Fabricators that weld and grind in their shops can control their insurance costs by proactively managing their risks, and by finding an insurance broker who will advise them on their insurance needs.

The premiums that fabricators pay for insurance are based on the level of risk — or exposure to financial loss — that is transferred to insurers. Fabricators can limit those costs by keeping part of their exposure to themselves. That is, by not insuring the total value of a potential financial loss.

That typically calls for welding shops to pay deductibles and to add co-pays to their insurance contracts. Fabricators also can limit their risks and, subsequently, their insurance costs, by instituting programs to control workplace hazards and to promote safety through specific efforts that have the full commitment of management.

Managing risk
Insurance costs are based in part on the claims history of the insured. This applies to all types of business insurance, including property, health, workman's compensation, unemployment and automotive.

If all things are equal, two fabricators who have hot work operations may pay the same amount of premiums for their property, unemployment, or health insurance until one makes an insurance claim. That claim could result in higher insurance premiums.

Consequently, one of the best ways to manage insurance costs is to control the number of insurance claims, and the best way to keep the number of claims in check is to minimize risks.

This means that fabricators who use any form of hot work — any process that produces flames, sparks or heat — should have a program to manage that risk, says Keith Domagale, a property loss prevention engineer and engineering manager at Affiliated FM. Affiliated FM and its parent FM Global (www.fmglobal.com) are commercial property insurers that are known for their expertise in property loss control engineering.

Most risk or hazard control programs are evaluation and audit processes that involve management, employees and, often, a risk-management or loss-control consultant. This group identifies the hazards or risks in a workplace and develops a plan to manage those hazards or risks.

That plan is audited regularly to determine if its guidelines are being followed and whether it is effective. But for such a plan to be truly effective in controlling insurance costs, it must have management's total commitment. "Loss control begins at the top and flows to the employees," says Domagale.

Not all insurance companies visit the companies that they insure but, when they do, they have the expertise and experience to recognize whether a shop's management is practicing or paying lip service to safety and good work practices.

Insurance inspectors notice when fire sprinklers are not in working condition and when they have not been tested. They spot shop floors that have oil or grease puddles, and they see when gas cylinders are stored improperly. They look for exit aisles and doors that are cluttered and poorly marked. And, they monitor the incidence of worker injuries and the effectiveness of safety programs that management says are in place and to which management says it is committed.

Well-managed risk control programs have a ripple effect. Safety training programs that are instituted to control property insurance premiums naturally lead to fewer injuries for workers, and lower premiums for worker's compensation insurance: Fewer claims translate into lower premiums.

More on insurance premiums
Most insurance companies calculate insurance premiums using actuarial tables. Premiums are based on the extent of risk involved to the insurance company according to the most appropriate measure of that risk, says Marsh & McLennan Companies (www.mmc.com), a risk and insurance services firm.

Insurance companies do not disclose the methods they use to calculate premiums. Those methods and the risk assumptions that go along with them vary. That is the reason that quotes from several insurers, for the same coverage carry different prices. For that reason alone, insurance consultants advise shops to seek quotes from different insurers as a way to control their insurance costs.

A trusted adviser
Insurance brokers shop the insurance market to find quotes from wholesale distributors of insurance, and to directly market insurance company's products to clients. Because insurance is an ongoing service, welding shops and fabricators should select brokers who understand their business, and they should evaluate the effectiveness of their relationship with their broker periodically.

Fabricators and welding shops also should select a broker who will take the time to explain options that are available and the trade-offs between those options.

For example, insurers may offer only insurance policies that have exclusions for black mold — an environmental problem in some regions of the nation — to clients that are located in a particular geographic area because the insurers have experienced a high number of claims related to black mold in that region. The insurers have determined that the exclusion reduces their financial risk to an acceptable level. A broker may evaluate these different policies and determine that one of them best suits a client's needs and risks but recognizes the client needs a policy covering black mold. That broker may recommend the client seek a separate policy covering black mold in the secondary insurance market.

Brokers also should help shops to get the best possible service from the insurance companies that they represent. That includes preparing and submitting insurance policy applications for renewal, submitting the appropriate documentation to an insurance company for any losses, and monitoring the financial solvency of an insurer.

Commercial insurance brokers also should help their clients assess their risk and how best to handle that risk, and whether that means keeping some of the risk, or transferring it to the insurance company or mitigating the risk.

Most methods for handling risk are a combination of risk assumption, transference or mitigation. For example, the cost of installing a sprinkler system could mitigate the financial impact of a fire, and a fabricator that installs fire sprinklers to reduce the cost of insurance premiums could further reduce his insurance costs by including a $30,000 deductible in his policy, and assuming additional financial risk in the form of that deductible.

A little truth
Indemnity — putting a business or individual back in the same position they enjoyed before the loss occurred — is one of the underlying concepts of insurance, Marsh says. However, full indemnity never really happens because of the combination of things that typically happen in catastrophic events. Such indirect costs as loss of production time, reduced employee morale and the elimination of customer goodwill can cost as much as ten times the direct costs, and some businesses never fully recover. For example, 40 percent of businesses affected by fire never reopen.

Control unemployment insurance costs Unemployment insurance is a tax that is charged to each business and is based on a shop's experience with unemployment. Shops can control the amount of this tax because the tax rate for each company is directly related to the amount paid out by the unemployment system to that shop's former employees. One avenue for controlling the amount paid out is to document properly such events as employee tardiness/absenteeism, warnings and unsatisfactory performance. This documentation could determine whether a business is protected against an unwarranted claim made by a former employee who was discharged for chronic tardiness. Another avenue is to institute employee evaluations or probationary periods so that employees can be discharged without receiving unemployment insurance if their work habits and skills do not match requirements.