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How to Determine a Maximum Loss Estimates (MLE) for Property Damage

Updated on July 12, 2015
Randi Glazer profile image

Randi Glazer is a Sr. Insurance Professional with experience underwriting, marketing, organizational leadership & managing large staff

Property Damage with Maximum Loss Estimates

Buildings of ordinary frame or joisted masonry construction without standard fire walls are considered total loss possibilities (100%) and must be underwritten within a Normal Company Retention determined for the occupancy as the maximum retention. Contents lines within a single building regardless of construction should not be underwritten on the basis of a Maximum Loss Estimate (MLE) except in ISO Class 5 (Modified Fire Resistive) and Class 6 (Fire Resistive) buildings which have approved vertical or horizontal cutoffs.

Certain risks or groups which are 'technically' 100% subject are not considered total fire loss possibilities because of superior construction features, separation, approved vertical and horizontal cutoffs and have a relatively light and well-distributed fire load.

In order to recognize the reduced loss expectation these risks are written on the basis of a Maximum Loss Estimate (MLE), which is defined as:

"The largest dollar loss to be expected in any one loss under adverse circumstances, but not under catastrophic conditions, expressed as a percentage of the total values at risk .''

What are considered Catastrophic conditions for MLE Underwriting?

Catastrophic conditions are those which are possible, but for which the loss to an individual risk cannot be estimated except by treating every risk as a total loss possibility. Examples of catastrophic conditions are as follows:

1. Conflagration of forest, brush-land or city blocks.

2. Tornadoes or other disastrous windstorms.

3. An aircraft crash resulting In total structural damage to a fire-resistive building or group of buildings.

4. Concerted riotous attack together with a deliberate hampering of fire fighting activity.

5. Multiple origin arson fires designed to overcome structural features and protective safeguards.

What are considered Adverse Circumstances for MLE underwriting?

Adverse circumstances are conditions that are not normally present, but are predictably certain to have a negative effect on the amount of loss. Examples of adverse circumstances include:

1. Winter storms with snow and severe cold.

2. Fire department strike.

3. Public water supply failure.

Maximum Loss Estimate vs. Probable Maximum Loss

The term Maximum Loss Estimate (MLE) should not be confused with Probable Maximum Loss (PML), Normal Loss Expectancy (NLE) or any other term which relates to the probability of the extent of fire loss in an occupancy. "Probability" is recognized in the Normal Company Retention as determined through the Risk Hazard/Risk Class assigned by the Company and/or underwriter. To the extent the "probable loss" contemplated by the Normal Company Retention is considered unrealistically high or low because of Individual risk conditions, correction could be made through a change in the Risk Hazard/Class. The Maximum Loss Estimate must be established with full recognition of the outer limits of possible loss without regard to the usual "probability" considerations, or catastrophic conditions.

Types of Risks where Maximum Loss Estimate Underwriting can be used

The following risks may/can be underwritten on the basis of a Maximum Loss Estimate (MLE) when there is adequate insurance to value, and in the judgment of the underwriter, a total loss cannot reasonably be expected.

NOTE: A vertical wall creates a horizontal cutoff, a horizontal floor creates vertical cutoff.

1. ISO Class 5 or 6 buildings exceeding one story in height with approved vertical cutoffs or such buildings with approved cutoffs creating standard fire divisions.

2. Other buildings of any height with horizontal cutoffs which create standard fire divisions when it is considered that the fire resistance of the division walls will confine a general fire.

3. Contents lines in ISO Class 5 or 6 buildings with measurable distribution over two or more water resistant floors with vertical cutoffs or contents lines in all construction classes contained in horizontal subdivisions created by approved fire walls.

4. A group of buildings, their contents, or property in the open, physically separated by clear space when subject to fire spread from one to the other within the group, but loss of the entire group cannot be expected.

5. Time Element lines when earning are distributed over more than one floor or fire division of risks qualifying in items 1-4 above.

Maximum Loss Estimates should be based on the largest area of possible of fire involvement with recognition of attendant heat, smoke and water damage beyond the area in which it is expected that a fire would be contained. It is not expected that Maximum Loss Estimates (MLE) will be exceeded in any fire occurrence. Occasionally, the "probability" built into the Normal Company Retention may be exceeded, but Maximum Loss Estimates (MLE) must be established on a basis that would include the worst fire loss which could be expected (except under catastrophic conditions as noted above).

Basic Maximum Loss Estimate Considerations

A specific guide for the establishment of Maximum Loss Estimates (MLE) cannot be given because individual risks differ considerably even when they are of similar construction and occupancy. The following basic considerations should be included in any Maximum Loss Estimate analysis.

1. A full Fire Underwriting Analysis and assignment of Risk Hazard/Risk Class - without regard to any reduced loss expectation. This should include a thorough analysis of each fire division.

2. Analysis of those buildings which include approved vertical or horizontal cutoffs, the identification of those portions of the building or fire division with the highest combination of area, value and hazards.

3. Analysis of the occupancy to determine the possible effect of a general fire within the building, to include the identification of explosion or flash fire possibilities and a determination of the combustibility of the contents and the approximate total fire load. The existence of combustible liquids, which can flow under fire doors and down stairways and elevator shafts, must be considered/evaluated.

4. Analysis of the structure and its fire resistance, relating the protection of structural members to the combustibility of the contents and the total fuel as determined above. This will also include a judgment as to the effectiveness of horizontal and vertical cutoffs, watertight floors, smoke barriers and other possibilities of fire, smoke or water communication. If cutoffs are dependent on fire doors, they must never be blocked open.

5. A consideration of all possible adverse circumstances which are common to most risks as well as those circumstances that might be inherent in the individual risk being analyzed. For example, the possibility of delayed fire discovery, report, response, and setting up of fire fighting equipment is possible for most risks. Difficult access or other fire fighting location problems are probable for many risks, and severe weather conditions, such as freezing or high winds, may be expected for risks in certain geographic locations.

6. High rise office or apartment towers present special problems. Fire Department access is limited to interior stairways above the 10th floor due to the limitations of even the most modern fire fighting equipment. Intense fires in glass-faced buildings may communicate externally despite standard floor cutoffs.

7. Analysis of public and private protection available at the site. Although public protection is recognized in the Normal Company Retentions, it may also be given some recognition in the determination of Maximum Loss Estimate. Even after recognition of delayed discovery, report and response to a fire, and allowing for difficulties which might be encountered at the scene of the fire before the Fire Department can be fully effective, it is expected that for fully fire-resistive risks, with a light or moderate fire load, the Fire Department will aid in controlling and extinguishing a fire short of a total loss.

Fire Resistive Buildings (ISO Class 6 Structures)

It is recognized that for many fire-resistive risks, structural damage will not be expected when there is a light occupancy and well protected structural components; however, a substantial dollar loss may be incurred because of damage to building service equipment, interior décor and the cost of cleaning, painting and other redecorating. Because repair costs greatly exceed original construction costs, Maximum Loss Estimates must be established on a conservative basis. Even without structural damage, the cost of rehabilitating a burned out floor of a fire resistive building can far exceed, in terms of a dollar loss, the percentage of the total amount of insurance produced by relating the area of possible fire involvement to the total area of the building.

Fire-resistive buildings which are spread out horizontally present a more difficult problem of estimating the extent of fire loss. Three or four-story hospitals composed of several wings are the most common examples of this type of construction. In these cases, the underwriter should look to the wing, or part of the building, containing the heaviest fire load and highest concentration of value (such as the service, surgical, diagnostic or laboratory occupancy) as the base in determination of a loss estimate. From this focal area, the possible extent of fire communication must be determined. This total area of possible fire Involvement, again considered in terms of dollar loss, would be the basis of the Maximum Loss Estimate percentage.

Maximum Loss Estimate for an Individual Risk

In determining the Maximum Loss Estimate (MLE) for an individual risk, an underwriter must consider all conditions which could influence the extent of fire loss. For example, in underwriting a qualifying ISO Class 5 building with lightly protected (at least 1, but less than 2 hours) structural components, containing a heavy fire load, with poor access, and where a fire could be well underway before discovery, it must be recognized that report to and response by the fire department could be further delayed and hampered by adverse weather conditions. In the situation described, a total loss to building and contents may well be expected, and therefore no MLE factor should be applied.

In this scenario the Total Insured Values (TIV) = the Maximum Loss Estimate (MLE).

Maximum Loss Estimate for a Group of Buildings

For a group of buildings, whether separated by space or fire walls, the judgment process is similar to that of an individual building. Size and relative values in each building must be considered. Fire department accessibility problems are different than in a vertical high-rise situation, but just as critical. The area of fire involvement can potentially spread in all directions horizontally, not just up or down. as a starting point for moderately close (up to 20 feet) joisted masonry buildings, with ordinary windows or shared fire walls and under fire protection grades 1-6, a reasonable presumption is that 2 out of 3 buildings can become involved under adverse circumstances.

Large groups will usually be proportionately vulnerable (6 of 10, 20 of 30) or worse due to the ability of the fire to spread in several directions at once. The result is a fire of near-conflagration proportions that becomes progressively more difficult to control. Unlike a high-rise where size can be an underwriting advantage, additional buildings in a group will usually increase the percentage estimate of loss.

Time Element Coverages and Maximum Loss Estimates

While the same basic construction/configuration requirements apply to both time element and property damage coverages, Maximum Loss Estimates (MLE) for time element coverages must be considered independently of any estimate for property damage. Risks underwritten and utilizing an MLE factor for building and contents will often carry a higher time element loss estimate because a serious fire can cause a total loss of interior furnishings and essential equipment producing a time element loss greater than that estimated for direct property damage. The underwriter must select the critical area or process most likely to result in major interruption of operations and estimate the length of time the business might be interrupted from a serious fire involving the selected area or process. This focal point may not necessarily be the same area of possible fire involvement estimated for the property damage MLE.

Related Topic - Amount Subject

Amount subject is the total dollar amount that is exposed to loss in a single occurrence, regardless of the number of structures involved. The structures which are involved in developing the amount subject are often referred to as "being subject."

Amount subject and being subject are terms commonly used in the process of determining the company retention for a single structure or when multiple structures expose one another. For example: for an unexposed fire resistive 10 story building with a limit of $10,000,000 at 90% coinsurance, the amount subject is $10,000,000. For two or more buildings that can be involved, not necessarily totally, in a single occurrence, the combined limits determine the amount subject. 100% values are used if these buildings are written on a blanket basis.

Caution when using MLE Underwriting

When using an MLE factor to increase Company retentions it is imperative to do as much underwriting as possible prior to your determination. Having a current Loss Control/Engineering report is a must. Evaluating any prior claims/claims history on the risk also can assist in the MLE determination. If after all the analysis and investigation the underwriter is unsure of using an MLE factor then it might be best to not employ one.

© 2015 Randi Glazer

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