Are you protected? Understanding the role of insurance in reliability decisions

Industry regulations and standards do matter, but sometimes insurance is calling the shots.

By Sheila Kennedy, CMRP, Contributing Editor

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The human, property, environmental, and reputational toll of asset failure can be difficult to stomach, but the risk is ever present in asset-intensive industries. Effective reliability-based maintenance programs mitigate the threats by improving the safety and uptime of critical assets and allowing for timely scheduling of repairs. Insurance policies, on the other hand, protect against economic losses should an incident occur.

The role of insurance in reliability decisions is becoming increasingly prominent. Catastrophic losses can lead to sharp increases in insurance premiums or outright cancellation of the policy, and ill-defined coverage or misunderstandings can lead to expensive litigation to settle coverage disputes.

To avoid issues of this nature, asset owners are working with their insurance providers to ensure adequate coverage. For example, California-based food and beverage manufacturer The Wonderful Company is covered fully for fixed and mobile asset losses and liabilities, says Bob Kazar, director of reliability and operational excellence at The Wonderful Company.

At the same time, insurers and policyholders are taking a closer look at asset reliability programs. The importance of these programs as a means to save lives and protect property and the environment cannot be overestimated.

Reliability program drivers are evolving

Asset reliability programs are commonly recognized for their financial and operational benefits, and they’re implemented with these results in mind. The traditional drivers of reliability programs are establishing a competitive advantage within the given industry, lowering maintenance costs, and extending equipment life cycles, says Terry Harris, president of Reliable Process Solutions (RPS).

Attention to the programs also can be reactionary. “Normally, any major incident such as a production loss based on a technical failure leads to thinking about doing some more reliability work. It is often pretty much event driven,” remarks Achim Krüger, vice president of operational excellence solutions at SAP.

Whether proactive or reactive, risk management is more important than ever in our technology-focused world. “The increasing dependency on equipment by Operations can create substantial business exposure,” says Buddy Lee, reliability subject matter expert at FacileX. “Unfortunately, not everyone understands what can go wrong with the equipment or what the replacement cost will be.”

The Deepwater Horizon event is the poster child for expensive industrial losses, says Lee. The Transocean oil rig exploded and sank in the Gulf of Mexico in 2010 while drilling a BP well, triggering an oil spill that would become the worst in U.S. history. In September 2014, a federal judge ruled that the discharge of oil was the result of BP’s gross negligence and willful misconduct. He described BP's actions as "reckless," while he said Transocean's and Halliburton's actions were "negligent."

“BP was self-insured at the time. Transocean apparently had named BP as additional insured under its $750 million insurance policy for the rig, but BP’s interest in that policy was thrown out of court,” remarks Lee. By July 2016, BP’s liability for the spill had reached nearly $62 billion.

Another example is the 2010 explosion of a Pacific Gas & Electric (PG&E) natural gas transmission pipeline that leveled a San Bruno neighborhood in California, killing eight people. Federal investigators determined that PG&E’s violation of recordkeeping regulations and flawed maintenance contributed to the disaster. The company had nearly $1 billion in fire insurance to cover liabilities from that blast.

“Arguably, the worst possible way to start a reliability program is in a reactionary state with little to no resources and political power granted only by proximity to a recent disaster. Yet, many successful programs have been implemented specifically in reaction to an event,” says Lee.

Proactive actions by policyholders

Some asset owners are using their reliability programs as a way to reduce insurance premiums. Frontrunner companies that approach asset management from a broader perspective are looking for the best levers to negotiate with insurance providers, says SAP’s Krüger. “Insurance is all about risk, so the thinking is, if I can document my overall asset management systems, not from an IT sense but from a management sense, and I have all of my risks under control, then I can negotiate with my insurer about lower rates,” he explains.

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