A Bear of a Necessity

It's not like the budget at home, where one might cut out expensive meals or daily lottery tickets to help save up for a nice vacation. Insurance is a necessity that is harder to trim. Auto insurance, workers' compensation, property and equipment insurance, and liability are all necessities most rental companies can't do without. While it's not feasible to eliminate the coverage, there are ways to cut down on costs, even if it may take a while for those pennies to add up.

Deciding on the amount of coverage needed is a complex and individual decision each rental company must make. As there is no one-size-fits-all policy, rental companies should work with a professional agent or broker who has knowledge of the rental industry. But the purpose of insurance is to protect assets from catastrophic loss, the cost of which may depend on how much risk a company is willing to assume through deductibles and self insurance, such as physical damage coverage for vehicles.

“A lot is based on the amount of risk appetite,” says Marty O'Brien, president of Allied Insurance Brokers.

One area not to scrimp on though is liability insurance, according to Phil Kelling, president and CEO of ARA Insurance Services, who says proper insurance can cure sleepless nights. “If you wake up in the middle of the night worrying about it, you don't have enough or the right insurance,” he says. “Do an insurance checkup. It's good sleep insurance.”

The market

As opposed to the increasing rates of the past few years, rates are currently flattening and the insurance market is stabilizing. According to Kelling, a lot of favorable legislation has played a role in the stabilization of the market, keeping insurance rates flat or even slightly decreasing.

“Limits on lawsuits and new rules on class action lawsuits have helped the insurance industry and business atmosphere,” Kelling says.

Tom Erickson, underwriting director of national programs for St. Paul Travelers, agrees that the market is leveling off after some lean years in the late 1990s and early 2000s when companies were having a hard time making ends meet. “It seems to have stabilized and rates are flat,” he says. “We're not seeing the dramatic increases that we were three to four years ago.”

And it's not just those selling the insurance that see the market improving. Richard Datzman, owner of Lawrence Tool Rental in Indianapolis, Ind., hasn't seen his insurance rates jump lately. “Mine have stayed as close to the same as the last few years as they have for awhile,” he says. “Insurance has always been a cycle.”

Nicole Selvidge, treasurer/secretary for Sunflower Rents in Topeka, Kan., also says she's seen not only a leveling off, but a decreasing as well. “The market is much more competitive than it used to be,” she says.

Ways to save

One way to help cut down on insurance costs is to raise deductibles as high as possible. Datzman recommends carrying a $1,000, $2,500 or even higher deductible to bring rates down. Doing so, the insured takes the risk that if damages are lower than the deductible, the company will eat the loss, but it can save money in the long run. For instance, if roof repairs are needed that will cost $1,800 and the deductible is $2,500, a rental owner may pay the $1,800 amount for the cost of the repairs. But that may be an expense that will only be made every 10 years, so in the long run it could save money.

Kelling says to self-insure as much as possible and pay for losses that are predictable, small and frequent, such as damage to vehicles or glass. Don't self-insure on an unknown, or infrequent but severe factors, such as tornado damage. “Look at insurance as catastrophe coverage and self-insure as much as you can,” Kelling says.

Insurance companies also see certain items as high-risk, and rates may increase as a result. Kelling says to look at the risk profile on items such as inflatables. Insurance companies see inflatables as a high-risk item because kids are involved. “If a rental company eliminates one big slide, a company may view them entirely differently,” Kelling says.

When purchasing a new rental item, Kelling says a company likely thinks about the cost of the item and the labor involved and asks, “What can I get in rental return?” But they may fail to think about the cost of risk.

Selvidge says a significant cost saver for Sunflower Rents was no longer offering rental trucks. “We don't rent moving trucks anymore because the premiums on those are astronomical,” she says.

Choose wisely

When looking to change coverage or buy insurance for the first time, it can pay to do insurance research.

“You need a company that knows rental,” Kelling says. “And you need an agent that knows rental because rental is different.”

O'Brien also says it's a necessity that an insurance agent really know the rental business. “We're in the age of specialization,” he says. “And if you're going to have a heart operation, you're not going to go to a general practitioner, you're going to go to a specialist.”

If an agent doesn't understand the rental business, he or she may think he has sold a rental company theft coverage, but after a customer fails to return a piece of equipment and the insurance company denies the claims, the agent finds out along with the store owner that the rental store “gave” the equipment to the customer and there is no coverage. To an insurance company it doesn't look like the traditional theft because the rental company knowingly handed the thief the equipment. Without the proper coverage, the loss would equal the price tag of the missing equipment.

Also, look for a financially stable company. A.M. Best rates insurance companies and issues in-depth reports and financial strength ratings about insurance organizations. Do some research on and look for an A-rated company.

Selvidge says she looks at reputation and rates when looking for an insurance company. But she also looks at many different options before deciding on coverage, especially for health insurance. “Even when workers' comp and liability were not competitive health insurance companies remained competitive, so shop around,” she says.

Contract necessities

Besides the basic equipment charges and due dates, rental contracts should contain certain clauses to protect the rental store in case of loss or injury to a customer or as a result of that customer's negligence while using the equipment. Contracts should be reviewed by an attorney to ensure that they are current, up-to-date, and specific to a company's locality because laws change constantly.

“I highly encourage each rental company to take the time and the money to sit down with an attorney and figure out what's best for the company,” Erickson says. “Also contact any associations for helpful information.”

The “hold harmless/indemnification” clause should be included in the rental contract, which states that a customer can't hold a rental company responsible for a loss involving the use of their rental equipment. Also include that the purpose of the agreement is to transfer this responsibility to the lessee so that it is clearly defined in the rental contract what each party's responsibilities are. Although this doesn't always guarantee no liability for the rental owner, it helps to limit liability.

Special sign-offs should also be used that require the use of side rails for scaffolding equipment, for example. If a customer refuses that safety item, they have to sign off that it was offered. Other sign-offs should include that customers received safety instructions on the equipment. Don't assume that a customer is familiar with equipment and knows how to correctly operate it. Always give oral and printed instructions on how to operate equipment.

“We're in a world of litigation and you're guilty until you prove yourself innocent, unfortunately,” O'Brien says. “You need to demonstrate that as best as possible you have provided all of that. And for them to have signed off — that's a plus.”

Fleet age

New and well-maintained equipment is an important factor in decreasing the risk for losses and insurance claims. Not only is newer equipment in better condition, but it most likely has newer safety features that weren't included on older models. Kelling says that the attitude of insurance companies on fleet is “the newer the better” and equipment older than about seven years raises a red flag. Some smaller items can of course be kept around longer, but they should be well kept and maintained regularly.

“Have a strong maintenance program on all equipment,” Erickson says. “Have employees who are trained in maintaining equipment. Keeping records on maintenance of equipment is very helpful.”

Regular maintenance is a necessity not only because customers want the most efficient equipment, but also because if a customer has a problem, a rental company can prove that they performed regular maintenance and that it was in proper condition to be put out on rent. Rental companies should keep detailed and regular maintenance records of all work done on equipment.

Prevention is the policy

As the saying goes, an ounce of prevention is worth a pound of cure. Preventing losses and claims before they occur is the best way to save on insurance.

“You want to run a good operation — bottom line,” Kelling says. “Anyone who runs a good operation will reduce loss. Accidents and losses are typically symptoms of a poorly run operation.”

A part of taking a proactive approach to prevent losses can start with good employees. Hire responsible employees and train them properly. Kelling's big tip to rental companies: Work on driver training. “Be very selective and be sure that only the best employees and best drivers are driving the equipment,” he says.

A solid safety culture is the key to reducing rates. NationsRent implemented a “Zero Injuries” campaign for 2005 to remind team members about the year's safety goals. With so much at stake in safety, NationsRent's goal is to raise the bar until it reaches “Zero Injuries,” according to NationsRent's national director of safety, Joe Weimerskirch.

To go through the year with a common safety vision among all NationsRent employees, the company developed a wristband that clearly states its safety goal for 2005: Zero Injuries in 2005. All employees have been asked to wear it as much as possible to signify their commitment to safety.

Since NationsRent adopted safety as one of its core values, its safety records have improved, including a 41-percent reduction in recordable injury rates from 2003 to 2004, and an end-of-year recordable incident rate of 3.11 for 2004, according to the company. NationsRent continues to experience marked improvement in these rates in 2005.

According to O'Brien, focusing on internal risk management and loss control can reduce insurance costs. For example, doing pre-hiring background checks, having a drug-free work environment, offering a defensive driver training program and a documented consistent fleet maintenance program are ways to keep insurance costs down. He also recommends having regular meetings with staff on safety-related issues. Limit these meetings to 15 minutes and cover only one or two areas in a given meeting. Routine, repetitive meetings on a specific topic work better than a quarterly half-day meeting, O'Brien says. It tells employees that safety is important and is a priority with the company.

Having a good loss history will make a company more desirable and a better risk for the insurer, which will help rates stay low. Preventing a costly theft ties into loss history, and not having to make a claim influences rates. Rates are basically tied to the loss experience of individual accounts.

Although insurance companies may not offer discounts for anti-theft devices, they are good risk management tools. To reduce occurrences of equipment theft, rental companies need to take security precautions as a deterrent. Some ideas include placing lights and fencing along the perimeter of the site, as well as adding perimeter alarms and cameras. Simple, low-cost techniques, such as positioning larger pieces of equipment in a circular, wagon-train pattern, with generators, compressors, and other small items inside the ring, are also effective in reducing theft.

Another theft prevention step a rental company might want to take is registering equipment with the National Equipment Register. To combat the problem of heavy equipment theft, NER has developed database services to record heavy equipment ownership and theft information in order to increase the recovery rate of stolen equipment and reduce the costs associated with theft for owners and insurers. NER is continually developing relationships with law enforcement to be a source of owner identification for stolen equipment. Additionally, electronic tracking devices such as LoJack continue to make an impact on the industry. While these units require an initial investment, they provide up to a 100 percent return rate on stolen equipment, with the average payback period against the initial investment being measured in terms of months.

While O'Brien agrees that the insurance market is stabilizing and has become more favorable to the rental equipment dealer, he voices caution that this stabilization creates a false sense of security. “Keep costs down by focusing on loss control issues and that's where they'll see savings in the long run,” he says. Spending the time and money to promote safety, hire better employees, and provide a better work environment will help a rental owner run a better and more efficient business.

“If you're doing a lot of these things, you're probably running a better business,” O'Brien says. “Insurance costs and running a good operation go hand in hand.”

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