As an insurance professional, I am a major proponent of promoting loss prevention. While I am sure no one would argue that it is best to not have a fire, there is some comfort knowing that your insurance coverage is adequate and you are not just discovering the extent of your insurance coverage at the time of a loss. In the almost 5 years that I’ve had a significant interest in the records management industry, I’ve seen loss prevention, particularly relative to fire, as a very recurrent topic in all the industry periodicals, conferences, etc. However, what strikes me, by way of its absence, is the minimal attention that seems to be paid to properly insuring a records management facility for the truly unique exposures that it faces. For this article, I’m going to focus on the one exposure that I feel is most critical to understand in order to properly protect a records management facility.
I was first exposed to the records management industry approximately 10 years ago when one of my longtime courier clients stumbled into the records management industry by simply storing, and at that time, not yet managing, some boxes of old documents for a few of their customers. One thing led to another and before too long, my client realized that this additional revenue source had the potential to become quite lucrative for them. While we were providing them with an insurance program for all of their operations, both courier and record storage, we hadn’t really done anything that much different. We were providing them with Warehouseman’s Legal Liability and the plain vanilla business insurance coverage. As this business continued to grow, we also implemented some traditional Business Income coverage.
It bears mentioning at this point that I have had a national insurance program for the courier industry for many years and I love working with unique industries where companies have unusual exposures and insurance needs. As I would soon discover, the records management industry would definitely fit that bill!
Fast forwarding a couple of years, the record management business had grown significantly and my client had experienced sizable growth. Due to their growth, they had built a 50,000 square foot, state of the art records management facility. This event triggered a fresh, comprehensive insurance and risk management review. During this review, the exposure that really jumped off the page was business income. At the time they opened their new facility, they had approximately 300,000 units in storage. The question was, what would happen from a loss of income standpoint, if, in spite of all the fire protection and security, there was a major fire? How would the business income insurance respond and would it be adequate?
Understand that the basic concept of business income insurance is to protect against loss of net income (net profit or loss before income taxes) that would have been earned or incurred, plus continuing normal operating expenses, including payroll, during the period of restoration. The actual loss payment will not exceed the limit of the policy. Basically, once the facility is rebuilt, the business income coverage ends. The premise behind the coverage ceasing at this point is that the business has been made whole again and can now operate as it did prior to the covered loss.
All of the business income coverage forms expand coverage slightly via an Extended Period of Indemnity (EPI) provision. In some carrier’s coverage forms there is a 30 day period of extension that is automatic. Most carriers will offer, for additional premium, EPI’s ranging from 60 days to unlimited. A significant EPI helps, but you must remember that the claim still cannot exceed the applicable limit of insurance on the policy. Even with a significant EPI provision, you would have to contemplate and calculate out several years of potential loss income to arrive at a limit that is adequate. The fact is, traditional business income coverage, even with a significant EPI, doesn’t offer adequate coverage for the records management industry.
Perhaps the best way to illustrate this point is an example where the traditional coverage does work well for a “normal business.” Let’s take a basic, single location manufacturing operation. Hypothetically, this operation has a fire that destroys three quarters of the building. It takes 10 months to rebuild the building, install new equipment, and replenish raw material. The manufacturer has business income insurance, with a 60 day EPI provision and this will take care of the lost profit and continuing expense for the 10 month period they were down. The 60 day EPI helped as it took some time to get the operation ramped back up to the production levels it was at pre-fire. Of course, we are assuming the limit of insurance they had in effect was adequate. So, as you can see, this is pretty straight forward and the coverage did exactly what it was supposed to do. Now, the manufacturer is ready to pick up where they left off.
Now let’s apply a similar scenario to a records management facility…
The building gets rebuilt in 10 months and racking, security, etc, have been installed, the operation is ready to go again. But, where are all the boxes that were there prior to the fire? Gone…your hard work and future revenue potential (boxes) have been destroyed – up in flames!
The records management operator cannot just go back to his customers and get replacement units. So, he’s got to go out and solicit new customers (who, by the way, may have some concern about a facility that had a recent major fire). Of course the old customers may come back or continue to utilize the operation, but how long before they have anywhere near the number of units lost in the fire? The answer is several years. Does the traditional business income coverage form, with an EPI of any length, get the job done? In a word…NO!
Remember, regardless of the EPI, any claim cannot exceed the limit of the policy. How are you going to project out several years of net income with any kind of accuracy? Even if you are able to come up with a limit you are reasonably comfortable with, are you prepared to put up with a very long and complicated loss adjustment? Why should you?
There is a new product available to the records management industry, called Storage Legal Life (SLL), which will eliminate the shortfalls of traditional business income insurance. In this product, there are two coverage parts: Part A. Warehouseman’s Legal Liability and, Part B. Gross Income and Extra Expense. Part A works similarly to most Warehouseman’s Legal Liability policies, although it is arguably broader than most. It provides coverage that tracks with what you and your customer agree to via the Customer Storage & Service Agreement (ie – $1/box). Part B, on the other hand, replaces the traditional Business Income / Extra Expense insurance with what amounts to “life insurance on a box”.
To illustrate how this coverage would work, here is an example.
- 500,000 box/unit facility
- Average unit generates $6 annual revenue
- Insured chooses to base coverage on a 3 year period of lost revenue
$6 x 3 years = $18 /unit –round up to $20, to allow for misc. lost
revenue and extra expense
- Fire damages 100,000 units
- Insurance company sends in an adjuster to verify the 100,000
- Insurance company issues a check for $2,000,000 less the applicable deductible.
That is basically all there is to it! So you receive gross revenue for those damaged/destroyed units, to deploy in any way you determine. You may have a long-term, good customer that had 5,000 boxes soaked by sprinklers and is now pressuring you to restore them via expensive freeze drying, which can run up to $50 per box, or he will move his other 20,000 boxes, regardless of the fact he’s agreed to $1 per box liability. Based on the simple and lucrative loss settlement under the SLL policy, you can easily accommodate this customer and still be in a pretty good position relative to your future lost revenue.
For most exposures facing a records management facility, standard insurance policies and coverage can offer adequate protection, assuming the proper limits are chosen. However, the specialized service you provide your customers creates a unique exposure for your business with respects to business income. It’s important to understand your insurance program prior to a loss, but it’s even more important to know that there are products available that can provide you with adequate protection. You wouldn’t set yourself up for failure by utilizing a picker that only extends up 10’ if you had 20’ tall racking, so why continue to purchase business income insurance that will come up short when you need it most?
Jeff Ice is Sr. Vice President of Oswald Logistics which operates the logistics division of its parent company; Oswald companies. The Oswald Companies is a 115 year old full service insurance and risk management firm headquartered in Cleveland Ohio. They have branch offices in Columbus and Middelburg Heights, Ohio; Birmingham, Michigan; Minneapolis, Minnesota; and Tampa, Florida. They also have a 27 year old sister company, Oswald Trippe & Co., which is a full service insurance and risk management firm based in Ft. Myers, Florida, with 20 offices in Florida and North Carolina. In all, they have over 450 employees and currently are ranked in Business Insurance as the 42nd largest US insurance broker. Both firms are 100% employee owned and operated.
Oswald Companies is also a proud, long-time member of Assurex Global, a worldwide organization of 112 independent partners who are some of the world’s largest privately held risk management, commercial insurance, and employee benefits firms. With annual premiums exceeding $28 billion, Assurex Global would rank as the third broker in the world.
For more information on Oswald Logistics or to learn more about the R&ISM Advantage Insurance Program please contact an Oswald Logistics team member today at 877-862-4755 or www.oswaldlogistics.com.