Sometimes the most common causes of significant financial lossesfor manufacturing companies also are the most overlooked risks.

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From an operational risk standpoint, many risk managers andbusiness owners tend to focus more on external and naturalcatastrophe perils such as fire, flood, windstorm and earthquakes.They often ignore exposures to manmade accidents that also cancause millions of dollars in repair and replacement costs as wellas lost income.

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The following are four key asset protection strategies that canhelp industrial companies mitigate financial risks associated withequipment breakdown, inaccurate valuation, lawand ordinance costs and flood zone change.

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Daniel McLaughlin-fire tube section of wood-chip-fired boiler-crop-AP_269704274269-Wilson Ring

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(Photo: Shutterstock/Wilson Ring)

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1. Boiler and machinery breakdown coverage

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Today’s industrial companies have to contend with an insuranceenvironment in which coverage for losses arising from boiler andmachinery exposures—risks encompassing mechanical or electricalbreakdown to boilers, pressure vessels, refrigeration systems,piping and other vital equipment—are frequently excluded orlimited.

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Given these challenges, industrial manufacturing companiesshould 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 correctlystructured coverage.

This can be done through a review process, which includesestablishing the value of loss to various types of machinerycritical to the operation of a business, and valuing the associatedincome loss. That information is then used to negotiate customcoverage to protect client assets and income streams.

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Commercial-insurance-policy-with-abacus-SS-crop-emilie zhang

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(Photo: Shutterstock/emilie zhang)

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2. Full replacement cost coverage

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The financial impact of an insurance company using restrictivevaluation policy language to calculate loss payments can besignificant to any business. Although blanket or full-replacementcost coverage are ways to eliminate disputes around the actualvaluation of a damaged property, coverage should be structured withan eye toward removing restrictive policy language, such as theoccurrence limit of liability and margin clause.

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For example, a $10 million building insured with the commonlyused 10% margin clause would limit total recovery to 110%. In theevent the building is completely destroyed, and the cost to replaceand repair is $12 million, the client would sustain a $1 millionout-of-pocket loss, despite buying replacement cost coverage. Assuch, it is critical to establish accurate value and appropriatevaluation wording in the property policy exclusive of otherlimitations.

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[Related: Businesses lacking full disaster plans]

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Yellow-traffic-signs-with-regulations-crop-shutterstock_207668335-Gustavo Frazao

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(Photo: Shutterstock/Gustavo Frazao)

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3. Coverage for law and ordinance exposure

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Many commercial property policies include an ordinance or lawsection that limits coverage for loss or damage resulting fromenforcement of any ordinance or law regulating reconstruction. Forinstance, a local ordinance regarding the use or repair of propertymight require total demolition of partially damaged buildings.

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A comprehensive evaluation of this risk helps businesses valuepotential law and ordinance exposure, preventing partially coveredor uncovered losses. Typically, standard policies provide asublimit of $250,000 to address this issue, which is insufficientin many situations. In a recent case following a fire, a companywas required by local ordinance to upgrade building systemsincluding the installation of fire protection at a cost of $1million above the normal repair of the fire damage. The company’sprevious property policy limited law and ordinance coverageto$250,000. Fortunately, the current coverage that was placedbefore the fire fully addressed this $750,000 coverage gap.

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Collapsed-roof-warehouse-after-storm-crop-AP_080410020871-Tony Gutierrez

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4. Flood zone determination

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Recent widespread flooding across Texas and other regions hashighlighted the need for property owners to be aware of their riskwithin all flood zones. The Texas flooding also reinforces the needfor industrial companies and their brokers to stay on top ofchanges to flood maps. Misinformation regarding flood zonelocations could leave a property owner with an uncovered floodclaim. This situation nearly happened to a manufacturing company incentral Texas that suffered damage to several buildings.

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The company assumed the properties were outside the mosthazardous flood zones as they had historically been. The owner wasnot aware that the Federal Emergency Management Agency (betterknown as FEMA) had adjusted flood maps during the policy yearputting their property in a high hazard zone. Even worse, thecompany’s previous property coverage included only $1 million ofhazardous flood zone coverage, insufficient for their riskprofile.

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The owner and agent reviewed the updated flood zone data, andthe owner decided that the exposure warranted higher limits for theaffected locations. This review and update in coverage closed a$2.5 million potential coverage gap.

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These asset protection strategies represent four solutions thatindustrial companies across the country should be considering tomitigate financial risks and protect their bottom line.

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[Related: Managing manufacturing risk: Cyber enters thepicture]

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Randy Crawford is USI Insurance Services’ nationalindustrial practice leader, specializing in alternative riskstructures product development and risk consulting. Based inHouston, Texas, Randy leverages the USI ONE Advantage™, a holistic,risk management approach that uses proprietary analytics technologyand local and national resources to solve real [email protected].

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