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

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.

This is already being done by some SAP customers. “A couple of years ago, I met (people from) an Australian utility that successfully negotiated its insurance rates with Lloyd’s of London based on their asset management documentation. At that point in time, it was quite stunning to me, but I see it is coming up more and more,” remarks Krüger.

Another big influence he sees is the ISO 55001 asset-management standard. Insurers may not make certification an imperative, but they want to see that their policyholders have risks under control and that there’s a certain maturity level in the organization in how they’re doing asset management. “I see this definitely coming up in rail, utilities, oil and gas, and chemicals, but I’m not seeing it in discrete manufacturing. I think it’s because that industry still focuses on ‘maintenance’ as part of operations rather than ‘asset management’ more holistically,” says Krüger.

The Wonderful Company’s Kazar points to Pacific Gas & Electric as an example. In his view, “PG&E recently implemented ISO 55001 in part because it has been a part of many lawsuits due to asset failures that endangered the lives of California citizens,” he explains. PG&E President Chris Johns credited efforts “to transform the safety and reliability of our gas system and earn back the trust of our customers” in a May 2014 press release announcing its certification.

Directives from insurance providers and regulators

Regulators such as the Occupational Safety and Health Administration (OSHA) and the Mine Safety and Health Administration (MSHA) mandate discipline in risk management. Insurance providers seek proof of regulatory compliance, and some add their own rules and reliability practices to their policies.

“Equipment breakdown insurance, formerly called boiler and machinery insurance, protects an organization from breakdowns in electrical infrastructure and key pieces of business equipment that are relied upon for productivity. By law, boilers and pressure vessels are required to be inspected periodically. So are certain devices, such as air-conditioning systems in New York City,” says FacileX’s Lee.

“Insurance providers have offered premium discounts for predictive maintenance programs for several years," Lee adds. "While I am not an insurance agent, it would make sense that insurance companies have expanded these programs to the reliability and asset management functions.”

What Kazar has seen is more attention to detail in assuring the assets meet specific criteria for their intended function. “When The Wonderful Company installed a new oil-storage building (Sea-Can) in California, the insurance company required additional spill protection in the form of a 6-inch raised floor to accommodate overflow from the original containment under the tanks. An upgrade to the building’s fire suppression system was also necessary before the insurer would sign off,” says Kazar.

Insurance companies also are doing more investigations and research around preventive and predictive maintenance and their effect on losses, reports RPS’ Harris. “They are asking more questions after failures to make sure companies are doing effective PMs to prevent major failures and losses, and they are actually even looking at the original design and installation as a cause of failure,” he explains.

For example, it was proven in the BP Texas City refinery explosion that PMs were missed or not performed, which led to some of the root causes of the incident, explains Harris.

“I have been called by law firms and insurance providers to testify against plants that lack effective PMs, which may have caused major losses such as fires or explosions. However, I have never taken such a case since it would affect my future work in the industry,” remarks Harris.

Every industry is different

The type and amount of coverage needed depends on the specific industry and use of the equipment. Airline operators are pretty regulated, so they get all sorts of procedures from aircraft manufacturers they must prove are being followed; otherwise ,they’ll lose their certificate of airworthiness, says SAP’s Krüger.

“In a mine, you have a different degree of freedom. You are more in the driver’s seat to decide the maintenance strategy,” adds Krüger. “This also applies to facilities where the operator has some responsibility for the design, such as a refinery, in which there are all sorts of components where you can get recommendations from the manufacturer, but the overall setup at the end of the day is governed by the operator on the production line. That strongly influences how much the operator has to think about what can be done to reduce costs, but also to reduce risk. That also strongly influences the documentation needs for their insurance company.”

The Wonderful Company’s Kazar says: “In the food manufacturing and building materials industries where I have worked, insurance companies have exercised very little influence on reliability programs. I believe insurance will become a bigger player over time, but insurance company influence over reliability programs will be slow in the United States.”

The need for a production increase or quality improvement is the main driver for a reliability program in these industries, says Kazar. “However, I would say 50% of those cases are not actually a reliability issue at all. Instead, a combination of standard operating procedures and training usually delivers the required results.”

Kazar notes that food audits such as AIB International and Global Food Safety Initiative (GFSI) have had a great positive impact on reliability by supporting necessary efforts to improve procedures and processes impacting food safety. OSHA issues and audits also have had a positive impact on assisting reliability programs.

Conclusion

Reliability is truly a win-win-win for an industrial plant. “I believe that some industries are starting to make the connection that a reliable plant is a safer plant, that reliability impacts sustainability since environmental releases are reduced, and reliability impacts the costs of goods sold by reducing the maintenance component of costs and improving throughput, so products are made with first-pass quality,” observes FacileX’s Lee.

Maintaining a working relationship with your insurance provider is key, advises Kazar. “Utilize your corporate insurance manager for all communications with the insurance company. This ensures that you are working with the right corporate teams, keeping everyone in the loop, and avoiding any missteps.”

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