This article was produced in partnership with Sovereign Insurance.
Desmond Devoy, of Insurance Business Canada, sat down with Suanne Mitchinson and Rory O’Donoghue, both underwriting specialists, commercial solutions, western operations, with Sovereign Insurance, to discuss the realities of insuring the warehousing industry, and solutions at hand.
Canada’s transportation and warehousing industry is making a comeback – but so are the risks associated with the sector.
The transportation and warehousing sector economy has bounced back, with $8.6 billion of gross domestic product in January of 2023, nipping at the heels of the $8.7 billion recorded in January of 2018, prior to its pandemic-induced slump. This is according to Statistics Canada figures.
Employee numbers have also boomed, with 63,299 employees in the industry in September, accounting for a jump of 5.3% from 2018, according to IBIS World.
With an impressive uptick in business, the industry has an increased appetite for insurance as it faces challenges that both warehousers and brokers need to stay on top of, from storage safety issues to weather related claims, some linked to climate change.
Insuring such a diverse industry can feel as complex as the logistics behind warehouses themselves, with their literal and figurative moving parts.
Insurance Business sat down with two experts in the warehousing field, Suanne Mitchinson (pictured right) and Rory O’Donoghue (pictured left), both underwriting specialists, commercial solutions (western operations) for Sovereign Insurance, and asked them what they thought the four greatest challenges facing the warehouse industry in 2023, were – and what can be done about them.
The frequency and severity of weather-related events has an impact on all sectors, but warehousing can be heavily affected.
Location can play a critical role in determining how much cover a warehousing client can access, with cat exposure across insurers’ books potentially leading to “a situation where sub limits and higher deductibles become the norm,” according to Mitchinson.
Given that warehouses take up a lot of space, those building them may want to keep land costs down. This means that some warehouses end up being built in riskier locations, such as floodplains, that make securing adequate insurance that much harder.
“It makes it really difficult to put up these (insurance) lines there because it is in a flood zone,” said O’Donoghue.
Storage safety is another key issue when it comes to warehouse insurance, with sprinkler safety systems and fire load limits posing particular concern for underwriters.
No matter what is being stored, or how it is to be stored (frozen or other temperature controls), the stored items need to be safe.
Insulated sandwich panel walls in particular can pose a fire risk.
“Our take at Sovereign is that if the paneling does not meet NFPA standards, or the equivalent, then we would treat that risk as combustible, and then we may need to limit capacity on any given risk based on that,” said Mitchinson.
In a lot of older warehouses, paneling was fairly combustible. The recent introduction of non-combustible foam has had a positive impact when it comes to insurance access.
“Non-combustible foam has really brought down the exposure,” O’Donoghue said.
Spoiled temperature sensitive goods are a leading cause of loss in the warehouse sector for carriers.
Sovereign has found that some carriers do not want to participate in those risks at all, or only offer very small sub-limits.
There are several main challenges associated with cold storage facilities, and the need to prevent spoilage for temperature-sensitive goods. This includes maintaining a consistent temperature, managing humidity levels, preventing frost build-up, and ensuring product safety and quality. Government regulators and consumers take food spoilage seriously.
“A small chance of spoilage from bacteria due to incorrect temperature setting can result in a lot of food being destroyed and a large loss to keep the public safe,” said O’Donoghue. “Overall, the key to successfully managing the challenges of cold storage facilities is by implementing a comprehensive approach that includes property facility design, equipment selection, and ongoing maintenance and monitoring.”
Insurance to value continues to be a challenge, but in places like British Columbia, where Mitchinson and O’Donoghue are based, there is a good take-up rate on obtaining replacement cost appraisals, according to Mitchinson.
That said, from the past year alone, Mitchinson has seen at least two “extreme” examples of this, where building limits are more than doubling, and another where a newly constructed building was seemingly already underinsured.
For O’Donoghue, a major concern is getting the right values, the right premium for the risk.
The right valuation is important for both the building and equipment – as well as the Warehouse Legal Liability (WLL). On the building and equipment portion, the insurance policy would have a co-insurance clause which would contain a significant penalty for under insuring values.
While the warehouse portion does not contain a co-insurance penalty, getting the value for stored goods is quite important to ensure the values are high enough for their liability for stored product.
For warehouses that store their own goods, it’s the value of the goods or replacement cost value that is covered.
“The valuation is key to their storage contract,” says O’Donoghue. “In underwriting, we’d like to see a storage contract and see what it would be liable for.”
Amid insurance challenges faced by warehousers, the partnership between the broker and the insurer, is “paramount,” according to Mitchinson. This relationship is key in making sure that the client knows their risks and prepares for them.
“Clients with a robust risk management program are likely to be highly desirable risks, while those without may face greater challenges with their insurance placements,” she said.
“Solid contingency planning by clients, along with underwriting and risk engineering partnerships, which include bespoke risk advice and recommendations, can help a client improve their risk profile with insurers and make their business more desirable.”
Mitchinson stressed that warehouse clients should be thinking of business continuity planning, especially when it comes to risks with spoilage exposures, for instance when there is a power outage.
Other priorities for Sovereign include loss control, evaluating exposures, and offering comprehensive, valuable risk protection. Mitchinson pointed out that Sovereign will often pre-inspect the risk.
“We can go out and have boots on the ground inspecting the risk, and offering engineering recommendations, to ensure we have the full picture before the risk is bound,” Mitchinson said.
Another way the company enhances the resilience of Canadian businesses is through the Sovereign Secure ™ ® Wholesale, Warehousing and Transportation product offerings, which offer comprehensive protection to help reduce or eliminate potential gaps in coverage, from warehouse and equipment to customer merchandise. The product specializes in cold storage, transportation terminals and warehousing.
To find out more about Sovereign Insurance’s warehouse policy, visit them online at: https:// www.sovereigninsurance.ca/industries-and-solutions/wholesale-warehousing-and-transportation.
