(Read our emerging risk extra feature, 10 more emerging risks delivering unanticipated outcomes.)
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