Some pallet companies are facing steep increases when they renew their property and casualty insurance while still others are scrambling to find an insurer to protect them. The challenge is more pronounced for pallet recyclers.
Pallet companies are being squeezed because the industry has experienced numerous fire-related losses in years past, according to insurance officials. However, they say pallet businesses can take steps to help themselves, and insurers can help their clients, too.
The reason for insurance carriers exiting the pallet industry is simple and clear, according to Dan Berkwitt, a representative at Illinois-based Connor & Gallagher Insurance agency. “They look for profitable business, and a fire at a pallet company requires a big payout for losses,” said Berkwitt. “There have been a number of fires in the industry in recent years.”
“We’re going into a hard market,” said Stephen Sedlak, a risk advisor for Schmale Insurance in Illinois. “Premiums are increasing, and the acceptability of accounts is tighter.” Insurance carriers that in the past might have been on the edge of whether or not to cover a pallet business now are not even considering them. “They want the best of the best.” Pallet companies are coming under greater scrutiny to determine if they are an acceptable risk.
Pallet companies have incurred a lot of large losses over the years, agreed John Smith, president and CEO of Pennsylvania Lumbermens Mutual Insurance Company in Philadelphia. “If you think about it, you’re also reading about hurricanes, wildfires, flooding,” and other catastrophes, he added. “It doesn’t have to be pallet-oriented, but it adds to the pressure on the property side” of the insurance industry. The pallet industry is impacted by what is occurring in the general insurance marketplace.
“We’re starting to see capacity issues,” observed Smith. Although most pallet companies are small, insurers don’t want to take on the risk of protecting the bigger pallet businesses.
In the forest products industry, businesses like sawmills and pallet companies “don’t get a lot of loss frequency,” noted Smith. “They say, ‘I’ve never had a loss.’ It’s not unusual, but when they do have a loss, the loss is never small. They’re big losses.”
“Think of it as a bucket,” said Smith. “Over the past eight to ten years, the industry has not been putting enough in the bucket, if you will.” Although there are good accounts out there in the pallet and sawmill industry, it becomes difficult to price individual accounts in light of a big loss.
“What you’re starting to see is fewer companies willing to write (or cover) pallet companies. It’s simple supply and demand,” said Smith. “The supply of carriers is down. Given the same demand for coverage, prices go up.”
“It’s an environment that a lot of people haven’t seen before,” said Berkwitt. He received a call from one pallet company that reported its premium was increasing from roughly $100,000 to $600,000.”
With insurance carriers exiting the pallet industry, some pallet businesses are in “scramble mode,” having to pick from the remaining insurers. “There’s not a whole lot of options,” said Berkwitt.
“They give you an ample amount of time to find a new carrier, but a lot of people don’t know where to go…By the time they get the next best quote, it’s double or triple.”
A lot of pallet businesses are declining to purchase the insurance, according to Berkwitt. “They don’t want to pay those kinds of rates.”
Paltech Enterprises, a major supplier of pallets in the Midwest, is feeling the insurance squeeze.
The company has eight facilities in five states: Indiana, Illinois, Iowa, Missouri and Arkansas. Property and casualty insurance for all its facilities comes up for renewal in May. Paltech president John Swenby has been warned by his insurance agent that the renewal premium will be “beyond ugly,” likely increasing 75 to 100%.
If his premiums go up at least 75%, how would that impact his company? “I’d have to look at the numbers first,” said Swenby. The possibilities include forgoing insurance or closing a facility. Mortgage lenders require insurance on a building, he noted.
Swenby is concerned about the looming challenge. “I’m probably three or four weeks from having an emotional drama about what to do,” he admitted.
Swenby knows other pallet company owners who have received similar warnings about their insurance renewals. “There are a lot of people like me. They’re being warned, but they don’t know more than that.”
Commercial Lumber and Pallet, which has two plants in California, renewed its insurance in January, but the premium increased “not that much,” said Jeff Sano, the company’s comptroller. However, two years ago, the premium jumped three-fold.
Although it worked out this year, the company’s leaders were concerned because pallet companies are considered a high risk, observed Sano. “We weren’t positive we would get insurance. So far we have been able to obtain coverage.”
One option for pallet businesses having difficulty finding a carrier is to use several carriers in a “layered” approach to insurance, said Berkwitt. Each carrier will insure a certain amount or level of loss.
That’s the approach Commercial Lumber and Pallet takes. When the company renewed this year, it stayed with mostly the same carriers. “They all didn’t want to assume the full risk,” said Sano.
Being insured by more than one carrier, some carriers have different standards for fire safety, such as height for stacks of pallets and how close pallets are stored near a building. “Some are more particular than others,” said Sano.
Pallet companies can make themselves more attractive to insurers by being proactive when it comes to fire prevention, Smith suggested. “It’s all about risk management.” Risk management practices include keeping pallets stored a certain distance from building, having good housekeeping practices in a plant, proper electrical maintenance, and safety and fire prevention programs.
Playing the devil’s advocate, Smith said a pallet company owner may argue, ‘I don’t’ worry about risk management. I buy insurance.’
However, insurance companies “want someone who’s interested in their business and wants to protect it,” and is knowledgeable and proactive in managing the risk. “The insurer is a partner in the process, not just the one that is going to pay the loss and move on.” Insurers, too, are taking a more active role in risk management, he suggested.
“I tell everyone that you want to be as proactive as possible,” said Sedlak. He is warning clients 6-7 months in advance of their renewal to be proactive in risk management and position themselves to be attractive to their insurance carrier.
Commercial Lumber and Pallet has implemented a number of measures to help manage risk. For example, an electrical contractor visits the plants yearly and does an infrared scan of electrical equipment to determine if they need service or repairs in order to avoid overheating. The company also has surveillance cameras in place to detect intruders. In addition, security guards keep watch overnight — mainly for fire prevention. “That could be our biggest loss,” noted Sano.
Companies with newer buildings and easy access for firefighters, a sprinkler system, fire detection systems, and similar improvements remain good candidates for coverage and competitive premiums. “You can get a real competitive quote on those,” said Berkwitt.
“The biggest hurdle is not having a sprinkler system,” he added. “That’s the first question they ask.”
Sedlak agreed. In conversations with underwriters, “The first thing they ask about is sprinklers,” he said. “And what are they doing to help prevent a large loss.” Pallet storage is another issue, he acknowledged, particularly keeping pallets outside a safe distance from a building.
“Some have bit the bullet and added sprinklers,” said Sedlak, although that is not an option for some pallet companies because of the cost, he acknowledged. Nevertheless, for those that can, “It will attract more carriers and more favorable premiums.”
It’s not just about cost, either, when it comes to the feasibility of installing a sprinkler system.
In the case of Paltech, none of its plants have sprinklers. The buildings are older and not located in metropolitan areas, although each one is served by a fire hydrant. Swenby has considered adding sprinkler systems, but it’s a challenge. The company had a fire about 10 years at one plant and rebuilt it. City officials told him the water system could not provide enough water for a sprinkler system.
In addition, the company’s plants are not heated in winter. They would require a ‘dry’ sprinkler system so pipes do not freeze. A ‘dry’ system has no water in the pipes feeding the sprinklers; when the sprinkler system is activated, it triggers a main valve that allows water to flow into all the pipes.
Pallet recyclers have a more difficult time getting insurance at favorable rates than manufacturers of new pallets, said Smith. Recyclers have had a lot of fire-related losses. “It ties back to storage.” Businesses with more space can spread out their pallet storage area and keep pallets a safe distance from buildings.
Insurance agents can help their clients. “Our job is to sell the account to the underwriter,” said Sedlak. “We take a very proactive approach. You want to put it in the best light that you can and provide the most information you can.” His company will video the client property to show them what fire prevention practices are in place and submit “every document” that demonstrates a company’s safety practices.
Sedlak suggested, “It pays to invest in safety. I would add a dust collection system to reduce the risk associated with combustible dust. Beyond reducing fire exposure, it can also lead to lower work compensation costs associated with slips and falls.”
Insurance Brokers Serving the Pallet Industry
Connor & Gallagher Insurance
Dan Berkwitt
Phone: (630) 737-9357
Website: www.gocgo.com
Schmale Insurance Agency
Stephen Sedlak
Phone: (618) 233-0193, ext 2
Website: www.palletrisksolutions.com
Insurance Carriers Serving the Pallet Industry
Pennsylvania Lumbermens Mutual Insurance Company
John Smith
Phone: (800) 752-1895
Website: www.plmins.com
