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Risk Scenario

Hard Crash

An equipment breakdown harms a company and kills a career.
By: | August 31, 2015 • 7 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

Part One: Pressure Builds

Barry Little cast an appreciative glance back at the front door of the elementary school where he’d just dropped off his little girl Lila, age 5, for her morning kindergarten class. He was grateful that he trusted Lila’s teacher and the rest of the school staff.

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Walking to his car, with the late September sun warming his face, he ticked off the other reasons he had for being happy. Ten minutes before dropping Lila off, he’d dropped off her little brother Benjamin at daycare. Benjamin was a joy, now speaking in full sentences and displaying a wry sense of humor.

Driving to work, Little ruminated on his further good fortune. He was celebrating the one-year anniversary of his promotion to plant manager of the Glaucus Inc. ammonia plant in nearby Edmonton, in the province of Alberta, Canada.

His promotion coincided with increased natural gas production in the fields close to the Edmonton plant. Natural gas is the feedstock for ammonia, and its recent abundance and lower cost was a boon for the company.

Just that week, his managers asked him to extend the current ammonia production run out two years to take advantage of the lower cost of natural gas and the burgeoning demand for fertilizer in the emerging economies of India and China.

Ammonia is a key raw material for the production of fertilizers. But there are inherent risks. Ammonia production is a demanding process on plant equipment. And the extended production run was being performed at the expense of regularly scheduled equipment maintenance.

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Little knew the reasons for management’s decision. With global revenues at close to $1 billion annually, publicly traded Glaucus could run that figure close to $1.25 billion in this two-year window.

There was another factor gnawing at Little. The vastly increased production of natural gas in North America meant that chemical manufacturing was on the upswing. New plants were being built and existing plants expanded which increased lead times for equipment and spare parts

In this high-demand environment, contingency plans that included the purchase of spare parts were important to minimize any downtime due an equipment breakdown. Little, relatively new to this position, was in the process of drafting contingency plans, but they weren’t complete. The plant had some spare parts and equipment, but it was questionable whether that was adequate.

***

Little was relaxing that night after dinner, keeping half an eye on an Edmonton Eskimos game, when his cell phone lit up.

A fast moving storm was moving through Alberta. No sooner had Little seen that news on his phone, when he got a call. A lightning strike at the Glaucus plant tripped the electrical system off line, triggering a “hard crash” and a complete shutdown of the plant.

“Gotta go,” Little said to his wife as he jumped up and grabbed his raincoat.

“Where to?” she said.

“The plant’s been knocked out by a lightning strike. I gotta get over there!”

“Drive safely!” she called after him but he was already out the door.

Driving to the plant with rain pelting his windshield, Little’s mind raced.

“What to do?”

The truth was, he didn’t know.

Part Two: Break Down

When Little arrived at the stricken plant, his assistant plant manager, Denny Ashe, was waiting for him just outside the door.

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“It’s a complete shutdown, nothing is on line,” Ashe said as he and Little walked into the plant together.

Little strode out into the plant’s main control room. Nothing seemed amiss, but everything was shut down.

“Do we have power?” he asked Ashe.

“Yep, we’re just reconnected,” Ashe said. “The strike tripped our system, but the circuit breakers have been reset and service has been restored.”

Little stood, looking at the idled control panels for the plant’s equipment and at the faces of the operators, who were watching him expectantly. The faces of the watching operators triggered something in Little.

It looked like they were expecting him to act, so he did.

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Little turned to Ashe.

“Let’s start it back up.”

“Are you sure?” Ashe said.

Ashe was just asking a question, but it angered Little.

“Yes I’m sure!” Little thundered.

“Start it up like I said!”

Just then, the phone number of Little’s manager flashed on his phone. Flustered, Little didn’t answer the call.

What Little didn’t know and didn’t take the time to find out was that a critical steam turbine driving a process compressor was damaged when the lightning strike shut the plant down so suddenly. The turbine was vulnerable because it hadn’t been properly maintained due to production demands.

Little went out and stood in the middle of the compressor building with his hands on his hips as Ashe worked with the operators in the control room to get the plant back on line.

When the plant restarted, the turbine started to vibrate excessively. Without vibration trips, the turbine continued to operate. The vibration caused a lubrication oil line to break, which in turn started a fire.

“Fire!” one of the turbine operators yelled as he ran to grab a fire extinguisher since there was no sprinkler protection installed, but another turbine operator beat him to it. The fire was so intense that it burned the two workers severely.

Denny Ashe shut the plant back down as calls went out to the emergency response team.

As a member of the emergency response team used a first-aid kit to attend to the turbine operators, Little stepped back, realizing that he still held his phone in his hand.

He couldn’t look at the injured workers laid out on the compressor building floor, with their co-workers offering them aid. He couldn’t face it.

Little just stared at his phone in shock, unwilling to dial his boss’s number.

***

It took a week of meetings between plant operational personnel to determine just how bad the situation was.

The team determined that the $10 million turbine, which was crucial to the plant’s production process, was totally destroyed.

The plant was powerless without the turbine; it couldn’t produce ammonia.

“I can’t tell you,” is what the equipment manufacturer said when Little called him and asked when they could deliver a replacement.

“It could be six months, it could be nine months, it could be longer,” the manufacturer’s representative said.

“When are we going to be back up?” is what Little’s manager asked him, two weeks after the shutdown and the turbine fire.

“I can’t answer that question,” Little said.

Part Three: A Chilling Dawn

Seven months after the lightning strike and the turbine fire that injured two workers, Little finally had an answer to that question.

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With a date for the delivery of the replacement turbine now firm, it would be two more months before Glaucus Inc.’s Edmonton plant could resume ammonia production.

Little’s initial inability to tell senior management when the plant would reopen motivated them to send an engineering team from the company’s Shreveport, La., plant to conduct a complete inspection of the Edmonton plant.

“I want to state for the record that I was asked by management to extend the production run at the expense of the regularly scheduled maintenance,” Little told the inspection team as they sat down with him and some of the senior management team to report on their findings.

“Barry, we’re not here to officiate between you and your manager,” the head of the Shreveport engineering team told him.

“We’re just here to report on what we found.”

The engineering team reported that the Edmonton plant’s electrical system was well used and wasn’t adequately maintained. It didn’t matter that Barry Little had only been plant manager for a year, the fault lay at his feet.

The engineering team also faulted the Edmonton operation for extending production without maintaining the plant’s equipment; not installing vibration trips on the critical turbine; not adequately maintaining turbine integrity; failing to have a written contingency plan, including maintaining spares for critical pieces of equipment and not installing sprinkler protection on the turbine.

Instead of being on track to increase its revenues from $1 billion to $1.25 billion, Glaucus Inc. saw its revenues in the year of the Edmonton plant failure slip down to $900 million. The work stoppage at Edmonton cost the company $125 million in plant repairs and lost revenues.

When it reported its full-year figures, the company’s stock price tumbled 20 percent.

The fact that Barry Little was in the process of writing a contingency plan when the plant experienced the lightning strike and hard crash didn’t help him much. He was fired in the first quarter of the following year.

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Risk & Insurance® partnered with FM Global to produce this scenario. Below are FM Global’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance®.

No company can afford the loss of property, lives and productivity from destruction caused by fire, natural hazards or equipment outage. Equipment damaged in minutes can take many months to repair or replace. If there is business interruption, revenue, stock price and shareholder confidence all can take a major hit. Market position may be lost. Inflation and material shortage may make rebuilding difficult and costly.

Of course, insurance helps alleviate some of the cost associated with property damage. But insurance isn’t the only answer, especially when considering the loss of customers, productivity, goodwill and staff.

Reliable equipment delivers resilient service to your production, utility and support systems, can reduce risk to your business and help your organization maintain a competitive advantage.




Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]