Sometimes the most common causes of significant financial losses for manufacturing companies are also the most overlooked risks.
From an operational risk standpoint, many risk managers and business owners tend to focus more on external and natural catastrophe perils such as fire, flood, windstorm and earthquakes, ignoring exposures to man-made accidents that can also cause millions of dollars in repair and replacement costs, and lost income.
Below are four key asset protection strategies that can help industrial companies mitigate financial risks associated with equipment breakdown, inaccurate valuation, law and ordinance costs and flood zone change.
Boiler & Machinery Breakdown Coverage
Today’s industrial companies have to contend with an insurance environment where coverage for losses arising from boiler and machinery exposures – risks encompassing mechanical or electrical breakdown to boilers, pressure vessels, refrigeration systems, piping and other vital equipment – are frequently excluded or limited.
Given these challenges, industrial manufacturing companies should work with risk management professionals who can: help businesses measure their boiler and machinery risk; determine the optimal way to mitigate the financial impact; and negotiate with insurance companies to secure the correctly structured coverage. This can be done through a review process, which includes establishing the value of loss to various types of machinery critical to the operation of a business, and valuing the associated income loss. That information is then used to negotiate custom coverage to protect client assets and income streams.
Full Replacement Cost Coverage
The financial impact of an insurance company utilizing restrictive valuation policy language to calculate loss payments can be significant to any business. While blanket or full replacement cost coverage are ways to eliminate disputes around the actual valuation of a damaged property, coverage should be structured with an eye toward removing restrictive policy language, such as the occurrence limit of liability and margin clause.
For example, a $10 million building insured with the commonly used 10% margin clause would limit total recovery to 110%. In the event the building is completely destroyed and the cost to replace and repair is $12 million, the client would sustain a $1 million out-of-pocket loss, despite buying replacement cost coverage. As such, it is critical to establish accurate value and appropriate valuation wording in the property policy exclusive of other limitations.
Coverage for Law and Ordinance Exposure
Many commercial property policies include an ordinance or law section which limits coverage for loss or damage resulting from enforcement of any ordinance or law regulating reconstruction. For instance, a local ordinance regarding the use or repair of property might require total demolition of partially damaged buildings.
A comprehensive evaluation of this risk helps businesses value potential law and ordinance exposure, preventing partially covered or uncovered losses. Typically, standard policies provide a sublimit of $250,000 to address this issue. This is insufficient in many cases. In a recent case following a fire, a company was required by local ordinance to upgrade building systems including the installation of fire protection at a cost $1 million above the normal repair of the fire damage. The company’s previous property policy limited law and ordinance coverage to $250,000. Fortunately, the current coverage that was placed before the fire fully addressed this $750,000 coverage gap.
Flood Zone Determination
Recent widespread flooding across Texas and other regions has highlighted the need for property owners to be aware of their risk within all flood zones. The Texas flooding also reinforces the need for industrial companies and their brokers to stay on top of changes to flood maps. Misinformation regarding flood zone locations could leave a property owner with an uncovered flood claim. This situation nearly happened to a manufacturing company in central Texas that suffered damage to several buildings.
The company assumed the properties were outside the most hazardous flood zones as they had historically been. The owner was not aware that FEMA had adjusted flood maps during the policy year putting their property in a high hazard zone. Even worse, the company’s previous property coverage included only $1 million of hazardous flood zone coverage, insufficient for their risk profile.
A review of the updated flood zone data was made, and the owner decided that the exposure warranted higher limits for the affected locations. This review and update in coverage closed a $2.5 million potential coverage gap.
These asset protection strategies represent four solutions that industrial companies across the country should be considering to mitigate financial risks and protect their bottom line.
Randy Crawford is USI Insurance Services’ national industrial practice leader, specializing in alternative risk structures product development and risk consulting. He is based in Houston, Texas, and can be reached at [email protected].