Editor’s Note: This is the first article in a two-part series that identifies and addresses insurance risks to the recycling industry. Perspectives shared in this article are from the recycling insurance practice of Commercial Insurance Associates (CIA), Nashville, Tennessee.
During the last five years, incidences of insured and uninsured fire losses in all sectors of the recycling industry have increased dramatically. The monetary impact of these losses has had a material impact on the property and casualty insurance industry. As a result, insurance companies are further restricting or not writing risks in the recycling industry, causing a reduction in the terms of coverage offered and significantly increasing price.
Simply put, the issue is claims. Both the number and severity of claims within the recycling industry have been so adverse during the last four years that the availability of coverage at any price has been a real challenge to the industry and the insurance professionals seeking to provide coverage.
The restricted list
Historically, property insurers were attracted to the recycling industry because premiums had been relatively large as was capacity to bear risk. However, in the past 10 years, insurance companies have invested in data analytics, which have revealed the industries and occupancy types that have performed poorly. The insured and uninsured losses to the recycling industry place it in the lowest decile of industry groups by performance. Driven by this data, insurance companies have placed the recycling industry on the restricted list of occupancy types.
The reduction in the number of companies willing to insure recyclers also has been driven by the reinsurance industry. Insurance companies can purchase treaty reinsurance from another insurer for their entire books of business, passing on the risks of a specific class of policies to the purchasing company. Reinsurance also can be purchased on an individual risk, which is known as facultative reinsurance.
As the number of reinsurers willing to consider recycling operations is small (four to five reinsurers in North America), they have driven up the cost of insurance significantly. Fewer insurers will write property coverage for recyclers; the ones that remain are increasing rates based on their data. It’s important for recyclers to understand the risks insurers consider.
One of the most challenging risks in the recycling sector occurs in processing and sorting operations. Loss from fire remains adverse. Consequently, underwriters are increasingly unwilling or unable to grant terms of coverage.
One consideration is how infrequently recycling facilities are designed, built and protected from fire prior to occupancy. Given the margins typically generated in recycling, it is natural to look at location cost as a major component of engaging in these processes without considering the occupancy risk.
Over the past 20 years, insurance costs for property have been so low, business owners did not have much incentive to consider fire-suppression systems when constructing a new building or purchasing an existing one. Recyclers might assume their agents can take care of their new risks easily and inexpensively. Even locations that have automatic sprinklers for fire protection could have been designed for different occupancies.
Then, there is the issue of human error. My company, Nashville, Tennessee-based Commercial Insurance Associates (CIA), had a client that sustained a $10 million fire because the city in which it was located had turned off the water line supplying the two hydrants at that location to repair one of the hydrants.
Dust collection is paramount in most recycling facilities. Baghouse operations require their own analyses and protections. Accumulation of certain types of dust can be explosive. The flammability of the bags within the baghouse as well as protection within the collection system have a material effect on availability and cost of insurance.
For traditional metal processors, fires lead to two principal types of losses: losses to shredders and losses to buildings.
Primary losses to equipment
Automobile shredders are incredibly complex machines, costing many millions of dollars, and they might be difficult for underwriters to understand. What underwriters do not understand generates trouble for granting coverage. Revenue generated by shredding steel coupled with income generated by secondary processing have raised the insured values for these operations.
Auto shredders present two components to risk:
- direct loss, which includes loss to real and personal property as well as to equipment engaged in the manufacturing process; and
- indirect loss, which includes loss of income as a consequence from the loss.
The production and storage of auto shredder residue (ASR), or fluff, is the largest source of catastrophic loss for CIA’s clients engaged in automobile shredding. The physical composition of ASR makes it extremely flammable.
ASR burns at such a high temperature that an ASR fire might not be extinguishable using only water from an on-site hydrant. Firefighters largely have been using chemical foam in concert with water to extinguish ASR fires, resulting in higher fire department service costs and environmental cleanup.
The most severe loss to property within CIA’s recycling practice was a fire of this nature, which exceeded $15 million in direct and indirect loss. Shredder operators that do not adopt an intentional and aggressive loss prevention program for ASR will find themselves unable to buy fire insurance.
Primary losses to buildings
CIA’s practice also has experienced an increased number of building-based fires during the last five to seven years. Most recyclers operate their facilities in industrial zones where property values have been depressed, and many of the buildings used in recycling operations are older and lack fire-suppression systems.
Sources of combustion within older buildings can be shocking. In many cases, the electrical and mechanical components in these buildings have not been updated in decades. In colder climates, vehicles are routinely parked inside during winter months, and they contain combustible fuel.
Given the age and construction of these buildings, it might not be possible to rebuild them on the same site or with the prior type of construction because of changes in zoning or codes. Cleanup and debris removal as a result of a fire can exceed the cost to replace the building. Also, not all recyclers are inclined to insure inventory that is housed in their buildings.
Unimproved, repurposed buildings with challenged fire protection are getting the attention of insurers with adverse consequences in terms of availability of coverage.
Correcting potential losses
Recyclers can make simple and inexpensive changes to protect against potential risks as part of an overall property conservation program. CIA, in concert with outside engineering input, has developed guidelines for clients to help reduce fire exposures:
- ASR—if stored on-site—must be more than 100 feet from processing equipment and piled no higher than 30 feet.
- Fire-protection professionals should be asked to examine newly acquired buildings or locations.
- Recommendations might include automatic sprinklers, central station alarms or other remedies.
- Housekeeping standards should be established and enforced.
- Plant emergency teams should be formed and trained to respond appropriately to fires.
- Combustion sources should be analyzed continuously.
- Hot-work programs (including a fire watch) and training should be established and documented, including mandating hot-work permits prior to starting such tasks.
While insurers have limited terms and conditions and raised rates for recycling risks—if any coverage is offered at all—lenders demand coverage on real and personal property and on equipment as collateral for credit facilities. The combined effect of higher cost, higher deductibles and reduced terms and conditions can threaten recycling operations’ profitability. The above advice is designed to help recyclers identify and mitigate the potential risks to their operations.