Risk Hedging for Logistics Center Accidents

Accidents and Damage in Logistics Center Operation
Because of the nature of business a logistics center services, it tend to be built on a large site area and in a large construct and to use light-weight construction materials and be vulnerable to flame.

A majority of large accidents that have occurred at local logistics centers are either burned down or destroyed. Also, logistics centers are vulnerable to a variety of accidents involving forklift operation, vehicle accidents, dangerous materials and personal injury and material damage.

An overwhelming reason that causes these accidents and incidents is primarily ignition of dangerous articles, short circuit, ignitions made during construction works and intentional or negligent ignitions.

Most operators and building owners think they are protected against these accidents and incidents, when they choose, as a risk hedge, fire insurance or property insurance. Most insurance coverage is divided into a security against personal (human injuries) and things (material damage). These insurance products are far from universal coverage, but realistically they are the only option for financial reparation compensation, unless a concerned case of damage was not caused by a third party or a lack of operational management.

Major Logistics Center Accidents/Incidents Since 2008


However, the coverage of the local financial & insurance products, in most cases, is too small to cover the loss or fall short of a response to actual damage done or accidents caused. Furthermore, local or international insurance products are limited in the type and most insurance do not carry these products.
When insurance companies were asked why they don’t develop or carry insurance products for logistics centers, the culprits they pointed to was 1) that risks outweigh the insurance premiums and it is difficult to exactly estimate an amount of compensation for the initial collateral (buildings or articles in custody) and 2) that it is difficult to identify causes for an event at the time of the occurrence of the concerned event and to exercise the right of indemnify.

Insurance Is No Magic Club For Event Prevention
Some argue that we have to introduce the same scheme or insurance product as the ones adopted in the advanced countries to avert potential accidents at logistics centers, but it may prove challenging to develop insurance products with universal coverage with no regard to the reality.

Realistically, insurance offer minimum guarantee at the time of accidents, and thus it is far from a magic club. Thinking that insurance can solve anything is a problem, but it is far more problematic to treat insurance coverage so lightly to meet the minimum legal requirements.

If I indulge a bit with my own experiences, an owner of A logistics center that was three years old only bought an insurance product that only covers retail part of the logistics center like a beauty parlor and restaurants that would require low insurance premiums, just enough to cover meet the legal requirement. Of course, in such case, the coverage falls far short of emergency compensation as well as real damage from an actual event.
In particular, when a financial investor who has operated a logistics center himself or has no real experience invests in a logistics center, he tends to assume an insurance subscription will be enough to provide a due risk hedge. It is a fact that although insurance cannot hedge any or all risks, it is a requirement.

What keeps insurers from taking insurance subscriptions for logistics centers
Local fire and indemnify insurance tend to have higher premiums for higher compensation caps. Of the local products, products do exist that pay up to KRW 10 billion per event. (Dongbu Fire, Ssamsung Fire)
No product that pays KRW 90 to 100 billion, an amount that may be suitable to cover conserving the previous accidents and cases, is available in the local market. Even if you can find a product from an international insurer, the premium is too much for returns from logistics center operation. (KRW 50 million in premium for KRW 1 billion coverage / Dongbu Fire, Samsung Fire)
No product that offer infinite coverage in local or international market.
Any damage that exceeds the compensation is burdened by the lessor and operator.
Logistics centers, in particular cold storage, are designed, to keep the cold inside the structure, in a maze style or in a vertical buildup style, both of which make it very difficult to put out a fire at its initial stage and worsen the damage. 

Precaution Is The Best Countermeasure
Individuals, companies and corporations who own logistic centers must make proper investment in their operators or operating staff. In fact, the number of operators tasked with a room temperature logistics center that is as big as two to three pyung is only one to three members, except for those owned and operated by conglomerates. No disrespect to a certain generation, the staff is either senior or lacks professional safety training.

With it, initial response is practically impossible or not properly done. When these few operators are set aside for security, cleaning, repair functions, practically there is no one actually responsible for accident prevention.
In a time of high throughput, tenant companies put in part-timers, day workers or others with little awareness in safety into vehicle entering & exiting. There are numerous potential causes that might break out accidents: drinking, smoking or use of flammable devices (fixed or portable gas burner) by employees of lessees (or residents of company apartments); presence of bonfire in a winter season and ignorance by those stationed on site of safety guidelines on fire related accidents.
As part of preventive and overseeing measures against such unsafe factors, security or safety management staff must be employed to educate users (lessees’ staff) on how to prevent unsafe behaviors and accident prevention on a regular basis, to establish more detailed patrol plans of the premises and to provide education and training on how to execute initial response at the initial time of an accident.
Some may argue that this will hike up the fixed costs and raise the rents, but you will enjoy a substantially lower occurrence of accidents, if users (owner-operator or tenant) increase facility management personnel and conduct proper patrol.
In particular, investment companies who own and invest in leasable logistics centers must look carefully into facility operation personnel when selecting operators or management companies. Logistics center owners or operators are strongly advised to change their complacent perception to cut down on management or supervising personnel for the sake of payroll expenses or fixed costs reduction and return improvement. One cannot emphasize enough when it comes to the necessity of developing professional personnel or continuing safety education for those on site.

Some thoughts on risk hedging measure
 It is essential that you do not blindly reduce the coverage or value of an insurance product just to pay less insurance premium and that you get insurance coverage after thoroughly examining the terms and conditions. Especially, you should try to avert damage from an occurrence of an accident, using a business interruption insurance (BI), on top of personal and material reparation. Already mentioned in the above, safety related rules and regulations are only getting strengthened and actual owners, along with project managers and facility managers, are held more responsible.
② The most urgent issue to tackle in today’s logistics center operation is to make investment in training and expanding professionals, as management fees or efforts to foster the expertise of operation personnel and safety trainers on site. Lines of check-up and surveillance should be efficiently improved. Surveillance system that leave no space on the premise hind-sight. Management personnel and users (tenants) should join force in conducting emergency response education on initial response on a regular basis.
 Safety personnel should be given a clear approval on their line of work and their professionalism, in that they should not be tasked with other jobs than their ones and be concentrated on their designed responsibilities. They should be treated as professionals, so that they can approach their work with a strong sense of professionalism.
 In investing in a logistics center, operational returns, term of tenant (shipper) lease or other acquisition decision factor is all important. As important is examination of the existing manner of management and operation of the property. The existing tenant’s sense of safety helps address event occurrence factors.

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