Risk Management: Impacting your cost of risk
Risk Management: Impacting your cost of risk
01/14/2013

Equipment you buy can affect insurance rates

If you’re thinking about moving into a new line of equipment to meet customer demand, there’s more to it than just buying inventory at The Rental Show.

Even if you do the proper research to find the best equipment, determine rental rates, figure out maintenance needs and the labor involved, there is one other factor that many rental store owners might overlook — the cost of risk.

Your first step in determining cost of risk might be to check how your prospective purchase may affect your insurance rates. Different types of inventory present varying exposures to loss. Examples of inventory that are typically considered at the high end of the hazard spectrum include high-reach material lifts and personnel lifts; large tents; cutting or breaking tools, such as saws, jackhammers, trenchers and log splitters; and inflatable games. A large concentration of these items can cause your insurance rates to be somewhat higher than stores with a blend of less hazardous inventory.

“The cost of insurance might change the equation from a profitable move to unprofitable, especially if you’re moving into something totally different from what you normally rent. You need to do your homework, be aware of this and build it into the equation,” says Phil Kelling, president and CEO, ARA Insurance, Kansas City, Mo. “It’s as easy as calling your insurance agent and explaining what you plan to do. Your agent can discuss this with the underwriter and help you calculate that cost of insurance into your buying decision.”

Kelling also suggests that buyers be aware of the practices of some insurance companies when it comes to inventory. While ARA Insurance has blanket coverage and makes an adjustment once a year based on overall inventory value, some insurance companies schedule each item and if it is not on the list, it is not covered.

Another question, he says, is transit. “If you buy equipment at the show, you need to know if you have the proper transit coverage to get it home. ARA Insurance provides for that, but some companies may have limitations. That means you might only be covered for $10,000 in transit coverage when it’s a $25,000 piece of equipment,” Kelling says.

However, even if you have the best insurance in place, there is still an uninsured cost of risk — time. Once there is a loss, there is time spent reporting the loss, gathering information to help evaluate the amount of loss, disruption to your business because employees need to report what they know about the loss, loss of use of the rental inventory while it is being repaired and more.

The best way to mitigate this cost is to ensure that the hazards of the equipment have been properly controlled. Is the product Underwriter’s Laboratory (UL) approved? Does it conform with Occupational Safety and Health Administration (OSHA), International Organization for Standardization (ISO) and/or American National Standards Institute (ANSI) guidelines? Ask before you buy. At the end of the day, these standards decrease the likelihood that a loss will occur and loss prevention is just as effective as loss financing in controlling the cost of risk.

For example, one of the more ubiquitous factors affecting exposure to loss is gravity. Any product that you rent that raises people or products off the ground and exposes them to falls should be reviewed to determine what the manufacturer has done to mitigate that exposure to loss.

Inflatable slides inside a fully enclosed bounce house present a much lower exposure to loss than a freestanding slide. If a child falls from the slide in the bounce house, the fall is cushioned. A free standing slide with the ladder enclosed and a large landing area is preferable to one without those features.

A lift with outriggers, “out-of-level” indicators and clearly marked load limits has a reduced likelihood of upset and overturn while that lift is being used. Stages, platforms and scaffolding should include safety railing.

On individual purchases, these features will not affect your insurance costs significantly. However, you can still achieve a significantly lower cost of risk when you are making an informed purchase decision taking these factors into account and those lower costs flow to your bottom line.

Harvey Felzke is underwriting manager for ARA Insurance, Kansas City, Mo. For more information, call 800-821-6580 or visit  ARAinsure.com.