This Business of Risk Management

By G.C. Skipper, Contributing Editor | September 28, 2010

Pitfalls of Coverage

When reviewing risk-management procedures and insurance coverage, try to avoid the following pitfalls:

  • If you borrow or lease equipment, make sure that equipment is covered under your policy or under the owner's policy, especially during the time the equipment is being transported from one place to another.
  • Make sure equipment is covered when loading it onto your truck or onto someone else's truck.
  • Avoid out-of-the-box insurance policies since usually they don't apply to areas that are unique to construction. For instance, such a policy wouldn't cover a piece of equipment that is put on a barge for transporting.
  • If your equipment is out of service for maintenance, be sure you have rental reimbursement, plus reimbursement for revenue loss while the machine is down. This is a hidden cost that you should watch out for.
  • Make sure you're covered when you add new equipment to your fleet. Your policy should be written in such a way that it is automatically covered.
  • Don't forget building inventory in your coverage. Not only do you want to cover the building itself, but also the hundreds of thousands of dollars worth of parts that may be in it.

Training Can Reduce Premiums

Because governmental regulations require that equipment operators be properly trained and qualified for the specific piece of equipment they are operating, too often fleet managers stop there.

Properly trained operators can go a long way toward minimizing or even reducing insurance premiums, but you have to make sure you let the insurance company know what you're doing.

If your company's track record is not what it should be and you have a history of inspection problems, such as back-up warning signals that don't work, lights not working, or jobsite accidents (even small ones), your insurance rates are going to go up. Poor track records mean higher premiums.

But training and safety awareness can help. Although operators can learn to run a machine in a fairly short period of time, for training to have an impact on insurance costs, it has to be on-going and conducted on a continuing basis, which can be a long process.

Risk-management experts suggest that training be done on a monthly basis, although that might not include presenting the entire program. The objective is to raise the safety-awareness level among equipment operators and other employees.

"As busy as we are, monthly training is probably pushing it," says Sam Reiff, director of fleet service for Martin Limestone. "But training can be as simple as tool box, or tailgate, meetings. They don't have to be full, formal sessions or meetings. If you've had an incident at a jobsite, use that opportunity to talk about what could have been done to avoid it."

Lifting the awareness level of safety through training will pay off, Reiff says, when you start to see your incidents go down and see your accidents decrease. Insurance companies make you work for a lower rate, he says, but if you can go an entire year with an accident-free record, or you can show minimal accidents during that period, the insurance company could well give you a break.

"It's still a hard sell," he says, "especially in construction where anything can go wrong, but it can be done."

Tom Serfass, who manages the fleet for the City of Decatur, suggests that insurance rates might drop if you implement a policy of no smoking in fleet vehicles or if you prohibit the use of cell phones by operators.

And, he says, if certain types of accidents start to repeat themselves, it may be time to hold a special training session, or a refresher course, on how to avoid that particular accident.

Serfass admits that employee training is sometimes difficult to assess in dollar value, but having what he calls "training modules," possibly could qualify a company for a rate reduction. "There might be certain requirements, for instance, that if you conduct 'X' number of training sessions on improving driving skills, then the company qualifies for lower premiums."

Since he manages a city-owned fleet, every new-hire is expected to go through driver-improvement training "right from the get-go," he says. There is no refresher course, but if someone has an accident, the driver is required to attend the driver-improvement training class again.

Insurance companies can, and do, lower premiums for customers with good safety track records. Bringing insurers up to date on what you're doing and how you're doing it is a good first step toward rate reevaluation.


The words "risk management" and what they imply can be interpreted two different ways, says Tom Serfass, CEM, fleet manager for the City of Decatur (Ill.). Serfass is in charge of Decatur's fleet of 350 vehicles, including 20 off-road units, used to maintain the city's infrastructure.

"One could perceive the term in a negative tone — voodoo words [protection against disasters] — or in a positive light in that risk management is a preventive maintenance tool that you use to reduce the risk to your employees and your equipment," says Serfass. "I look at the glass half full. Risk management is another PM tool a fleet manager has at his disposal."

By comparison, most private fleets, arguably, are prone to the "voodoo" interpretation. "Risk management is thought of as primarily insurance coverage that protects the fleet from loss or damage from storms, fire, theft, accidents and all the things that can happen to your equipment or cargo," says Sam Reiff, CEM, director of fleet service, for Martin Limestone. Martin operates a fleet of 800 vehicles, 200 of which are primarily trucks used in on-highway applications. The company owns several quarries and produces concrete block and ready-mix, and provides asphalt paving services.

Both public and private fleets have similarities when it comes to risk management, yet the use of construction equipment is unique in varying degrees. For instance, in Serfass' public fleet, backhoe-loaders stand out as a risk factor and, to deal with it, the city has established an 800 number that contractors can call before a dig. On receipt of the call, the power company or gas company will come out and identify electrical and gas lines across the work area to reduce the risk of, not only electrical and gas-line damage, but also to cut down the risks of explosions or power outage to customers.

Although Serfass quickly pointed out he has no experience in the private sector, "I would say risk management is pretty similar for both. However, I would say it is a little more cumbersome in the private sector from the standpoint that anything that occurs affects the bottom dollar. That is also true in government, but a public fleet is more forgiving, if you will."

Reiff says construction fleets operate in different situations than those in the nonconstruction industry. "One day you might have equipment on a highway job where pulling in and out of traffic is always an issue. On another day the equipment might be used to clean up pier damage along a beachfront."

Even geography affects risk-management decisions, Reiff says. For instance, a fleet operating in a tornado-prone section of the country where tree damage is common has entirely different coverage needs than that of a similar fleet on a jobsite in a bitter cold climate. Yet, the actual type of construction work being done — mining, road building, commercial projects — does not necessarily affect the cost of coverage, Reiff says.

Risk-management rates, says Serfass, aren't necessarily determined by weather or "acts of God." They often are "predicated on the mileage, hours driven, and the number of incidents in a given region," he says. "Although I'm not versed in insurance, I suspect cost of coverage doesn't have much to do with different climates but has more to do with mileage and hours. That possibly determines the insurability of a particular fleet."

No matter if risk management is viewed as a PM tool or as insurance coverage, equipment managers need to know certain basics, not the least of which is this: More often than not, off-the-shelf insurance coverage, won't work, says Reiff, because there are so many different situations that places equipment, cargo and manpower at risk. Therefore, fleet managers should custom-design coverage for their particular application.

Although "risk management takes a lot of different trails," Reif says he has sorted through its complexities and has come up with some useful pointers.

"When you get into insuring construction equipment that is mobile, the high cost of the equipment itself often makes it tempting for contractors to insure it at a lower rate." That, he says, might not be the way to go.

Insurance basics

Because there is more involved than just price, equipment professionals need to understand certain insurance basics before they determine which coverage is right for their particular application. Those basics include the types of policies available, valuation (how to determine the amount of coverage you need), deductibles and general liability, Reiff says.

There are two basic types of policies for mobile construction equipment, he says: all-risk and named-perils. All-risk is the policy of choice for most construction fleets, because it covers all-perils automatically. "It isn't limited to a specific peril," Reiff says. "If you're working in the Midwest one week and your equipment suffers tree damage from a tornado, you're covered. If you haul that equipment to Florida the next week and a hurricane damages your equipment, you're covered."

By comparison, a named-perils policy only covers the specific perils actually listed in the policy: tornado, hail damage, tree damage. "If you want to be covered for hurricanes, for instance, and they're not on the list, you're not covered," Reiff says. "As you move from location to location, each peril you encounter must be on the list."

The advantages of all-risk are obvious. The advantage of a named-peril policy is that it costs less, Reiff says. "If you're always working in an area that floods frequently, for example, but seldom has tree damage, you might want a named-perils policy," he says.

When it comes to property insurance, construction equipment is not standardized and will vary greatly by insurance carrier. Also, most property insurance can be extended to include owned, non-owned/leased equipment, loss of use, extra expenses, and rental-replacement cost.

Equipment can be scheduled, with a detailed list of equipment on the policy, or there can be a blanket policy. The blanket limit can be written on the total equipment covered, but not limited by a schedule. Benefits of the blanket over the scheduled are that additions and deletions are not handled throughout the year. "This eliminates administration expenses and eliminates the possibility of forgetting to add a piece of new equipment," Reiff says.

As for valuation (determining how much coverage you need) policies contain co-insurance clauses that are based on a simple formula: amount insured multiplied by the amount of loss equals recovery amount required.

"If you only carried limits of 50 percent of value and have a partial loss, the insurance company would only pay 50 percent of the partial loss," Reiff says.

How much is enough?

Noting that it is imperative for fleet managers to value their equipment annually, Reiff says there are two types of valuation: actual cash value and replacement cost. "Determining how much coverage you need, of course, is based on how much risk you're willing to take."

Cash value is the amount of money you would garner if you sold the equipment; its cost minus depreciation. If the equipment is old and has a lot of hours on it, actual cash value may be considerably less than replacement cost if you bought a new one. Replacement value, however, covers the actual cost to replace the machine. "Generally speaking, contractors have a tendency to underinsure," Reiff says. "We're all looking at being competitive, at saving costs, and these are all reasons for being underinsured. But you're taking a risk. Insurance is something you can't be without, yet every year you hope you don't have to use it."

When it comes to deductibles, Reiff says, insurance companies determine the amount "somewhat." Still, fleet managers have a choice. Deductibles can be written into the policy as per loss per occurrence. For instance, if fire damages multiple pieces of equipment, you would only have to pay the deductible once, which is preferred. If you have a policy that requires deductibles per piece, then you would have to pay $1,000 for each piece of equipment damaged in that fire, Reiff says. "There can be a substantial difference. But there could be a substantial difference in your monthly premiums as well," he says.

General liability as it pertains to fleet operations is similar to a homeowner's policy, but in a much bigger way, Reiff says. "It provides for bodily damage and property damage, coverage to a third party for something the construction company did through negligence. It covers against operational mistakes," he says.

Limited coverage is also available for environmental or pollution incidents that may be caused by fuel or lubrication systems, he says. But such coverage isn't limited to liquids. It now extends to noise, dust and odors. Far greater exposure for the fleet, however, exists with temporary storage on site, underground storage sites, and transporting fuels into jobsites for equipment maintenance and fueling purposes. Overfill issues must be reckoned with, and on site storage tanks must be protected from vehicle traffic.

"Environmental or pollution coverage is typically not provided in standard forms," Reiff says. "However, it can be purchased separately under a Contractor's Pollution Legal Liability form."

Whatever types of coverage you have, policies have to be reviewed annually, Serfass says. "All too often, policies get written, put on a shelf, collect dust, and are forgotten until they are needed. Reviewing them every year is just good, prudent management."

And to reduce overall risks, he says, consider such things as whether or not to permit smoking in fleet vehicles; whether or not operators should use cell phones; and the total number of accidents your fleet has had and the reasons for those accidents. If, for example, operators are rear-ending vehicles often, some training is needed on not following too closely.

And don't forget buildings, Reiff says. Another way to reduce risks and possibly lower insurance premiums is to keep work areas clean. "Housekeeping can make a big difference," he says. "When insurance underwriters conduct a walk-around and look at your buildings, make sure they don't see a rag lying around or cigarette butts scattered everywhere. That could be a fire potential. The condition of a shop could even determine if they will insure you at all."

Finally, this advice from Reiff: "If you do have a claim, take pictures to document it and pay attention to how you handle the claim. Your attitude, how quick you respond and how accurate your information is, make a big difference. Underwriters judge management attitudes by this. If the claim is handled carelessly, or records aren't well-maintained and are inaccurate or incomplete, it shows management's attitude is questionable."

And attitude, he says, can go a long way in obtaining a better rate.

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