The expected maximum probable loss increases if the building is vacant. A vacant building is more vulnerable to destruction than a building that is occupied. When occupants are in the building, they are aware when something happens that could cause damage, and they do something about it. For instance, if a fire starts in a building that is occupied, the people get out and call the fire department. But if a fire starts in a vacant building, the fire could burn for a very long time and cause a lot of damage before anyone would notice and call the fire department.
The maximum probable loss (also called the probable maximum loss, or PML) is the largest loss that can occur under foreseeable circumstances. This is the largest amount of damage that is likely to occur in a very bad year. When we say that something is directly related to something else, it means they move in the same direction. When one thing increases, the other thing also increases; and when one thing decreases, the other thing also decreases. It is not accurate to say that the expected maximum probable loss to a commercial building increases as the size of the building increases. The larger the building is, the less probability there is that the maximum probable loss will occur. So even though the amount of the maximum probable loss may be greater for a large building than it is for a smaller building, the probability of that amount of loss occurring is much smaller for a large building than it is for a small building. When the probability of the maximum probable loss occurring is multiplied by the amount of the maximum probable loss, the expected maximum probable loss will generally be smaller for a large building than for a small building.
The complete destruction of the building and all of its contents is the definition of the maximum possible loss, not the definition of the maximum probable loss. The definition of the maximum probable loss is the largest loss that can occur under foreseeable circumstances, or the largest amount of damage that is likely to occur in a very bad year. Damage greater than the maximum probable loss could occur, but in the judgment of management, it is very unlikely to occur.
The maximum probable loss (also called the probable maximum loss, or PML) is the largest loss that can occur under foreseeable circumstances. This is the largest amount of damage that is likely to occur in a very bad year. The expected maximum probable loss is inversely related to the size of the building. When we say that something is inversely related to something else, it means that the two things move in opposite directions. When one thing increases, the other thing decreases, and when one thing decreases, the other thing increases. The larger a building is, the less probability there is that the largest loss that can occur under foreseeable circumstances will occur. So as the size of the building increases, the probability of maximum probable loss decreases. Even though the amount of the maximum probable loss may be greater for a large building than it is for a smaller building, the probability of that amount of loss occurring is much smaller for a large building than it is for a small building. When the probability of the maximum probable loss occurring is multiplied by the amount of the maximum probable loss, the expected maximum probable loss will generally be smaller for a large building than for a small building.
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