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Planning a Warehouse in the City? Here are 5 Ways Your Risks Will Change.

The demand for fast delivery is driving the growth of city warehouses, but these urban facilities present unique property and safety challenges for wholesale distributors.
By: | July 30, 2018 • 6 min read

How quickly do you want that package you ordered today? Would you rather have it tomorrow, or a week from now?

According to the National Retail Federation, nearly 40 percent of online shoppers expect free two-day delivery, which is no surprise considering the appeal of online shopping lies in its convenience and speed.

But these expectations increase the pressure on wholesale distributors to shorten last-mile delivery timelines. Where warehousing was once a mechanism to store inventory at low cost, it’s now becoming a way to keep products closer to consumers to cut down on delivery lead times and costs.

“This is where urban warehouses come into play,” said Mark Morneau, Senior Vice President and General Manager, National Insurance, East Division, Liberty Mutual Insurance. “By moving into cities and getting products closer to where consumers live, they eliminate some delivery lead time and expense.”

Warehouses in densely-populated areas, however, come with unique risks that suburban or rural warehouses don’t typically need to manage. As wholesale distributors increasingly turn to urban warehousing to meet the demands of e-commerce, risk managers should be aware of these key risks and challenges:

1. Older Properties in Densely-Packed Neighborhoods

Warehousing in an urban setting typically means moving into an older and smaller building than what would be available further outside city limits, which presents many challenges.

“Oftentimes the buildings used are old manufacturing facilities that aren’t designed for extensive storage. So, they need to be brought up to standards suitable for housing products for wholesale distribution,” Morneau said.

That means retrofitting them with standard and code-compliant sprinkler, ventilation, electrical, and alarm systems and reconfiguring the space to properly store and move inventory, which could include raising ceilings, adding racks, and widening loading docks.

“Being much closer to your neighbors also presents risks,” Morneau said. “In densely populated areas, a fire that starts three buildings down can still take out your facility. Older water systems may not supply sufficient water pressure for fire sprinkler systems, so fire pumps may also need to be installed.”

While infrequent, fires can result in total loss without the proper safeguards. Clear emergency response and recovery plans can help mitigate the damage.

2. Premises Security

Fully-stocked warehouses make an attractive target for thieves.

“Urban environments mean more people, which means more potential for crime,” Morneau said. “The logistical realities of urban warehousing also make it more difficult to keep crime out.”

Concentrated areas mean less space for fences and other barriers that limit access. Narrow roadways necessitate smaller delivery trucks which will have to enter and exit the facility more frequently, increasing the opportunities for vandals or thieves to gain entry.

“Your inventory is a critical asset and must be well-secured,” Morneau said.

Around-the-clock security guards and security equipment that includes video surveillance can help to deter thieves, while protocols dictating who can enter the facility and when can help to limit opportunities for criminals.

3. Workforce Safety in Confined Spaces

The tighter floorplans of urban facilities also present safety risks to employees.

“Older facilities with less space won’t have as much automation, which means workers are doing more material handling. That alone increases injury risk,” Morneau said. “Employees are also likely to interface more with forklifts and other machinery, which are also operating in more confined spaces. Whenever people work near this type of machinery, the risk of bodily injury goes up.”

Investing in equipment like conveyer belts and elevators to streamline workflows can help mitigate that risk. Whatever changes are made, thorough safety training for employees is paramount.

4. City Fleet Operations

Cities’ crowded streets and tight corners aren’t built for hulking delivery trucks.

“A benefit of being in an urban warehouse is access to highways and roads, but larger vehicles can’t navigate as easily in a city environment. With more people, vehicles, and distractions on the part of both pedestrians and drivers today, accidents become much more likely,” Morneau said.

The pressure to meet quick delivery timelines could also lead to overscheduling drivers. Not only could this run afoul of regulations, but it can also lead to driver fatigue and a greater likelihood of accidents.

“Warehouse managers need to determine if they can operate effectively with their current fleet and should also consider city ordinances that may limit hours of business operation or affect parking,” Morneau said.

Distributors may also choose to outsource delivery rather than manage their own fleets. In cities, new sharing economy platforms are taking up this task along with traditional players. But farming out delivery to the sharing economy comes with its own liability challenges.

5. Relying on the Sharing Economy for Delivery

The sharing economy is introducing opportunities for businesses of all types to offer better, faster, and more cost-effective service, and the wholesale sector is no exception.

Wholesalers are finding available vehicles and drivers to deliver inventory to client locations via online transportation marketplaces. In the future, gig workers using their own cars and bikes as delivery vehicles could even help wholesalers get packages directly to consumers’ doorsteps. While these services can help expand distribution operations, they can also introduce general liability risks.

“Risk managers may be exposing their companies to a host of emerging liability issues by using sharing economy platforms because the drivers and fleets are relatively unknown,” Morneau said. “A third party is responsible for verifying drivers and their credentials, backgrounds, and vehicles, but you are trusting them to make deliveries. It’s a much harder situation to control.”

These relationships can offer the benefits of speed, efficiency, and capacity, but contracts with third-party platforms should outline service expectations and clearly delineate which party assumes liability.

Access Risk Management Resources and Comprehensive Coverage

Wholesale distributors are already making use of multistory urban warehouses in Europe and Asia, with a few cropping up in U.S. hubs like San Francisco and New York. The trend is likely to continue as e-commerce keeps growing and consumers keep expecting speedy delivery.

Risk managers can best plan and prepare for the unique exposures associated with urban warehouses by working with well-resourced insurers. Liberty Mutual’s risk control consultants can assess property, safety, and fleet risks and recommend strategies to mitigate them, such as developing a fleet safety program, evaluating a new or existing fire protection system, or reviewing an emergency response plan.

“Our risk control team helps risk managers identify the exposures they’ve overlooked so they can bring down their residual risk and focus on operating their businesses profitably,” Morneau said.

Along with core primary property and casualty products, Liberty Mutual also offers specialty coverages like environmental, cyber, and professional policies through Ironshore, a Liberty Mutual company.

“We have the full suite of products to address urban warehousing exposures and help distributors take advantage of these opportunities,” Morneau said.

To learn more, visit https://business.libertymutualgroup.com/business-insurance/industries/wholesale-business-insurance-coverage.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.




Liberty Mutual Insurance offers a wide range of insurance products and services, including general liability, property, commercial automobile, excess casualty and workers compensation.

More from Risk & Insurance

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Risk Focus: Workers' Comp

Do You Have Employees or Gig Workers?

The number of gig economy workers is growing in the U.S. But their classification as contractors leaves many without workers’ comp, unemployment protection or other benefits.
By: and | July 30, 2018 • 5 min read

A growing number of Americans earn their living in the gig economy without employer-provided benefits and protections such as workers’ compensation.

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With the proliferation of on-demand services powered by digital platforms, questions surrounding who does and does not actually work in the gig economy continue to vex stakeholders. Courts and legislators are being asked to decide what constitutes an employee and what constitutes an independent contractor, or gig worker.

The issues are how the worker is paid and who controls the work process, said Bobby Bollinger, a North Carolina attorney specializing in workers’ compensation law with a client roster in the trucking industry.

The common law test, he said, the same one the IRS uses, considers “whose tools and whose materials are used. Whether the employer is telling the worker how to do the job on a minute-to-minute basis. Whether the worker is paid by the hour or by the job. Whether he’s free to work for someone else.”

Legal challenges have occurred, starting with lawsuits against transportation network companies (TNCs) like Uber and Lyft. Several court cases in recent years have come down on the side of allowing such companies to continue classifying drivers as independent contractors.

Those decisions are significant for TNCs, because the gig model relies on the lower labor cost of independent contractors. Classification as an employee adds at least 30 percent to labor costs.

The issues lie with how a worker is paid and who controls the work process. — Bobby Bollinger, a North Carolina attorney

However, a March 2018 California Supreme Court ruling in a case involving delivery drivers for Dynamex went the other way. The Dynamex decision places heavy emphasis on whether the worker is performing a core function of the business.

Under the Dynamex court’s standard, an electrician called to fix a wiring problem at an Uber office would be considered a general contractor. But a driver providing rides to customers would be part of the company’s central mission and therefore an employee.

Despite the California ruling, a Philadelphia court a month later declined to follow suit, ruling that Uber’s limousine drivers are independent contractors, not employees. So a definitive answer remains elusive.

A Legislative Movement

Misclassification of workers as independent contractors introduces risks to both employers and workers, said Matt Zender, vice president, workers’ compensation product manager, AmTrust.

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered.”

Misclassifying workers opens a “Pandora’s box” for employers, said Richard R. Meneghello, partner, Fisher Phillips.

Issues include tax liabilities, claims for minimum wage and overtime violations, workers’ comp benefits, civil labor law rights and wrongful termination suits.

The motive for companies seeking the contractor definition is clear: They don’t have to pay for benefits, said Meneghello. “But from a legal perspective, it’s not so easy to turn the workforce into contractors.”

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered in the eyes of the state.” — Matt Zender, vice president, workers’ compensation product manager, AmTrust

It’s about to get easier, however. In 2016, Handy — which is being sued in five states for misclassification of workers — drafted a N.Y. bill to establish a program where gig-economy companies would pay 2.5 percent of workers’ income into individual health savings accounts, yet would classify them as independent contractors.

Unions and worker advocacy groups argue the program would rob workers of rights and protections. So Handy moved on to eight other states where it would be more likely to win.

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So far, the Handy bills have passed one house of the legislature in Georgia and Colorado; passed both houses in Iowa and Tennessee; and been signed into law in Kentucky, Utah and Indiana. A similar bill was also introduced in Alabama.

The bills’ language says all workers who find jobs through a website or mobile app are independent contractors, as long as the company running the digital platform does not control schedules, prohibit them from working elsewhere and meets other criteria. Two bills exclude transportation network companies such as Uber.

These laws could have far-reaching consequences. Traditional service companies will struggle to compete with start-ups paying minimal labor costs.

Opponents warn that the Handy bills are so broad that a service company need only launch an app for customers to contract services, and they’d be free to re-classify their employees as independent contractors — leaving workers without social security, health insurance or the protections of unemployment insurance or workers’ comp.

That could destabilize social safety nets as well as shrink available workers’ comp premiums.

A New Classification

Independent contractors need to buy their own insurance, including workers’ compensation. But many don’t, said Hart Brown, executive vice president, COO, Firestorm. They may not realize that in the case of an accident, their personal car and health insurance won’t engage, Brown said.

Matt Zender, vice president, workers’ compensation product manager, AmTrust

Workers’ compensation for gig workers can be hard to find. Some state-sponsored funds provide self-employed contractors’ coverage.  Policies can be expensive though in some high-risk occupations, such as roofing, said Bollinger.

The gig system, where a worker does several different jobs for several different companies, breaks down without portable benefits, said Brown. Portable benefits would follow workers from one workplace engagement to another.

What a portable benefits program would look like is unclear, he said, but some combination of employers, independent contractors and intermediaries (such as a digital platform business or staffing agency) would contribute to the program based on a percentage of each transaction.

There is movement toward portable benefits legislation. The Aspen Institute proposed portable benefits where companies contribute to workers’ benefits based on how much an employee works for them. Uber and SEI together proposed a portable benefits bill to the Washington State Legislature.

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Senator Mark Warner (D. VA) introduced the Portable Benefits for Independent Workers Pilot Program Act for the study of portable benefits, and Congresswoman Suzan DelBene (D. WA) introduced a House companion bill.

Meneghello is skeptical of portable benefits as a long-term solution. “They’re a good first step,” he said, “but they paper over the problem. We need a new category of workers.”

A portable benefits model would open opportunities for the growing Insurtech market. Brad Smith, CEO, Intuit, estimates the gig economy to be about 34 percent of the workforce in 2018, growing to 43 percent by 2020.

The insurance industry reinvented itself from a risk transfer mechanism to a risk management mechanism, Brown said, and now it’s reinventing itself again as risk educator to a new hybrid market. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected] Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]