Know the rules and risk before flying a drone for commercial use

Years ago, the thought of drones being used in everyday life was something you would only see on the movie screen. However, this is the 21st century where technology is rapidly improving and becoming more advanced every day.

“Not too long ago, people stopped using drones just for a hobby and began to implement them as a part of their businesses,” says Patrick Zedreck, area assistant vice president at Gallagher. “The popularity of business owners using these unmanned aircrafts can be attributed to the decrease in cost, the portability and their easy to access information without putting an employee at risk.”

Smart Business spoke with Zedreck and Brad Meinhardt, managing director of Aviation Insurance & Risk Management, North America, Gallagher, to get a risk management perspective on drones.

How are drones being used by employers today?

The possibilities are limitless, but they have been used for things like motion pictures, documentaries, sporting events (ESPN College GameDay) or by the construction industry. Loss adjusters are even using them for significant disaster events. Drone use is also growing in the agriculture, aerial survey, mapping and security industries.

As commercial drone use increases, the Federal Aviation Administration (FAA) is trying to balance safety rules for unmanned aircraft systems against innovation. The FAA’s Drone Advisory Committee has dissenting opinions about how civilian drones should be tracked by authorities, but the FAA is considering the committee recommendations in order to create a rule about flights over people and beyond the pilot’s line of sight. After that rule is crafted, expanded commercial uses would be pipeline patrol, energy grid infrastructure oversight, package delivery or medical supply delivery to remote areas.

What kinds of risks and potential liabilities do employers need to be aware of?

Similar to manned aircraft exposures, the biggest risks are bodily injury and property damage to third parties, and invasion of privacy (personal injury).

Commercial use is governed under the FAA’s Small Unmanned Aircraft Systems Rule or Part 107. It requires the drone be registered and the pilot be certified through the FAA. Drones need to be under 55 pounds and fly within a visual line-of-sight, during daylight or civil twilight, at or below 400 feet. They can’t fly near other aircraft, over people or controlled airspace near airports without FAA permission. However, the FAA does issue waivers for certain Part 107 requirements.

FAA violations for not following Part 107 guidelines can be significant, and local law enforcement entities are empowered to enforce them. Those liabilities are not insurable. But ultimately, the worst case for careless operations would be impacting a manned aircraft and causing significant loss of aircraft and passenger lives.

How should these exposures be covered, through insurance or otherwise?

The insurance is the same as manned aircraft coverage, but excludes passengers. There is a robust insurance marketplace willing to insure $1 million of coverage for about $800 to $1,000 annually, but higher limits are available. Physical damage to drones can also be insured.

Most firms that hire a drone operator require evidence of insurance, including additional insured status. Government entities, colleges, universities and nonprofits require insurance to access their facilities.

What else should employers know about drone liability coverage or drone operation?

Be careful to study and follow guidelines of FAA Part 107 if your organization is operating its own drone. You also want to buy insurance, just like you would for any other manned aircraft on an annual basis.

When hiring an outside drone operator, vet the operator to make sure it’s legal and following best practices. Secure the insurance information with additional insured status, and consider non-owned aircraft liability insurance for yourself if your use of third-party operators is frequent.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

How to detect safety hazards in the oil and gas industry

Oil and gas well drilling and servicing can be dangerous. It involves many types of equipment and materials, and recognizing and working to minimize the hazards is critical.

Employers need to control or eliminate occupational injuries, illnesses and fatalities among workers by being aware of likely safety risks, and most importantly making planning and prevention part of the everyday culture, says Taylor Troiano, area vice president at Arthur J. Gallagher & Co.

Smart Business spoke with Troiano about the biggest hazards of the oil and gas industry and what employers can do about these concerns.

What do oil and gas industry employers find to be the biggest safety risks?

Three of every five on-site fatalities in the oil and gas extraction industry are the result of struck-by, caught-in or caught-between hazards, according to the Occupational Safety and Health Administration’s (OSHA) database. These can come from moving vehicles or equipment, falling equipment and high-pressure lines.

The risk of fire and explosion is another concern for workers in the oil and gas industry. Flammable gases, such as well gases, vapors and hydrogen sulfide, can be released from wells, trucks, production equipment or surface equipment. They can ignite by static, electrical energy sources, open flames, lightning, cigarettes, cutting and welding tools, hot surfaces or frictional heat.

In addition, workers are often required to enter confined spaces such as petroleum and other storage tanks, mud pits, reserve pits and other excavated areas, sand storage containers and other confined spaces around a wellhead. These confined spaces can ignite flammable vapors or gases, or cause asphyxiation and exposure to hazardous chemicals. Confined spaces that contain or could contain a serious atmospheric hazard must be classified as permit required, tested prior to entry and continuously monitored.

How should drilling and servicing companies plan for and prevent these hazards?

Each drilling and servicing company should have its own safety program, which can be developed with help from your insurance broker/risk manager. For process-specific and task-specific hazards and controls, OSHA has an Oil and Gas Well Drilling and Servicing eTool that may prove helpful. It identifies common hazards and possible solutions to reduce incidents that could lead to injuries or deaths.

Oil and gas companies need to regularly evaluate worksite hazards and find solutions to minimize those. They should establish ways to protect workers, including developing and implementing safe practices for:

  • Confined space; excavations.
  • Chemical handling; exposure.
  • Chemical storage.
  • Electrical work.
  • Emergency response.
  • Equipment/machine hazards.
  • Fall protection.
  • Fire protection.
  • Hot work, welding, flame cutting operations.
  • Personal protective equipment use.
  • Power sources (lockout/tagout provisions, safe distance from power lines).
  • Working in the heat, long shifts.

If a worker points out a hazard, respond and correct it quickly. Educate, train and retrain your workers about the site hazards to promote worksite safety and awareness. For example, workers need to be aware of the swing radius of tongs and/or a spinning chain on a drilling rig floor. Lines and hoses need to be properly secured with whip-checks and connections that aren’t worn. If a pipe is being moved, a properly attached tag line can keep loads from shifting or falling suddenly — workers need to take the time to set one up before a lift. While working at heights, tail ropes can keep tools from falling on workers below.

When engineering controls alone cannot protect worker overexposure to chemicals, noise or other hazards, the employer must provide personal protective equipment. In addition, don’t forget to make a plan for contractor safety and training.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

How to plan for potential business interruptions

Companies get interrupted by the unexpected — fire, machinery breakdown, street closure or supply chain issues. It happens. And like many things in business, planning is everything. More than 70 percent of companies that don’t have a comprehensive business continuity plan fail to recover from a significant business interruption event.

“The goal of a business continuity program is to minimize, if not avoid, the impact from any given business interruption event,” says Dereck Malzi, area assistant vice president at Arthur J. Gallagher & Co. “At a high level, it prioritizes the recovery of business processes and establishes an incident management structure designed to lead an organization through a crisis.”

Smart Business spoke with Malzi about how to set up a business continuity program before disaster strikes.

What steps should employers take now to prepare for business interruption?

A proper business continuity plan covers planning and preparation, response, recovery, and continual review and revision.

Start with a business impact analysis (BIA) and risk assessment to determine post-event recovery strategies and priorities before an event occurs. The BIA helps determine ‘what is at risk,’ the adverse impact of critical business functions if they’re interrupted and the ideal post-event recovery sequence. A risk assessment identifies the type of risks that have the potential to impact the company’s operations.

When a crisis strikes, time is of the essence. But typically, these events aren’t addressed in the policies and procedures. Developing emergency policies and procedures beforehand can save valuable time.

Timely and accurate communication is essential. The inability to communicate can result in unnecessary loss of life, business and customers. Having a process to handle the heavy volume of information gives companies the ability to make timely and accurate decisions. Poor communication and sharing of information is the No. 1 reason companies fail to fully recover from significant business interruption events.

Other important factors are:

  • Plan testing: Exercising or testing helps train staff and evaluate the completeness of written plans.
  • Education/awareness: No plan will be effective unless all employees and key external parties understand what is expected of them. An educational or awareness campaign helps ensure the successful execution of company plans.
  • Continual review and revision: It is extremely important that business recovery plans and strategies are revised on a continual and regular basis. Without this constant review and revision, plans can quickly become out of date.

How can a table top exercise help? How often does it need to be revisited, reviewed and practiced?

A table top exercise can facilitate discussion and preparation for any scenario, such as closed roadways, key personnel who are absent and power outages. This exercise helps review roles and responsibilities, and the participants can identify which functions are impacted and how to meet recovery time objectives for each. It helps them prioritize what to recover first and includes things like vendors, phone service, IT and data backup.

Once you’ve completed the exercise, make sure all gaps, new ideas and recommendations for improvement are identified, recorded and assigned to personnel for follow-up. Next steps can be to build on what was learned by making changes and clarifications to your written plan. Consider developing focused exercises for key business processes. Also, complete formal post-mortems on any event that impacts or has the potential to impact business operations and employees. Always keep learning to improve your plan.

What kinds of insurance are available to manage business interruption risk?

There is no cookie-cutter policy that will work for everyone. Business interruption insurance is designed to cover loss of income that a business suffers after a disaster. This can be paired with self-insured tools such as an 831b captive, depending on your appetite for risk. Your agent can help you put together the right program for your organization.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

Critical risks in the energy industry — and what to do about them

The energy sector seems to be doing well, especially in the Pittsburgh market. But with that upswing comes two challenges that growing employers are facing: staffing shortages and increasing automobile insurance rates.

While these challenges aren’t limited to the energy industry, nearly all companies in the sector are struggling with them, says Tony DeRiggi, area vice president at Arthur J. Gallagher & Co.

Smart Business spoke with DeRiggi about what he’s hearing from the energy industry and ideas for managing these challenges.

Why are energy companies having trouble finding employees?

As these companies grow, they’re struggling to find good people. Certain jobs are especially hard to fill, such as welders or drivers with a commercial driver’s license (CDL). Most people who are skillful and have experience are already working. Many of the younger generation, those ages 22-30, aren’t choosing to do these jobs, even though they pay very well.

With difficult, physical jobs, many of the potential candidates willing to perform them have challenging work history issues, such as a DUI, a history of quitting jobs or they haven’t been working. The hiring company may be afraid that if it invests the time for new hires to get drug tested and trained, they may end up quitting. It’s a balancing act — managing turnover while striving for an acceptable return on investment.

While this is a problem across the board, the energy companies that didn’t downscale as drastically during the downturn rebounded quicker. Obviously, businesses couldn’t pay for more people than needed, but when the energy sector turned around, there was a bit of a hiring frenzy. The people with the most favorable employment history were picked up first, and now there’s not enough qualified people in the talent pool.

How can companies overcome these staffing shortages?

Employers can get creative about finding candidates and increase recruiting efforts. Training and mentoring programs may need to be improved. Experienced employees can record detailed videos for operating important heavy equipment, for example, or rotate assignments to broaden experience and increase knowledge transfer.

Consider adding programs to make your organization a more attractive destination. This includes flexible schedules, paid time off, child care, employee assistance programs, and a total rewards program that incorporates an attractive compensation and benefits bundle with the promise of potential growth in the company.

What’s happening with automobile insurance rates? What can companies do about it?

In general, insurance companies are charging higher rates for any type of automobile exposure — it doesn’t matter if a business has heavy trucks or small vehicles on the road. The reason for the increase is more frequent and more severe accidents than history would predict, which is largely attributed to distracted driving.

Every company should implement hands-free driving and Bluetooth devices. Many companies don’t allow handheld devices in the car. Some have rules where employees aren’t allowed to answer their cellphone, Bluetooth or not, while they’re driving.

A few companies have added technology, such as Lytx or GreenRoad, to help safety ratings. These fleet safety solutions are usually used for commercial vehicles because it’s an investment per vehicle. They score drivers and let them know when they accelerate too fast, swerve, speed or hit the brakes abruptly. The problem is if a driver slams the brakes to avoid a deer, it’s a ding on the score. However, this technology should bring down close calls and accident claims.

Whether or not a company invests in safety technology, employers can create bonus structures for safe driving with different award levels. If someone’s score is low enough, management can move them to a different job or provide additional training.

If a company’s driving record improves, insurance companies will notice. That requires a strong fleet safety program with management support, ongoing supervision, driver training and ongoing education, vehicle maintenance and accident investigation. As a safe risk, insurance companies will be more inclined to compete for your business, even in a market where rates are generally rising.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

How to get back in your underwriter’s good graces

Effective risk management often involves avoiding risks before they occur, but accidents will happen and frequent accidents may cause the insurance company to raise your rates. Perhaps, a project was plagued by job site accidents and cases became difficult to manage, so your workers’ compensation experience modification factor rating shifts unfavorably. Now what?

Employers must consistently make safety a priority and part of the overall culture. If they increase awareness and incorporate risk management, risk control and claims management into each department, there will be fewer employee injuries and vehicle accidents and reduced public liability. This lower cost of risk will help insurance companies see your company in a more favorable light.

Smart Business spoke with Patrick Zedreck, assistant vice president at Arthur J. Gallagher & Co., about how to control your losses and lower your costs.

How far back do underwriters look when determining rates? How long does it take to overcome a poor claim experience?

Underwriters use five years of claims history for most types of insurance. It can take three to five years to overcome a poor claim experience, but a business can argue that it has improved its accident prevention efforts and the past doesn’t predict the future.

If a company has claims that drive up rates, how can it lower those?

Any business, not just companies with poor experiences, should get into these habits.
Start by reviewing claims management and risk exposures, such as safety policies, work practices and procedures, training and management practices that promote safety. Analyze loss-run claims and accident data to identify the causes driving loss trends.

Review covered vehicles or machinery to make sure everything is still being used. If you’ve experienced turnover, update your driver list. You may be insuring a problem driver you no longer employ. Make sure your employees are classified correctly, so workers’ compensation rates are accurate.

Work with your agent on premium reduction and risk management strategies. You can take on more risk by increasing deductibles or eliminating an exposure, and implement preventive actions that eliminate or greatly reduce the possibility of a large claim happening again. You also could subcontract out the types of accidents causing exposures and eliminate them from your insurance. If you take this approach, it’s critical to have appropriate risk transfer agreements with the subcontractor (i.e. hold harmless/indemnification agreements and adequate insurance requirements).

What training are underwriters looking for? 

They typically want training to address the types of claims an organization is having. If employees are experiencing back strains, then underwriters want to implement safe lift training. If vehicular accidents are too common, require a defensive driving class.

How can a business improve its safety plan? 

Training employees in workplace safety, automobile operation, property protection and employment practices liability is just the beginning. Employers need to make supervisors responsible for safety, with their compliance to the safety plan part of their evaluation. Workplace safety committees also should be used as a vehicle for employee engagement and ownership of the risk management program. If employees don’t ‘buy in’ to what an organization is trying to implement, programs cannot succeed.

Identify additional sources of injury and unsafe work practices with your agent. A comprehensive service plan to mitigate hazards, correct unsafe behaviors and improve supervisory controls needs to remain a priority, not sit on a shelf. To make safety part of everyday life, add activities throughout the year, such as:

  • Safety and security assessments of facilities and properties.
  • Comprehensive site-specific emergency response plans that are discussed regularly.
  • Table-top training exercises with the staff and random site audits to benchmark safety and security readiness.
  • Workplace safety committees that promote employee involvement and ownership of risk management.

Any company needs to manage its risk and loss experiences, but to lower your rates, you’ll have to show that you’re taking steps to lower your risk profile.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

Enhance your risk management program with data-driven strategies

It’s not unusual for a company’s finance department to manage the insurance premiums and program structure, while HR and safety manages claims and loss control programs.

“Each department measures its own results, but until the company reviews all top drivers of the risk management costs holistically, it isn’t truly measuring the success,” says Kathy Betts, Area Vice President at Arthur J. Gallagher & Co.

For example, a company might resolve a workers’ compensation claim. But that payment might not be the best financial decision, could set a precedent for future claims or not address the root cause, such as a problematic shelving unit.

Smart Business spoke with Betts about implementing data-driven strategies for a holistic view of your risk management costs.

How do successful companies measure their risk management and safety programs?

It’s surprising how many companies don’t know how to effectively measure the success (or failure) of their programs. A few key considerations allow successful companies to get it done. Identifying, capturing and tracking the right data is the first step. Then, communicate goals and results throughout the company while encouraging employee input. To sustain long-term consistency and success, keep it simple.

What should be tracked and communicated?

Identifying key performance indicators (KPIs) and tracking them as a function of a meaningful exposure — payroll, sales or even number of units or pounds shipped — provides a clearer picture. KPIs should focus on common and costly types of losses or exposures. It’s important to capture and use accurate information and consider variables like state of operation, a recent acquisition or a law change. Beyond tracking KPIs, understand how those components affect the total cost of risk, which includes contractual risk transfer, program structure, etc. Are you getting worse or better?

How do companies bring it together to accomplish a holistic view?

Have finance, HR and safety all involved in understanding the full consequences of a program they’re purchasing, the size of the deductible, whether to settle a claim or even whether to insure something. Companies typically have internal one-pagers the leadership team reviews regularly, so top leadership should add some measurement of risk to the overall KPIs. Then, filter those throughout the organization. With more awareness, employees take ownership. If it’s not looked at holistically, you miss learning opportunities. If different disciplines look at what happened and how to prevent it, people may say, ‘That’s an easy fix.’

How can your insurance agent help implement a data-driven strategy?

The challenge with measuring and making data-driven decisions is capturing the right data — not only about your company, but also your industry. You need accurate information to make accurate decisions.

By working with someone who deals with different companies, he or she can help identify best practices and places to start. It takes sophistication to measure and track this. Plus, you have to prioritize; you can’t do it all. Beyond that, it’s important to convey what you’re doing to stakeholders, like insurance companies, so that you’ll get the best results. Your agent can provide some brief reports and assist you with communicating all your efforts. Your agent can also help identify an emerging issue so you can consider taking proactive measures, like driver training to prevent hijacking.

How do companies ensure long-term consistency and success?

A program may run smoothly until someone leaves. Again, keep it simple; if you get too in the weeds, it becomes hard, or frankly impossible, to manage. Accountability is key. Depending on the company size, it helps to split risk management into finance, HR and safety/physical activities, with one person to pull it all together. Update your plan annually, identifying top indicators and what activities you can perform to address those exposures, along with consistent internal communication. Set goals and see how you did at the year-end. Prevent as much of the cost of risk as you can by being proactive and getting input from the field. If you have good prevention systems in place, you’ll feel more comfortable assuming more risk.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

Rethink the need for D&O

For many private companies and nonprofits the cost of defending and settling an uninsured lawsuit could significantly impair or destroy the entity itself. This isn’t news. But spending a little more premium to package directors and officers liability (D&O) insurance onto your employment practices liability coverage could turn out to be one the most important assets for your organization.

Many people think that by being a smaller private, nonprofit and/or family run business, there is no potential for a D&O claim to occur. However, this unfortunately is not the case, says Dereck M. Malzi, area assistant vice president at Arthur J. Gallagher & Co. Regardless of the talent or strength of the organization or its management, even frivolous lawsuits can occur and the costs to defend them are on the rise. Even if your organization doesn’t have a large board, the coverage may kick in for any individual who is acting in the capacity of a director or officer.

“There’s a reason why some board members won’t agree to join your organization without D&O coverage,” Malzi says.

Smart Business spoke with Malzi about the importance of D&O and why spending a little more may be worth it to your organization.

What are some examples of claims scenarios where D&O could come into play?

Let’s say the vice president of a manufacturer determines that diversifying into a different product line presents tremendous sales potential for his company. Instead of presenting that opportunity to his employer, the VP shares his idea with his brother who forms a new company to produce that product. On behalf of the company, a shareholder might sue the VP, alleging that he wrongfully took advantage of an opportunity belonging to the corporation.

Another example would be if investors file a $5 million derivative lawsuit alleging breach of fiduciary duty. They might claim some of the officers had personal connections to a third-party contractor hired to re-tool the assembly line, so the contractor wasn’t hired to further the interests of the company. The suit could allege that other officers and directors breached their duty of care by undertaking the project without properly investigating the qualifications of the contractor.

Another scenario could involve misuse of funds. A state attorney general might sue a charitable foundation, alleging the trustees were excessively compensated and devoted insufficient time and resources to support the foundation’s intended purpose.

In all three of these examples, the settlements and attorney’s fees could run to several million dollars, which would put a significant strain on almost any organization.

How does fiduciary liability insurance differ from D&O?

D&O and fiduciary are typically bundled together, but D&O provides coverage for mismanagement, conflicts of interest, unwarranted compensation, failure to fulfill the organization’s mission, etc. Fiduciary liability insurance is specially designed to protect against claims alleging violations of the Employee Retirement Income Security Act of 1974.

What types of D&O insurance are available?

D&O insurance has three sides to it:

  • ■ Side A, ‘non-indemnified individuals’ — This provides coverage for individual directors and officers on claims that are not indemnified by the corporation, usually since it is either not legally permissible to indemnify or there are no funds to indemnify. Generally, Side A coverage has no deductible.
  • Side B, ‘indemnified individuals’ — This provides coverage reimbursement on claims against individuals who are indemnified by the corporation.
  • Side C, ‘entity coverage’ — This provides coverage to an organization for claims made against it, and separate and apart from claims made the directors and officers.

This information is the tip of the iceberg on the subject. Make sure you speak with a D&O insurance expert before you decide to pass on this protection for you and your company.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

Reduce costs and realize tax benefits through a captive insurance program

A “captive” is an insurance company that has some common ownership or management with each of its insured companies, meaning that it only insures the risks of its affiliated companies. Its specific form is dictated by the risks, needs and goals of the companies that it insures.

“Captive programs enable companies to take control of their risk financing,” says Andrew Seger, general counsel at Imprise Financial. “The arrangement also reduces some third-party insurance expenses while adding tax efficiencies. It’s clear why many small and midsize companies are getting into it — flexibility, control, expense reduction and tax benefits.”

These programs have been around for decades, but until recently they were only feasible for Fortune 500 companies because of the resources necessary to setup and manage them. Captive managers have since evolved, creating efficiencies that make it feasible for smaller companies. As it stands today, captive programs can be cost-effective for most any size business.

“Any company, regardless of size, type or industry, should look into captive insurance programs,” he says. “Otherwise, they could be missing out on an opportunity to leverage its features to get more competitive.”

Smart Business spoke with Seger about captive programs, how they’re structured and what makes a good candidate.

In what ways can captive insurance programs lower costs for companies?
Company owners and managers are in the best position to assess the risk profile of their companies. Captive programs enable them to select the risks they want to retain and which they’d prefer to transfer to an insurance company. This drives down outside insurance expenses.

By reducing payments to insurance companies and instead funding the captive program, the money accrues to the benefit of the owners and managers, creating investment income in a tax-preferred manner while reducing costs.

Who are the better candidates for captive insurance programs?
It comes down to what uninsured and self -insured risk the company has, how much money it spends on insurance and whether the company has a good claims history. If the company is spending six figures on a policy, but hasn’t had a claim in 10 years, it could easily retain that risk in a captive program.

Another factor is cash flow. Good candidates should be financially healthy with cash coming in — not necessarily high net income and high revenue, but recurring, reliable cash flow.

What should companies know about the program’s administrative responsibilities?
Most smaller and midsize companies hire a captive administrator to run the program. One of their functions is to navigate the regulations and compliance issues. A good captive manager takes a turnkey approach to the regulatory responsibilities at an affordable and transparent cost. But they also can be innovative in finding ways to leverage the benefits of the program to achieve the company’s long-term goals.

What tax benefits do captive programs offer companies?
Captive insurance programs can play a role in a company’s tax strategy. Insurance premiums paid by a company to the captive are tax deductible. And since insurance companies are subject to special tax rules, a captive can take deductions for loss reserves, resulting in deferred taxation. Even better, some programs qualify to exclude all insurance profits from taxable income.

The tax advantages of captive insurance are there for a reason. Congress put them in place to help captives accumulate assets quicker so they’re ready to bear the brunt of a catastrophic event. It’s essentially building a war chest to combat risk, but that war chest can be used for other things in the core business as an asset of the captive program.

Even though times have changed, many people still think captive insurance programs are too complicated or their company is not big enough, so they don’t consider them a viable option. These programs have become flexible and efficient, and are worth a closer look to see if they can be a benefit to the company. Some companies find it becomes a very valuable asset, not just for risk financing, but it helps contribute to the company’s long-term success and competitiveness.

Insights Insurance and Risk Management is brought to you by Imprise Financial

As oil and gas picks up, insurance increases should be scrutinized

Drillers, suppliers and others connected to Marcellus Shale are hiring again, says Taylor Troiano, area vice president at Arthur J. Gallagher & Co. One company went from 35 to 69 employees in one month and still needed to hire 20 more.

Locally, Washington County has 1,146 open wells, with additional wells in the counties of Greene (870), Butler (321), Fayette (257) and Westmoreland (251).

“Energy has big swings,” Troiano says. “With the new presidential administration in place in Washington, an upturn is upon us.”

But as revenues go up, workers are hired and equipment is running again, insurance premiums will increase as well. The question for the business owner is: “How can I minimize those premium increases.”

Smart Business spoke with Troiano about what he expects to see with insurance and how energy companies can respond.

How should business owners manage through the rising costs?

First and foremost, safety is ‘huge.’ With workers’ compensation, for example, a service provider with an experience modifier above 1.00 can’t generally perform work for the larger exploration and production, or E&P, companies. Companies that want to hire more employees should have a strict process to ensure they’re hiring and continuously training the best workers.

When it comes to safety and risk, at a minimum, businesses need a certified safety committee that meets monthly. They will receive the 5 percent discount for their efforts, but perhaps more importantly, they will look more attractive to the insurance marketplace and give the insurance broker more leverage for negotiating renewal terms.

Property insurance rates may also increase as energy companies buy up more space and expand their risk profile (e.g., to build and repair their own equipment).

Another area to watch is umbrella coverage. As large energy companies, such as EQT, Range Resources Corp. and Rice Energy, start to contract for more services, subcontractors may be forced to purchase higher limits. Currently many of those requirements call for a $10 million umbrella limit, which could be $20,000 or more of additional upfront cost.

What about automobile rates?

In the first five months of 2017, the energy sector has seen about a 12 percent rate increase on automobile insurance. The National Highway Traffic Safety Administration found a 9 percent increase in fatalities, from 2014-2017, because of distracted driving. In addition, with unemployment low and more people on the road, an uptick in accidents is predicted.

To combat these increases, companies need to hire safe drivers — people without prior issues like DUIs. It’s a good idea to run motor vehicle reports (MVR) internally. If your insurance broker or insurance company does it, you can’t see the details of the report due to confidentiality. Also, be sure to clearly identify criteria for MVR and violations, reporting of accidents, etc. You might want to capture data by location or shift. It’s critical to implement strong policies, such as prohibiting cellphone use, even though state law allows it. Otherwise, make sure company vehicles have hands-free technology.

In addition, you can reward safe drivers so your employees see evidence of your commitment to creating a positive safety culture. Your insurance broker should be sharing best practices with you in this area.

What’s going on with the coal industry?

Experts believe the coal industry will stay steady or start to increase, as well. Even with the need for clean energy, coal is still an important part of the world we live in. Coal powers 35 percent of the world’s electricity and is also used in the industrial sector. With developing countries requiring more electricity for industrialization, this should help the global market. In the U.S., there has been a lot of consolidation.

How else can your insurance broker help?

Only a handful of insurance brokers have expertise in the energy industry within a 100 mile radius, so it’s critical for companies to work closely with the right broker to manage the total risk cost. Finally, as suppliers and drillers look for ways to generate new revenue, your energy insurance broker can help with referrals.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.

Emerging cyber risks reshape the market in the internet-of-things era

As the internet of things connects machines in complex networks, a new cyber risk is developing — bodily injury or property damage as a result of a cyber breach. Employers and risk managers need to consider the worst-case scenarios of a cyber breach of these systems.

At the same time, insurance companies that write property and general liability policies are starting to push back to avoid picking up this exposure, which may create a gap in your company’s coverage.

Smart Business spoke with Patrick Zedreck, area assistant vice president at Arthur J. Gallagher & Co., about how to mitigate coverage gaps with your cyber risks.

How has this cyber risk developed?

The traditional cyber policy addresses the financial aspects of a breach, such as the cost of notifying individuals of compromised information as well as defending against a lawsuit. It doesn’t, however, extend to covering bodily injury or property damage that result from a breach. For example, the Target Corp. data breach came through a HVAC company that serviced Target stores. While the hacker only took payment card information, that same server could have potentially allowed the hacker to overheat or freeze all of Target’s refrigeration units.

A cyber policy won’t pick up this kind of claim. While a property or general liability policy theoretically covers it, carriers are adding exclusions for cyber-based claims, specifically unauthorized access exclusions for bodily injury and property damage.

What businesses are most vulnerable?

If a manufacturing plant is run on a network, a hacker could overheat a machine and cause property damage or potentially bodily injury. Someone also could hack into a hospital’s network to access patient monitors or the pharmacy. While most hackers focus on financial gain — credit card information or ransom to return the organization’s data — that doesn’t eliminate the motivation of causing damage.

If your company isn’t linked to the internet of things, you don’t run the same risk. But building controls, utilities, etc., are increasingly connected. A refrigerator unit made by a large manufacturer might have a firewall, but the password could be the same for every single unit — and it could be easy for the hacker to determine. Once a hacker determines the password, he or she could theoretically access every unit manufactured.

How should employers cover this exposure?

It’s crucial to sit down with your broker and do a full gap analysis between the property, general liability and cyber policies. You need to be aware of what exclusions are on what policies and make sure there are no significant coverage gaps.

Because the claims information and actuarial data is still dynamic, insurance companies are including exclusions for this risk. Property, general liability and cyber carriers each want this exposure to trigger a policy they didn’t write. Currently, general liability carriers are issuing three types of unauthorized access exclusions. The least restrictive just excludes personal and advertising injury as a result of a breach, which a traditional cyber policy could cover. The other two exclude bodily injury and property damage as well. You’ll want to work with your broker to closely examine the exclusion language.

Going forward, as insurance companies continue to add cyber-based exclusions, some will come out with a policy form that expressly covers bodily injury and property damage resulting from a cyber breach.

It’s also a good idea to review your contracts with suppliers and vendors for cyber liability coverage requirements and standard security protocols.

What else can minimize this risk?

Getting the most advanced security and privacy training is important because employees are the biggest exposure for letting these breaches in — but they can also be the first line of defense. For example, an email may say, “You just booked something for $5,000, click here if you didn’t.” An untrained individual clicks the link, malware or a virus is on the network and the hacker is in. One error can expose an entire company.

Many people don’t realize how connected their systems are. The entire organization — from the CEO to the lowest-ranking employees — needs to work together to keep the company network safe. It doesn’t benefit anyone to experience a breach.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.