Risk Report: Manufacturing

Struggling With Safety Rules

Manufacturers must comply with up to 26 different state safety plans.
By: | April 4, 2016 • 5 min read

Manufacturers that have operations in one or more states have the complex task of complying with either state or federal safety and health standards — and the provisions are not always in alignment.

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Failure to do so means they run the risk of being hit with hefty fines totaling hundreds of thousands — or even millions — of dollars.

The U.S. Occupational Safety and Health Administration (OSHA) requires all companies to meet its regulations as a minimum. However, firms that have operations in one of the 26 states that have adopted their own occupational safety and health rules must also adhere to each state’s rules.

State-run programs are required to meet minimum federal requirements, but often they are more stringent. In many cases, companies operate in multiple states, so they have to subscribe to a range of different standards for each state.

Employers are required only to comply with the state-run program; if there is no state program, they must comply with the federal rules.

To compound this, according to industry sources, federal OSHA has just increased the maximum penalty by nearly 80 percent for failure to comply with its standards, meaning that companies that fail could be hit with a fine of $125,000 or higher for a serious violation.

And with thousands of cases of workplace injuries believed to be unreported every year, federal OSHA is now tightening the net on willful and repeat offenders.

Robert Cartwright, safety and health manager, Bridgestone Retail Operations LLC

Robert Cartwright, safety and health manager, Bridgestone Retail Operations LLC

“State plan standards are often higher or exceed those of federal OSHA,” said Robert Cartwright, safety and health manager for Bridgestone Retail Operations LLC and a board director of RIMS.

“With fire safety, for example, in states like California, where they have had a certain violation or frequency and severity of violation, the state may decide to apply their own set of standards that are tougher than the federal OSHA.

“In my experience, in those particular cases, the fines tend to be higher and the citations more detailed than they would be from the federal authority.”

State vs. Federal OSHA

David Carlson, Marsh’s U.S. manufacturing and automobile practice leader, said that state plans are often more stringent in terms of enforcement protocols and the composition of their hazard communication programs such as labeling requirements, exposure limits and types of chemical used.

For example, he said, California created a standard specifically focused on reducing and eliminating hazardous chemicals from the workplace. It has significantly tightened up exposure limits and the quantities that can be stored.

Dave Barry, senior vice president and national director of casualty risk control, Willis Towers Watson

Dave Barry, senior vice president and national director of casualty risk control, Willis Towers Watson

Dave Barry, senior vice president and national director of casualty risk control at Willis Towers Watson’s risk control and claims advocacy practice, said California’s state plan requires companies to implement a written injury and illness prevention plan, while federal OSHA does not.

Sometimes, he said, the U.S. regulations will be revised to match state rules, such as the requirement for reporting an amputation, hospitalization or loss of an eye within 24 hours, which had already been in force in states like California for several years.

“The state programs typically focus their efforts on the specific industries in their state, for example if they do a lot of agriculture, whereas federal OSHA standards are not necessarily geared toward one particular industry,” he said.

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He said that regulations often vary widely from state to state.

On the other hand, Mike Heembrock, vice president and executive specialist, risk engineering at Chubb, said that states often fall short of federal OSHA enforcement performance in terms of inspections and fines because of staffing and resource limitations due to budget constraints.

“In general, because of the relatively low salary and operating budgets, states have struggled to recruit new inspectors and often they don’t have as much experience as federal inspectors, so it’s been difficult for them to meet federal OSHA performance criteria,” he said.

Risks for Manufacturers

Carlson said that the biggest risk for manufacturers operating in multiple states is to understand how to comply with different state and federal standards and record-keeping requirements.

“If you have operations, say, in California, Michigan, Oregon or Washington, those

David Carlson, U.S. manufacturing and automobile practice leader, Marsh

David Carlson, U.S. manufacturing and automobile practice leader, Marsh

all have their own state plan programs that you need to be aware of and comply with, not to mention the administrative burden and costs associated with complying with federal OSHA in other states where they may operate,” he said.

“That’s a challenge for not only a large manufacturer like Ford or GM, but also for smaller businesses with operations across the U.S.”

Carlson said that oftentimes companies become preoccupied with emerging risks such as cyber and overlook the broader risk of their employees’ health and safety.

“At the end of the day, the largest variable cost of risk for most manufacturers is still the workers’ compensation and employee benefits programs,” he said.

“The problem is that too many employers look at it simply as the cost of doing business; however if they focused on it, that’s the area where they could reduce claims and financially protect their balance sheet.”

Fines and Penalties

U.S. OSHA raised its penalties for the first time in 25 years, by 78 percent last November.

The maximum fine for a serious violation rose from $7,000 to $12,500, and the maximum willful or repeat violation increased from $70,000 to $125,000. State plans are expected to follow suit, taking effect from August this year.

And from now on, the penalties will be increased every year.

“I think we are going to see a lot more of these types of changes as the current administration leaves office,” said Barry.

Adele Abrams, Law Office of Adele L. Abrams

Adele Abrams, Law Office of Adele L. Abrams

“It’s been 25 years since the fee schedule has been increased and now it will be increasing every year, so I think we are going to see more additional requirements along these lines come into force.”

The maximum penalty per citation can also be higher if it is an egregious violation, said Adele Abrams, whose law practice is based in Beltsville, Md.

“If you have, for example, 10 employees working on a conveyor system in your facility and it doesn’t have adequate guards in place to protect them from injury, federal OSHA would usually issue a single citation with a maximum penalty of $70,000,” she said.

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“However, if all of a sudden they decided it was an egregious violation, because there are 10 workers involved, you could be fined up to $700,000, and you would be put into a ‘Severe Violator Enforcement Program’ for at least three years.”

Christine Sullivan, vice president of risk control services at Lockton, said manufacturers should “avail themselves of the relevant programs that federal OSHA provides.”

“There are a lot of programs and resources out there than can help a risk manager to identify the pitfalls and build a thorough and reliable safety program.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Alternative Energy

A Shift in the Wind

As warranties run out on wind turbines, underwriters gain insight into their long-term costs.
By: | September 12, 2017 • 6 min read

Wind energy is all grown up. It is no longer an alternative, but in some wholesale markets has set the incremental cost of generation.

As the industry has grown, turbine towers have as well. And as the older ones roll out of their warranty periods, there are more claims.

This is a bit of a pinch in a soft market, but it gives underwriters new insight into performance over time — insight not available while manufacturers were repairing or replacing components.

Charles Long, area SVP, renewable energy, Arthur J. Gallagher

“There is a lot of capacity in the wind market,” said Charles Long, area senior vice president for renewable energy at broker Arthur J. Gallagher.

“The segment is still very soft. What we are not seeing is any major change in forms from the major underwriters. They still have 280-page forms. The specialty underwriters have a 48-page form. The larger carriers need to get away from a standard form with multiple endorsements and move to a form designed for wind, or solar, or storage. It is starting to become apparent to the clients that the firms have not kept up with construction or operations,” at renewable energy facilities, he said.

Third-party liability also remains competitive, Long noted.

“The traditional markets are doing liability very well. There are opportunities for us to market to multiple carriers. There is a lot of generation out there, but the bulk of the writing is by a handful of insurers.”

Broadly the market is “still softish,” said Jatin Sharma, head of business development for specialty underwriter G-Cube.

“There has been an increase in some distressed areas, but there has also been some regional firming. Our focus is very much on the technical underwriting. We are also emphasizing standardization, clean contracts. That extends to business interruption, marine transit, and other covers.”

The Blade Problem

“Gear-box maintenance has been a significant issue for a long time, and now with bigger and bigger blades, leading-edge erosion has become a big topic,” said Sharma. “Others include cracking and lightning and even catastrophic blade loss.”

Long, at Gallagher, noted that operationally, gear boxes have been getting significantly better. “Now it is blades that have become a concern,” he said. “Problems include cracking, fraying, splitting.

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“In response, operators are using more sophisticated inspection techniques, including flying drones. Those reduce the amount of climbing necessary, reducing risk to personnel as well.”

Underwriters certainly like that, and it is a huge cost saver to the owners, however, “we are not yet seeing that credited in the underwriting,” said Long.

He added that insurance is playing an important role in the development of renewable energy beyond the traditional property, casualty, and liability coverages.

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine. Weather risk coverage can be done in multiple ways, or there can be an actual put, up to a fixed portion of capacity, plus or minus 20 percent, like a collar; a straight over/under.”

As useful as those financial instruments are, the first priority is to get power into the grid. And for that, Long anticipates “aggressive forward moves around storage. Spikes into the system are not good. Grid storage is not just a way of providing power when the wind is not blowing; it also acts as a shock absorber for times when the wind blows too hard. There are ebbs and flows in wind and solar so we really need that surge capacity.”

Long noted that there are some companies that are storage only.

“That is really what the utilities are seeking. The storage company becomes, in effect, just another generator. It has its own [power purchase agreement] and its own interconnect.”

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine.”  —Charles Long, area senior vice president for renewable energy, Arthur J. Gallagher

Another trend is co-location, with wind and solar, as well as grid-storage or auxiliary generation, on the same site.

“Investors like it because it boosts internal rates of return on the equity side,” said Sharma. “But while it increases revenue, it also increases exposure. … You may have a $400 million wind farm, plus a $150 million solar array on the same substation.”

In the beginning, wind turbines did not generate much power, explained Rob Battenfield, senior vice president and head of downstream at JLT Specialty USA.

“As turbines developed, they got higher and higher, with bigger blades. They became more economically viable. There are still subsidies, and at present those subsidies drive the investment decisions.”

For example, some non-tax paying utilities are not eligible for the tax credits, so they don’t invest in new wind power. But once smaller companies or private investors have made use of the credits, the big utilities are likely to provide a ready secondary market for the builders to recoup their capital.

That structure also affects insurance. More PPAs mandate grid storage for intermittent generators such as wind and solar. State of the art for such storage is lithium-ion batteries, which have been prone to fires if damaged or if they malfunction.

“Grid storage is getting larger,” said Battenfield. “If you have variable generation you need to balance that. Most underwriters insure generation and storage together. Project leaders may need to have that because of non-recourse debt financing. On the other side, insurers may be syndicating the battery risk, but to the insured it is all together.”

“Grid storage is getting larger. If you have variable generation you need to balance that.” — Rob Battenfield, senior vice president, head of downstream, JLT Specialty USA

There has also been a mechanical and maintenance evolution along the way. “The early-generation short turbines were throwing gears all the time,” said Battenfield.

But now, he said, with fewer manufacturers in play, “the blades, gears, nacelles, and generators are much more mechanically sound and much more standardized. Carriers are more willing to write that risk.”

There is also more operational and maintenance data now as warranties roll off. Battenfield suggested that the door started to open on that data three or four years ago, but it won’t stay open forever.

“When the equipment was under warranty, it would just be repaired or replaced by the manufacturer,” he said.

“Now there’s more equipment out of warranty, there are more claims. However, if the big utilities start to aggregate wind farms, claims are likely to drop again. That is because the utilities have large retentions, often about $5 million. Claims and premiums are likely to go down for wind equipment.”

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Repair costs are also dropping, said Battenfield.

“An out-of-warranty blade set replacement can cost $300,000. But if it is repairable by a third party, it could cost as little as $30,000 to have a specialist in fiberglass do it in a few days.”

As that approach becomes more prevalent, business interruption (BI) coverage comes to the fore. Battenfield stressed that it is important for owners to understand their PPA obligations, as well as BI triggers and waiting periods.

“The BI challenge can be bigger than the property loss,” said Battenfield. “It is important that coverage dovetails into the operator’s contractual obligations.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]