Insurance 101
Jun 9, 2014, 08:39 AM
March/April 1999
It’s a risk-filled world out there. Fortunately, there’s insurance to protect you, your employees, and your company from virtually any risk.
By Kristina Rundquist
Kristina Rundquist is an associate editor of Scrap.
If life held no risks, there’d be no need for insurance. But life does have risks.
Operating a business has risks too. That’s especially true when you’re operating a scrap processing business, given that potential hazards—related to equipment, trucks, torchcutting, employees and visitors, and so on—are omnipresent.
Fortunately, where there’s risk, there’s usually insurance, which enables you to protect your employees and visitors, equipment, accounts receivable, building contents—in short, virtually any aspect of your company—from the potentially catastrophic effects of risks. An insurance contract essentially transfers the risk to the insurer, and you pay a premium to the insurer to accept the risk of loss.
The insurance you choose, of course, depends on the specific risks your company could face. All scrap companies don’t require the same type or amount of insurance.
The law only requires you to have workers’ compensation insurance and, in some states, coverage for your company cars and trucks. After that, it’s your call to decide which insurance policies are necessary to protect your firm.
With the vast array of policies and insurance carriers out there, that decision can be overwhelming and confusing. Though this overview doesn’t cover every protection necessary to operate a scrap business, it can help you understand the basic insurance types and which may be necessary for your business.
Property/General Liability/Auto
While not mandated by law, prudence dictates that every company should insure itself against loss of property and liability.
Property insurance, or first-party, policies cover your buildings, personal property, and equipment—basically all of your physical assets. These policies can insure your property from damage caused by a variety of exposures, such as fire, lightning, tornados, floods, and so on.
Generally, property insurance “will cover the contents as well as the building, although there are certain instances where machinery might need to be insured separately because of its value and the standard portions content wouldn’t be able to cover it,” notes Jim Cicero, vice president of marketing for the commercial insurance, manufacturing, and distribution industries for CNA Insurance Cos. (Chicago).
Liability, or third-party, insurance protects your company if a visitor—a third party—suffers personal injury or property damage at your plant. Typically, these risks are covered under a general liability policy, which can encompass liabilities related to personal injury, broad form property damage, nonowned watercrafts, and premises medical pay coverage. “It covers you for damages you may be responsible for because of injuries to others or that might occur as a result of your product,” says Brooks Chase, vice president of Willis Corroon Corp., RecycleGuard Program (Rochester, N.H.), who notes that the latter point—product liability—isn’t a particularly large exposure for scrap companies.
Most scrap companies have both property and general liability coverage.
Auto and fleet insurance is another given for most businesses, giving them protection against damages to or caused by their company trucks and cars. Though corporate auto insurance is similar to individual auto insurance, there are some notable differences when it comes to the scrap industry. For instance, if your company leaves lugger boxes at customer locations, you need coverage for the box while it’s on their property, notes Cicero.
You can minimize your premiums on property, general liability, and auto insurance policies by implementing various “loss control” measures, including plant housekeeping, restricting visitors to limited areas of your plant, safety inspections, training for equipment operators and drivers, seminars on working safely, and more. You can also ask your insurance carrier to send a representative to inspect your facility and suggest ways to lower your premiums.
Health
Under today’s healthcare system, health insurance can be expensive for virtually any business. And the smaller the company, the more difficult it is to find affordable coverage. That’s not to say it’s impossible. Several options exist for small to mid-sized firms, including insuring employees through:
- national trade associations, such as the new group health insurance program offered by ReMA and Mass Marketing Insurance Consultants (Orland Park, Ill.).
In general, says Edwin Sterczek, Mass Marketing’s president, there are several options in selecting a plan that’s right for your company’s size and checkbook.
Under the standard major medical plan, the employee has to satisfy a deductible of $250, $500, $1,000, or $2,000 as determined by the employer. The higher the deductible, the lower the premium. Under the standard or indemnity program, the employee can go to any healthcare provider. After the deductible is met, the plan will pay 80 percent of costs up to $1,000, after which the plan pays 100 percent.
To keep premiums down, Sterczek says, “you can increase deductibles or go to a higher copayment. If the deductible is $250, for example, you can raise it to $500 and save 13 percent, or raise it to $1,000 and save 25 percent.” There’s a second major medical option—the preferred-provider organization (PPO). Under this plan, employees can use any healthcare provider, though more liberal benefits are available when they use providers who have contracted with the insurance company to provide services—referred to as staying in-network.
This managed-care option is the most popular today, Sterczek says. It features a doctor’s office visit benefit that has no deductible and requires employees to pay only a $10 or $15 copayment per visit. With the PPO major medical option, employers have the choice of offering either a 90-percent payment for in-network visits and 70 percent for out-of-network visits, or an 80/60-percent plan, which costs approximately 16 percent less, he says.
- local and regional organizations, which “have some very good health plans,” says John Schneider, president of E. Schneider & Sons Inc. (Allentown, Pa.) and chairman of ISRI’s insurance trustees; and
- self-coverage. ReMA First Vice President Sam Hummelstein, president of Hummelstein Iron & Metal Inc. (Jonesboro, Ark.), is one who opted for self-coverage. In doing so, he flew in the face of the conventional wisdom that says a company must have at least 100 employees before considering this option. “We’ve never had that many employees and we never will, but it’s been quite effective for us,” he says. “We have better coverage than we ever had with conventional policies and for truly just a fraction of the cost.”
Managing your own insurance involves three basic duties: “Someone has to process claims and handle paperwork, then there’s case management, and then there’s the payment of claims,” Hummelstein notes.
Hummelstein Iron & Metal’s program is managed by a third-party administrator, which processes all the paperwork for a fixed cost per employee per month, Hummelstein explains. This administrator also handles case management for the company, providing precertification for a fixed fee. “So if you’re going into the hospital, you call the administrator and they’ll have a nurse talk to you, evaluate what you’re going in for, and decide if it’s the appropriate approach,” Hummelstein says. How does his firm finance its self-insurance program?
“We come up with a number that will cover the fixed costs and estimated expenses based on our claim experience,” he says. “We have a tendency to make that a minimal figure because once we’ve put money into the insurance trust account, it can’t be used for anything other than health insurance. If we find that we need more money, we simply put more in.”
To keep costs at a minimum, the company has implemented wellness programs, as well as health education and training. These have allowed it not only to lower its premiums, but also “lower the employee-dependent deductible and add the prescription card and dental program without raising costs,” Hummelstein says.
Environmental
Prior to 1973, insurance carriers generally covered insureds’ losses caused by pollution or contamination of air, water, or land. In 1973, however, insurers began inserting exclusions that eliminated coverage for pollution or contamination of air, ground, or water, except when such pollution was “sudden and accidental.” Part of the problem was that insureds were filing environmental claims under their general liability policies, while the carriers felt they hadn’t specifically assumed environmental risks under those policies. “A lot of carriers were dragged into claims they hadn’t counted on,” says Timothy Donnellon, vice president of ECS Inc. (Exton, Pa.), an insurance provider specializing in environmental policies.
The problem worsened in the early 1980s when Superfund cases came before the courts. As the courts began to interpret many pollution cases as being sudden and accidental—even when the pollution occurred gradually—insurance carriers found themselves paying out on a large number of claims. In 1986, insurance companies reacted by inserting absolute pollution exclusions into their policies.
But even as carriers began refusing to insure companies against pollution and contamination, the need for such protection grew. Today, many companies with environmental risk are looking for policies that specifically cover environmental liability in every conceivable form. Even so, says CNA’s Cicero “it’s still next to impossible to buy coverage for the property on which the processor is located simply because of the presumed contamination.”
ECS is one carrier that offers a host of environmental-related policies, covering everything from business interruption caused by a spill or cleanup to brownfields reclamation. If a scrap processor, for example, wants to sell property that has a contaminated lagoon with an estimated remediation cost of $1 million, ECS could insure the seller or buyer for any costs above the $1-million cleanup after a deductible of, say, $250,000 has been met, Donnellon notes. How? “We’re willing to do this because we’ll go in and look at a site, make an estimate, and make our own third-party judgment,” he says. “In this case, we’d be betting that the cost will in actuality be $1 million. So, not only is the scrap processor insured, but he’s had an additional set of eyes look at the property and provide an estimate.”
While some general liability policies have endorsements that provide limited coverage for sudden and accidental environmental problems, most of them require accidents to be reported within 72 hours of occurring, says Donnellon. ECS, in contrast, provides gradual coverage so that if “10 years down the road a site is determined to be contaminated, the coverage will apply”—provided the claim is made during the policy period.
When shopping around for environmental insurance, look for a company that provides complete services, such as environmental consultants. Such an approach is a relatively new trend that has arisen because “it’s in no one’s best interest to be stuck in a policy with large losses,” Donnellon says.
To that end, ECS’s pollution and remediation legal liability policy covers the cost of legal defense or the option of using the company’s team of 45 lawyers.
Its policy also covers losses and/or remediation costs for both sudden and gradual pollution conditions. Other options include consultant environmental liability, which “covers for acts, errors, and omissions as well as pollution conditions arising from both contracting services and professional services rendered by the insured,” Donnellon notes.
Environmental insurance policies can be pricey, ranging from $10,000 to more than $1 million annually, though they’re getting more and more reasonable, says John Rich of Seneca Environmental Management (Cleveland), a provider of pollution coverage through the RecycleGuard Program. “These policies are much more available than they were a few years ago. And because more people are buying coverage, the whole marketplace has become very competitive so that lower costs eventually have rippled out to tough coverage like pollution.”
Business Interruption
While most property policies offer some protection against loss of business, some companies opt to add additional business interruption coverage. “In the event you experience a loss and are unable to conduct business, this policy would pay you a dollar amount to cover the profit you would’ve made from the business for a specified period of time,” explains Cicero.
While it’s appealing to think of being covered financially if an accident forced you to close your doors for six months, the likelihood of such a disaster occurring is slim. “Generally speaking, most companies don’t buy this coverage because they don’t imagine their business would be interrupted for any length of time in the event of a loss,” says Cicero. “This is really for the long term. If you can rebuild your operation in days or a couple of weeks, it’s not worth it. But if you’re looking at six to eight months, it might be worthwhile.”
In short, buying or not buying business interruption insurance is a “risk-reward type of decision,” notes Schneider. “You need to look closely at how a particular operation adds value to your company and what would happen in case of catastrophic failure in terms of how much income would be lost compared with how much the insurance company would charge to insure it.”
Typically, premiums for business interruption policies are considerable, so the protection has to truly be worthwhile. Marty Davis, president of Midland Davis Corp. (Moline Ill.), notes that he has purchased a business interruption policy for his paper facility but not for his metal processing operations.
“A fire in the paper business would be catastrophic,” he points out, “whereas with the scrap yard, it would take a tornado to cause us significant problems in our business operations.”
Credit
Insuring one’s receivables, an idea that’s been around for more than 100 years, gains popularity as markets deteriorate. The logic is simple: When business is good, everyone is paying their bills. When markets are bad, customers can default on their payments, leaving your company with bad debt.
Like most companies, scrap recycling firms check their customers’ payment history before deciding how much credit to extend. But even customers with solid track records can find themselves unable to pay their bills, perhaps due to fraud, class-action lawsuits, or a natural disaster that prevents them from conducting business. Some losses are expected as part of doing business and are factored into a product’s price. However, there’s no planning for more substantial losses. The best protection is to have credit insurance.
Polices generally run 12 months and cover losses of goods and services during the term of the policy. Premiums can range from 1/2 to 2 percent of the coverage requested or, if based on annual earnings, from 1/10 to 3/10 percent of covered annual sales.
Such premiums can be steep. Davis, for example, has opted not to insure his company’s receivables because of the combination of a high deductible and costly premiums. In the past 15 years, his company has “ended up way ahead” by not purchasing such insurance. “We would’ve had to have a $50,000 deductible to afford the premiums,” he says, noting that “in 15 years we’ve only experienced one bankruptcy and that was for $42,000.”
Hummelstein has also chosen not to insure his firm’s receivables. “We only do business with people we know,” he says. “We’re extra careful. We consider it every few years, but for us it just isn’t justified.”
For companies who do opt to purchase credit coverage, Schneider says full disclosure is your best bet for lowering premiums. “You should tell the insurance company about all your receivables, not just the ones you perceive to be bad,” he explains. “It might reduce your costs if you give the carrier a broader base to work with. Let’s face it, if you only want them to insure one account and it’s one you perceive as a risk, it’ll more likely cost you more.”
Business Practices
If you have employees—and what company doesn’t?—you could face employment practices liability, “which covers everything from sexual harassment to the firing of an older employee who then claims age discrimination,” Chase says. “These issues fall under business practice-type coverage where there’s no bodily injury but there are financial issues at stake.”
Another business practices coverage is directors and officers liability. It can protect you against suits brought against company directors and officers.
“While any company can have exposure for this, it’s especially pertinent to publicly held companies,” notes Chase. Say, for example, that a company’s management and board of directors made decisions that resulted in a lower stock price. Stockholders could sue the board.
A suit could also arise if management decides to sell the company, but the stockholders don’t receive exactly what they feel they should, Chase says.
As with other types of insurance, as more companies buy employment practices policies, they’re becoming less expensive and “more practical for everyone,” Chase notes.
* * *
It may be a risk-filled world out there, but insurance can help you manage those risks and ensure the viability of your company—no matter what happens. Choosing the insurance that’s right for your company depends on its specific circumstances. Says Schneider, “Every company has to look at its own risks, assess them, and then consider the cost of protecting against them. You need to look at what’s available and then shop around.” •
Editor’s note: For a more detailed discussion of insurance issues for scrap processors, consult the Insurance Purchasing Guide, written in 1996 by T.E. Brennan Co. for ISRI’s insurance trustees. For a free copy, ReMA members can call 202/737-1770. To reach Brooks Chase (property/casualty/environmental), call 603/330-5010; Jim Cicero (property/casualty), 312/822-6237; Tim Donnellon (environmental), 610/458-0570; Edwin Sterczek (health/dental), 800/349-1039; and Global Commercial Credit L.L.C. (credit), 248/646-6900.
It’s a risk-filled world out there. Fortunately, there’s insurance to protect you, your employees, and your company from virtually any risk.