Editor’s Note: This is the second 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.
In the first article of this series, titled “Considerable risk,” which begins on page 78 of the July issue of Recycling Today, I focus on property insurance claims and the impact that claims specific to the recycling industry are having on insurance costs and terms. That article addresses the current underwriting appetite and guidelines for addressing risks associated with recycling businesses in the insurance marketplace.
This article will delve deeper into actions recyclers can take to prevent or minimize property losses in the first place.
Focus on loss control
Loss control is any intentional management activity a company takes to reduce or minimize loss. The significant words are “intentional” and “management.”
Two principal focal points of the loss control risk management technique are the human element and the physical element.
Risk controls related to the human element involve management procedures designed to reduce the likelihood of an event occurring and determining how to react in the event of an emergency. They include using systems that are designed to control ignition sources, manage the presence of combustibles and assure systems function as intended. They can take the form of requiring hot work permits and developing smoking and housekeeping policies.
The physical element deals with activities that reduce the probability of loss by changing any of the physical properties where loss can occur. For example, in the case of last year’s wildfires in California, some property risks survived unscathed simply because the owners cut down all the vegetation surrounding their buildings. This seems like a simple and obvious preventive measure; however, the opportunity to minimize losses within the recycling industry requires more thoughtful analysis.
Operators are concerned with insurance cost as well as with the costs and benefits of improving their properties and plants.
My father, who operated a scrap yard, taught me that it’s easier and less expensive to perform preventive maintenance on equipment than to wait for it to fail. Establishing preventive maintenance activities, such as oil changes and air filter changes, has been proven to reduce mobile equipment losses.
It is not enough to perform these preventive activities, however; it is also necessary to keep accurate and timely records of these actions that, in time, will contribute to loss containment.
When considering buildings and fixed machinery (such as shredders, shears and downstream systems), the need for loss control is similar but decidedly more complicated. Recycling companies understand that a maintenance program is necessary to keep roofs, walls and machinery in working order. They are not, however, so clear regarding the tools and processes they need to implement best practices.
Today, we believe adequate alarm systems, fire suppression (or sprinkler systems) and infrared surveillance provide state-of-the-art protection from fires for buildings and fixed machinery. These items can be costly to install and maintain but have a material impact on the cost of insurance. And, more importantly, they improve business continuity.
A more disciplined approach
For the past 15 years, the cost of property insurance for recycling operations has been at historical lows. This low pricing was driven by new capital (such as hedge funds and private equity funds) flooding the insurance market. During this period, insurers primarily were focused on top-line growth, and they priced risk low across all industry groups to fill their coffers with premiums.
As described in the previous article in this series, though, property losses specific to recycling operations and pressure from weather-related catastrophes have forced insurance companies to be more disciplined. The significant price increases and reduced terms for insurance available to recycling operations are causing this paradigm to shift.
During this period of extremely low premiums, the cost-benefit analysis of improving property with fire-suppression systems and infrared cameras made little sense. However, as a result of the hardening of the property insurance market, the return is much more tangible.
Historically, property insurance rates for a recycling operation hovered around 25 cents per $100 of insured value, meaning a $10 million building without a sprinkler system would cost $25,000 annually to insure. Under current conditions, insurers are increasingly expecting a $1 per $100 rate for recycling operations, resulting in $100,000 of annual premium for the same building. However, a fire-protected building that includes a sprinkler system could generate a rate of 25 cents per $100 with the current market conditions, meaning it might be time to investigate the installation of a fire-suppression system.
The cost to install an automatic sprinkler system and a monitored fire and burglar alarm is approximately $2 per square foot, or $200,000. The annual savings for protecting the structure using this technology generates approximately a three-year payback on the investment.
The conclusion is simple: At a $1 rate, the investment makes sense, whereas at a 25-cent rate, it does not.
Consult the professionals
As I note in the earlier article, these issues should be considered before occupying a structure, but what actions should be taken when a business already occupies a challenged structure?
That solution involves consulting with a fire-protection engineer in conjunction with the business’ insurance agent and insurance company. The engineer can examine the construction and location of a premises, proximity to a fire department, water availability and residual pressure and myriad other issues when analyzing how a premises ideally should be protected. The costs associated with the various upgrades can be developed in conjunction with a contractor, and the insurance agent should have the ability to approximate the change in rate and therefore the cost- benefit of any changes to the location’s fire protection. An owner can then decide what action provides the best results.
How do efforts to improve the physical element risk couple with those designed to address the human element risk?
Thirty years ago, Factory Mutual Global (FM Global) created a program call the “Eyes of Awareness.” FM Global, based in Johnston, Rhode Island, is a leading provider of industrial property insurance. FM Global determined that surveillance of premises through human or electronic monitoring and a human response are the most effective actions to contain a loss.
FM Global’s “Eyes of Awareness” program instructs plant managers to notice and promptly respond to problems at their facilities, much like the Department of Homeland Security’s “If You See Something, Say Something” program does.
The FM Global program is effective because it places a focus on training employees to respond to an emergency when the property is endangered. That training allows employees to execute the proper response when needed.
Plan for action
Our recommended plan of action to help recycling operations receive the most affordable property insurance includes the following measures:
- Create a plant emergency team and train that team to respond to a variety of events, including fire, collision and overturn, collapse, medical emergency and impending storm and wind situations. Employee evacuation or safe zones must be created, and all employees must be directed to seek shelter depending upon an anticipated event. Training should be provided for response plans as well as for the operation of fire extinguishers and provided fire hoses.
- Smoking must be prohibited except in designated areas. A disciplinary protocol should be implemented with established responses for failure to comply.
- Sprinkler systems should be tested and recorded on at least an annual basis.
- Flow tests on all fire hydrants should be conducted on a semiannual basis.
- Oil testing on all mobile equipment and hydraulic systems should be conducted on a four-month cycle.
- Roof inspections should be conducted on an annual basis before the beginning of wind and hail season.
- Monthly tests using a radiation source should be conducted on all radiation detection equipment.
- All combustible storage should be discontinued in hydraulic or electrical rooms.
- Infrared testing of all electrical and mechanical risk should be conducted on a semiannual basis.
Nothing takes the place of coordinated, recorded and repeatable activities designed to prevent loss. The implementation of these processes will give a recycling operation a significant leg up in obtaining comprehensive and affordable property insurance.