Recycling operations: Why contractual risk transfer is essential | Insurance Business America
This article was produced in partnership with Amwins.
Recycling plays an essential role in driving sustainable economic growth in the United States. Recognized as one of the world’s first green industries, recycling has a positive environmental impact, and it also creates and supports thousands of jobs for Americans. But recycling operations have unique risks that require careful insurance consideration.
The RecycleGuard insurance program, part of Amwins Program Underwriters, has been a dedicated insurance provider to the recycling industry for over 25 years, covering metal, plastic, glass, paper, rubber, textile, electronics, or a mixture of these commodities.
Endorsed by the Institute of Scrap Recycling Industries (ISRI) since 2000, RecycleGuard provides coverage to over 50% of the scrap industry in the US. The program’s underwriting team has resolved over 20,000 scrap yard losses and has completed over 4,500 risk management visits to scrap yards.
Susan Diecidue, underwriting manager for RecycleGuard, and Dan Curran, senior vice president and underwriting officer for Amwins Program Underwriters, spoke to Insurance Business about the key risks impacting the recycling industry – and how to mitigate them.
Property - Fire
Scrap yards are highly exposed to fire. This is especially true for recycling operations that shred automobile hulks (wrecked, dismantled, or inoperative vehicles), explained Diecidue, because of the highly flammable automotive shredder residue (ASR) – also known as fluff – that is created in the shredding process.
There is also some speculation that an increase in lithium-ion batteries (especially those from small electronics, like cell phones) in the waste and recycling stream is causing an uptick in fire frequency at scrap yards – but there’s a lack of hard evidence to prove that theory, according to Curran.
With fire claims frequency on the rise, property insurance has become “the most challenging line” of business for the recycling industry, according to Diecidue. She said insureds must focus on loss control to gain more favorable treatment from underwriters.
“From an underwriting standpoint, when we’re looking at scrap yards – especially those with ASR – we want to ensure they have extinguishing systems in the appropriate spaces,” she said. “If they’re recycling paper, we want sprinklers overhead, a good clean-up process, and strong fire watch practices. All of those safety controls should be in place, and when they are, the risks become more palatable for underwriters to work with.
“If an insured has a fire, what have they done to mitigate it from happening again? That’s really important. When we see loss frequency on a property policy, we know there’s a bigger issue, as frequency bodes severity.”
General liability – Premises - Operations
Recycling businesses often open their scrap yards to vendors, contractors, peddlers, and other visitors. While on-site, those invitees are exposed to a “myriad of hazards,” according to Curran, from industrial power trucks to contractors’ equipment, excavators, moving vehicles, and more.
“We see injuries to invitees as the main driver of significant loss on the general liability side,” Curran said. “Scrap yard layout is critically important, and making sure there’s a place where peddlers can drop off and process their scrap, which is separate from other parts of the yard where there are lots of potential hazards. We also look for fencing, signage and PPE for all people on premises.”
Commercial auto – Trucking risks
Most recycling operations have fleets of commercial vehicles, which are a challenging risk class to insure. In recent years, the commercial transportation industry has been plagued with challenges around distracted driving, a general increase in auto claim costs due to new technology, and a rise in catastrophic liability claims driven by social inflation and nuclear jury verdicts.
Recycling businesses are not immune to those trends. Curran commented: “A lot of recycling businesses use dump trailers, which carry a looser load (with less stability) than a full truckload (FTL). But it’s a typical heavy truck exposure.
“The challenge is that many operations have fleets in tough legal venues and tough claims jurisdictions because the scrap yards are where the people are. They’re near metropolitan areas and then [the scrap material] is moved to more industrial areas. That means the trucks are driving through busy places, and they’re just as susceptible to large commercial auto losses as any other type of heavy truck operation.”
Driver/worker shortage - Why contractual risk transfer is essential
The recycling industry, like other commercial auto operators, is also dealing with a driver shortage, which many businesses are countering by hiring subcontractors to drive for them. When doing so, Diecidue said insureds must ensure they have appropriate contractual risk transfer wording in their fully executed contract between themselves and the contracted party to transfer exposures and prevent significant losses.
“If the [subcontracted driver] doesn’t have adequate or any insurance in place, we [as the insurer of the primary insured] are going to be named in a claim or a lawsuit if anything happens – and when trucks are involved, claims can get very nasty,” Diecidue told Insurance Business. “The contract should require the subcontractor to carry limits equal to or greater than our insured, and it should name our insured as an additional insured (AI). We also look for hold-harmless agreements, so the liability culpability sits with the subcontracted trucker.”
If insureds fail to meet this risk transfer criteria, insurers may exclude coverage for certain drivers or attach no-drive letters to policies, depending on the state. The same practices apply when recycling businesses hire temporary workers on-site. If the subcontracted workers do not have contractual risk transfer in place, insurers may exclude the exposure under the general liability policy.
“Agents and brokers must be an advocate for [contractual] risk transfer because it protects their clients,” Diecidue emphasized. “My best advice is for them to work with an attorney and the insured to get proper risk transfer in place so they don’t find themselves [facing a huge claim or in a situation where coverage is denied]. That makes it easier for them to get insurance too, because if an underwriter sees that an insured is being proactive about risk transfer and is safety conscious, that’s a win-win.”