Last week we looked at the insurance lessons we could learn from the fertilizer plant explosion in West, Texas on April 17th. The explosion destroyed the plant, killed 15 people, injured 200 and damaged or destroyed 350 homes, a school, an apartment building and a nursing home. Preliminary estimates of the damage and destruction were pegged at $100 million.
Rueters reported within a few days of the explosion that the West Fertilizer company carried a commercial policy with $1 million in liability coverage. The Dallas Morning News, and much of the news appearing on the internet, jumped on this with articles and editorials. The tone of these pieces bordered on incredulity with the implied thought West Fertilizer Company should have liability coverage of $100 million.
I don’t want to minimize the financial or emotional loss, nor the loss of 15 lives. No amount of money will ever replace the people who died or the pain suffered by an entire town reeling from the loss of homes and injuries. I think it’s important that we examine what happened and determine how this can be kept from happening again. Some of these questions will be answered when the report on what happened is released. The obvious questions are:
- What caused the fire?
- Was it the result of some accident, a freakish occurrence or a negligent act?
- Should the ammonia nitrate have been stored differently?
- Were proper safety procedures in place and being followed prior to the fire / explosion?
- Should the state of Texas establish a state version of OSHA that inspects all plants involved in the processing, storage, or distribution of hazardous material?
These are important questions, however none of them are insurance related and that’s really the focus of what I’d like to delve into. From an insurance perspective, I believe there are four key questions that need to be answered.
- Should Texas law (or any other state’s law for that matter) be changed to require all companies engaged in the production, storage, and distribution of material that is potentially hazardous and explosive to carry a certain minimum level of insurance coverage?
- If so, what level of insurance should be mandated?
- If state law is not amended, what level of insurance would be advisable for a business that works with hazardous and explosive material?
- Are there examples from other industries or other requirements that can guide us?
Texas law requires certain minimum limits of coverage for some businesses and not for others. Some examples of industries that are required to carry a minimum level of liability insurance include:
- Towing companies
- Title companies
- Home inspectors
- Heating & A/C installer & service companies
A $1 million general liability policy is a pretty common requirement by the state for the above business groups. Fertilizer companies, however, don’t have a state mandated requirement for a minimal level of insurance.
Should state law be amended to require any business engaged in the production, storage and distribution of hazardous or explosive materials? Yes, I believe there should be a set minimum level of coverage. To determine what that level is, as well as explore the other 3 questions, let’s look at a set of requirements Fannie Mae has for loans on multi-family housing.
Fannie Mae also buys and packages commercial loans on multi-family property, not just home loans. In order for them to purchase a loan, there are a number of insurance related guidelines;
- How the property insurance is to be structured (replacement cost, minimum of 90% of the value minimum)
- What the maximum deductibles can be
- How much coverage is required on the building’s boiler (heating / cooling)
- What type of perils are to be covered & what may be excluded
- There are also requirements on general liability for multi-family structures based on number of stories or beds.
- The general liability policy requirements are $1 million in coverage per incident with a $2 million aggregate
- In addition to the GL policy, an umbrella policy (excess liability coverage) is required:
- $1 million in coverage for up to 3 stories or 100 licensed beds
- $5 million for 4 to 10 stories or 101 – 500 licensed beds
- $10 million for 11 – 20 stories or 501 – 1000 licensed beds
- $25 million for more than 20 stories or over 1001 licensed beds
A good rule of thumb for an excess liability or umbrella policy is $1,000 in cost for every $1 million in coverage. That would put the cost of a $25 million umbrella in the neighborhood of $25,000 a year. If we extrapolate that to the amount many people felt West Fertilizer Company should carry, $100 million, the cost would have been $100,000 annually just for the umbrella policy. That does nothing to insure the buildings, equipment and inventory of raw material or finished product.
Comparing multi-family requirements to hazardous and explosive material is comparing apples to oranges; they’re two very different things. If we set that aside for a moment and think about the potential loss of life in a large multi-family building should a fire break out, then loss of life is still loss of life and could be much more than the number of people killed and injured when the plant exploded.
This model could be modified to fit a company like West Fertilizer based on the amount of a hazardous material on site by tons, gallons / barrels, or some other unit of measurement. The maximum amount would still not be enough to cover the financial loss the citizens of West, Texas experienced, but it would certainly go farther than the $1 million in general liability coverage Rueters reported the company as having. It would also have a greater likelihood of being purchased by a company the size of West Fertilizer (5 to 9 employees with estimated annual revenues of $5 to $10 million). Better coverage is only part of the solution. There also has to be better inspections and enforcement of violations.
What do you think? Share your comments with me on our Facebook & Google + pages or in the comments section of our blog. I’d like to hear what you think.