NATIONAL PETROCHEMICAL & REFINERS ASSOCIATION

1899 L STREET, NW, SUITE 1000

WASHINGTON, DC 20036

MC-02-100

MAINTENANCE & INSURANCE: “CLOSING THE CONNECTION”

By

Mack Rogers
Partner

John L. Wortham & Son L.L.P.

Houston, TX

Presented at the

NPRA
2002 Annual Refinery & Petrochemical Plant
Maintenance Conference and Exhibition
May 7-10, 2002
San Antonio Convention Center
San Antonio, TX
This paper has been reproduced for the author or authors as a courtesy by the National Petrochemical &
Refiners Association. Publication of this paper does not signify that the contents necessarily reflect the
opinions of the NPRA, its officers, directors, members, or staff. NPRA claims no copyright in this work.
Requests for authorization to quote or use the contents should be addressed directly to the author(s)
Without question, there is a direct connection between the maintenance program in an
organization and the efficiency of the risk management/insurance program. This obvious fact is
not surprising. What is surprising, perhaps, is that attention to the details of the maintenance
program has faded over the past decade, particularly where insurance is concerned, to the point
that some may believe it is of little importance. That view is changing rapidly. Currently, as we
enter a “hard” market, the impact of an effective maintenance program is a key determinate in
not only the price but the availability of insurance. Accordingly, requests for descriptive
information that have not been made in years are now coming forward. To the maintenance
manager, this may seem both alarming and a bit overwhelming. The purpose of this report is to
provide a basic understanding of the forces at play behind this seemingly “new” movement
which will allow the maintenance manager to participate meaningfully in insurance placement
activity so that the organization benefits from the quality and thoroughness of the maintenance
programs it practices. Typically, a greater understanding of this process will better enable
maintenance personnel to provide meaningful information to the risk manager; thus, generating
positive results in terms of reduced insurance pricing and an increased number of insurance
carriers interested in offering coverage.

To begin with, an overview of the insurance placement process itself is in order. First of all, it is
sometimes felt that commercial insurance primarily revolves around simple price negotiation. In
practice, underwriters accepting the uncertainty of risks on behalf of the insured need to know a
great deal more than the “price target” about the company they are covering in order to (a)
determine if they will accept the risk and (b) set premium rates each year. As major
organizations approach their renewals, volumes of information are assembled for presentation to
underwriters. One potential problem in this process is that the person responsible for
“insurance”, typically a risk manager or financial officer, may work in somewhat of a vacuum,
using outdated information and, in effect, short circuiting the great benefit that a maintenance
supervisor, training coordinator, or plant operations chief might be able to provide. This is
especially true in a soft market when only the most essential information concerning values,
throughput, revenues and payroll seem needed to get a quotation. To be sure, other information
is in the insurance submission, but is it current?

On the other hand, when we enter a hard market, underwriters become increasingly concerned
about the quality of their account files. At such times, a great variety of detailed information is
demanded and so, to the maintenance supervisor or chief accounting officer or to the Human
Resources Director or operations chief, it may seem as though the rules have changed. In reality,
the insurance industry has simply returned to basic business principles. Unfortunately,
information which could easily have been maintained all along now has to be recreated or
updated at considerable effort.

What causes the hard market--soft market swing? This phenomenon is a bit puzzling to some
and yet a brief reflection upon overall financial conditions will reveal considerable insight. We
have been in a “soft” insurance market for over ten years. Insurance companies were able to
make a considerable amount of income from investments in the stock market and other

MC-02-100
Page 1
commercial sources. That being the case, pure “underwriting profit”, i.e. the difference between
premium received minus paid losses and operating expenses was of less importance. The influx
of cash became the focal point and that prompted a frenzy of carriers willing to quote greatly
reduced rates, primarily to fuel the investment machine. Naturally, this “dumped” cash into the
financial market, creating a competitive environment in which premium dropped lower and
lower at each renewal. Additionally, it may seem somewhat surprising that insurance companies
rarely retain the limits reflected on their policies. Usually, “reinsurance” is purchased, reducing
a given carrier’s exposure to merely 10%-20% of the entire risk. This protection allows
insurance companies to operate more aggressively, to write more business and, in general, to
offer lower premium rates.

A “hard” insurance market greatly reduces the availability of reinsurance and significantly
increases the cost of the reinsurance that is available. During the past ten years, insurance
renewals typically offered increased limits and broadened coverage features at reduced pricing.
Naturally, the risk managers and financial chiefs were thrilled. The problem is, when the cycle
begins to turn, it can turn quickly and far more sharply than the gradual downward trend of a soft
market. It is a fairly common observation that stock market investments are less attractive today.
What happened to the rocket rise of the dot coms? Where are the “rollup”/merger companies?
Accordingly, if insurance companies cannot make additional income from outside sources, then a
determined campaign ensues to first, select only those insureds which present reduced risks and
secondly, to raise premiums to profitable levels. When this condition of increased pricing and
coverage restrictions occurs, it is referred to as a “hard” market. The insurance industry is
currently in a “hard market” and that is exactly where the maintenance manager can be of great
benefit. A quality maintenance program can, in fact, help identify the organization as one in
which major losses are far less likely to happen; thus, making the insured attractive to
underwriters.

But what is the overall placement process? Do insurance agents submit application insurance
companies who then look the appropriate premium up on published tables? Absolutely not!
There are few “published rates”. What it really comes down to is how effectively the broker can
“present” the facility to be insured as a desirable risk. This requires a great deal of negotiating
and, the better equipped the broker is with convincing data, the more favorable the outcome will
be.

With respect to maintenance, the underwriter looks for several specific characteristics. It all
begins at the top. The first assessment will be to gauge management’s attitude toward the
subject of maintenance in general. Does management proactively support the maintenance
program? Have adequate funds been budgeted to sustain required maintenance activities? Also,
is there adequate separation of responsibility between maintenance and operations such that the
maintenance program will not suffer in the face of ever-increasing demands for a higher
production levels. Underwriters need to understand and appreciate that, at a particular facility,
the maintenance of existing equipment, combined with the upgrading of outdated units is just as

MC-02-100
Page 2
important as showing a healthy return each year to investors. Not surprisingly, if the former
begins to fail, the latter will soon follow.

Underwriters will then begin to examine the program itself. Most maintenance programs can be

broken into the following components:

• Preventive Maintenance

• Operational Maintenance

• Scheduled Maintenance

• Breakdown Maintenance

In each of these areas, adequate record keeping is vital. There is no one correct way to
accomplish this; however, the essence of an adequate record system is to answer the following:
Where are we now with our maintenance campaign; where are we going and how are we
attempting to get there? This information is conveyed to the underwriters in two ways. It
appears first in the insurance submission and later, it is confirmed during onsite visits by loss
control engineers. If underwriters sense that the record system is faulty, they will quickly reach
the conclusion that maintenance efforts are also ineffective. Adequate records reflect the
existence of a viable maintenance program and, in addition, greatly benefit the organization from
a management perspective. Occasionally, one hears about a company that had a beautiful
maintenance program “on paper”, yet actual maintenance in the facility was a sham. Don’t fall
victim to the thought that “looking good on paper” is sufficient. The field inspectors will quickly
determine whether or not the actions indicated on paper have actually occurred. While it may be
possible to have some type of maintenance activity ongoing without documentation, failure to
have an adequate database leaves a very negative impression on the underwriter.

The next area likely to be examined is that of training. In this context, training refers to
schooling provided to maintenance personnel. Maintenance work in a modern, highly technical
facility is complex. Granted, while much is learned “on the job”, a truly effective organization
will have organized instruction to ensure employees are kept abreast of all developments. Here
again, record keeping is important and, here again, the records will be verified through random
interviews with selected plant personnel.

In a capsule, the typical maintenance program would consist of the following elements:

1. Written maintenance policy

2. Experienced maintenance manager

3. Detailed maintenance programs

MC-02-100
Page 3
 4. Maintenance information system

5. Written procedures for notification/work control

6. Documented maintenance personnel training program

It is not the purpose of this report to delve deeply into each of these elements as maintenance
professionals are adequately qualified to incorporate these components and others in tailoring a
maintenance program to meet organizational needs. The point here is to emphasize that this
information is carefully reviewed by insurance underwriters aided by the loss control engineers
who advise them and figures heavily in the placement of effective insurance coverage.

One leading cause of property and business interruption claims in petrochemical and refining
facilities is simple piping failure. Perhaps, because of its apparently innocuous characteristic,
facility piping may be overlooked as an item of key maintenance importance and yet major
losses result from piping failures. Similarly, another major cause of loss lies in the tank farm.
Here again, static, less complicated equipment may not receive the attention it deserves in favor
of more sophisticated plant system.

Other areas of keen interest to underwriters include:

Pressure vessel inspection program

Vibration inspection program
Relief valve verification testing
Rotating equipment inspection program
Electrical equipment inspection program
Alarm and instrument maintenance program
Oil and lubrication analysis
Metallurgical analysis
Spare parts inventory

Given the above, it would be extremely beneficial for the maintenance chief to provide a brief
summary of these areas to the respective risk manager for inclusion in the insurance submission.
This should be viewed, not as another administrative burden, but rather as an opportunity of
presenting the facility in a very positive light to the underwriters who will be responsible for
accepting or rejecting the risk of loss.

The next area of concern is the annual site inspection visit. Most major carriers require that all
significant facilities be visited at least annually by their loss control engineers. One excellent
way to accomplish this requirement is to invite all participating carriers to visit the facility at the
same time. In so doing, the insured economizes the amount of time required by members of the
organization to prepare for and host such visits. Being proactive during the site visit is an
excellent way to impress underwriters with the loss prevention/loss control features of the
facility. Some organizations accommodate the site visit by simply responding to questions
presented by the visiting engineers. While this is certainly acceptable, a better approach is to

MC-02-100
Page 4
take the opportunity of not only answering questions, but making certain that each visiting
engineer or underwriter leaves the facility truly believing it to be in excellent condition, fully
deserving the best premium rates. To do this requires some extra preparation, but the payoff can
be significant. An attachment to this paper shows a sample outline of such a visit. Naturally,
any particular organization might adapt this outline to meet their specific situation; but the point
is, the insured sets the pace throughout the entire event; not the visiting insurance engineers.

From an insurance standpoint, the payoff of an excellent maintenance program is to:

1. Anticipate failures

2. Assess the consequences of failures

3. Prevent failures

4. Expedite repairs

5. Provide tools for self-diagnosis and correction

These factors convey to underwriters a feeling that losses will indeed be infrequent. Further,
should an accident occur, its impact will be reduced and appropriate correction taken to prevent
recurrence. One typical characteristic of the “hard market” mentioned earlier is that insureds
will likely be accepting higher deductibles or even shifting to fully self-insured/captive
programs. As the retention of the risk increases, it naturally follows that a loss prevented means
money directly saved by the organization. Thus, in addition to reduced premium, an added
benefit of effective maintenance is created by minimizing or eliminating this otherwise “cash
drain” on the organization’s bottom line.

There is indeed a direct connection between maintenance and risk management. Open
communication between the risk manager, the operations chief and the head of maintenance will
contribute greatly toward the reduction of risk of loss, and it will also enable your organization to
maintain a favorable reputation within the insurance community.

MC-02-100
Page 5
 INSURANCE SITE VISIT
LOSS PREVENTION & CONTROL

1. Introduction

• Welcome by senior management representative

2. Safety Philosophy

• Safety Policy
• Key Personnel Responsible for Safety
• Safety Committee
• Accident/Incident Investigation Procedures
• Safety Statistics & Achievements
• Operational Standards (ISO 9000, Responsible Care, etc.)
• Contractual Risk Transfer

3. Operations

• Brief overview of plant operations highlighting production volumes, types of processes,

materials handled, temperatures, pressures, maximum concentration of flammable
materials, etc.

4. Loss Prevention

• Training
• “Best Practices” Review Procedures
• Emergency Procedures
• Area Sensors & Alarms
• Process/Control Room Alarms
• Product Quality Control
• Premises Access Control
• Contractor Management
• Vehicle - Railcar Control
• Construction Characteristics (Wind, Fireproofing, Drainage, Physical Separation, etc.)
• Employee Screening
• Maintenance Program
• Preventive
• Operational
• Scheduled
• Breakdown
• Status of Previous Safety Recommendations

MC-02-100
Page 6
5. Loss Control

• Emergency Response Personnel

• Firewater System
• Outside Firefighting Support
• Disaster Recovery Plan
• Spare Parts Inventory
• Process Isolation Capabilities
• Emergency Procedures
• Alternate Utility Sources

6. Plant Tour

7. Question - Answer Session / Outbrief of Visitors

MC-02-100
Page 7