If you want to save money, don't leave insurance planning to the agents

Buying insurance is an onerous task. It's about as gratifying as putting on an extra pair of socks in the winter. Worse still, it's costly, taking precious dollars away from the bottom line to prepare for catastrophes that may well never happen. No wonder many chief executives forgo the issue of insurance planning entirely and choose instead to rely on the recommendations of their local insurance agents.

Ron Lockhart is an exception. He's an owner-manager who strategizes about insurance protection for his $15-million packaging company, Julian B. Slevin Co., with the same thoughtfulness he directs toward product quality, customer relations, and, yes, his bottom line.

The Upper Darby, Pa., company, which Lockhart bought from his wife's family in 1986, manufactures paperboard containers for beer bottles -- and it has more financial exposure than a glass of beer has bubbles. The containers are printed, cut, and glued by massive -- and potentially dangerous -- machinery; the printing process uses hazardous solvents; and the company depends on one major client, Anheuser-Busch Cos. for a large part of its business. Lockhart also needs an insurance umbrella in case a defective product or disgruntled customer lands him in court. Despite the temptation to insure everything in sight, he also wants to keep his annual bill to a minimum, to free up cash for new-product and customer development.

Insurance planning at Julian B. Slevin begins on the production floor, a good rule of thumb for most businesses. Focus first on the product -- whether goods or services -- and identify risks in ever-widening circles of design, production, performance, workplace hazards, customer liabilities, and so on. In Slevin's case, there are potential problems throughout the factory, where 120 workers assemble cartons over three eight-hour shifts. Insurance bills could be enormous.

But Lockhart first looks at the cost-effectiveness of noninsurance solutions. For example, he keeps his supply of on-site hazardous solvents to a minimum -- only three tanks' worth -- and stores them underground to reduce the likelihood of explosion. Since he believes that "what could put us out of business would be a fire -- which could be very bad and very fast, given those solvents," the production floor is protected by an elaborate sprinkler system. "There's nothing our company could gain by collecting insurance after a fire," Lockhart says. "If we couldn't do business for a year, we'd lose our accounts and be virtually out of business." So the sprinkler system is only the beginning. Lockhart has instructed his production-floor supervisors to watch out for employees who, for example, pour too much ink into ink-machine sumps; those overflows would quickly ignite in a flash fire. In addition, workers are permitted to smoke only in a small, isolated area. As a result of these measures, Lockhart's fire-insurance bill is quite reasonable, given his line of business, at about $40,000 a year.

Machinery, which includes two 100-foot-long rotogravure printers, is another hazard. Twenty thousand paperboard units pass through each printer every hour, 24 hours a day, five days a week, and Lockhart is painfully aware that the slightest malfunction or lapse of attention by workers could mean trouble. "One of my own supervisors in the glue room lost a finger in one of the machines," he recalls, shaking his head. "The irony is, you can't make a machine completely safe, no matter what you do." Instead, Lockhart concentrates on the workers, enforcing safety standards "to the hilt."

Again, the results are good. Slevin's safety record is so impressive that the company recently qualified for a discount on its workers' compensation insurance. Like other organizations that pay more than $1,500 in annual workers' comp bills, Slevin is subject to an "experience rating," based on its past three years' performance compared with similar companies in the state. (If you're interested in learning about your own industry standards and how to qualify for discounts, you should contact your state's workers' compensation bureau.)

Lockhart's first goal -- to control as many risks as he can through noninsurance measures -- is a good one for any cost-conscious manager. Solutions, of course, will vary by company just as the problems do. Service firms, for example, do not have Lockhart's headaches over machinery and chemicals; instead, executives might consider certain types of hold-harmless agreements to limit their professional liabilities.

When it comes time to shop for insurance, Lockhart's concerns, again, should be those of every manager: how do you find high-quality, cost-effective insurance? Until recently, Lockhart did his insurance shopping the same way his father-in-law had done it, by calling a few local carriers and buying directly from them. But last year, he and his chief financial officer, Mike Dooley, decided there had to be a better way to save money. "I had gotten a mailing from a local insurance broker that included a list of corporate clients," says Dooley, an accountant. "I checked them out with some of their clients and then decided to test their marketing claims by asking for their best quote on a property-insurance policy we were thinking about buying." The broker came in with a price that was 50% less than Slevin's existing carrier's, and Dooley and Lockhart decided to make the switch. "It was purely a matter of dollars and cents," recalls Dooley. "We didn't want to spend a dime more than we had to."

Dooley and Lockhart did not bother to check out the financial health of the carrier. Although it worked out in their case, that can be a risky oversight, since price cutting among property casualty insurers has led to some defaults and lax coverage. It's a good idea to check out the ratings of all potential insurers with Best's Insurance Reports, a rating service you'll find at your local library. Another good idea: every few years check your brokerage's quotes against two or three others.

One highly effective way for Lockhart to cut insurance costs was to raise his deductibles. "We used to have only a $5,000 deductible on our fire insurance," he says. "Now, we've raised the deductible to $25,000, which is what I'd consider a threshold of pain for the company, but not life threatening."

CFO Dooley uses Slevin's insurance broker as an information resource, calling him about once a week, often to check out the risk-control ideas Lockhart keeps tinkering with. "I just called our broker today," he laughs, "because Ron is considering adding a backup unit to our CO2 fire-protection system." Lockhart already knows that the backup makes shop-floor sense: it would not only add an extra layer of protection but would also enable the company to resume production more quickly after a flash fire. If the addition will also help cut insurance bills, as the broker expects it will, Lockhart will give his OK.

Lockhart evaluates short-term decisions like these on their finances. Once, he says, he investigated a year's worth of insurance for his receivables, "but our problem was that we just had one big account we were worried about -- and the insurer would have required us to buy insurance for them all. That made it so costly that we were better off taking our chances on the account defaulting. So we did without insurance." Lockhart and Dooley, in this instance, might have done better if they'd kept checking, perhaps with the help of the company's lawyers or outside accountants. A few insurers are selling a new, state-of-the-art policy that offers companies the chance to sell their receivables in conjunction with buying insurance on them. The overall cost is less than current fees for conventional factoring and traditionally insuring receivables.

Larger or longer-term insurance issues are more complicated, forcing Lockhart to weigh current costs against other matters that may be as diverse or ambiguous as the company's long-term prospects, courtroom risks, or the current state of clients' financial pictures. Consider, for example, the always thorny question of product-liability insurance. Slevin has been burned by such lawsuits in the past. "When we were making containers for soda, a child once turned a container upside down," recalls Lockhart, who was then vice-president of sales and production for his father-in-law. "A bottle fell out and broke. The child lost an eye from the falling glass. It wasn't our fault -- our package hadn't even broken -- but we were sued all the same."

Although the company won the suit, some executives might have leapt to the conclusion that the only future protection would be policy piled upon policy of umbrella coverage. Not Lockhart, who has analyzed this issue under a magnifying glass. "I honestly believe that our risks are lower now that we're making beer instead of soda containers, because children don't pick them up -- there's less chance of them being held incorrectly. Also, beer isn't bottled under the intense pressure that soda is, so it's less likely to explode if bottles break." Currently, Lockhart pays about $6,500 for $5 million worth of liability coverage. He also emphasizes quality control in the plant -- workers pull and inspect 25 cartons every 15 minutes.

Another coverage Lockhart considered long and hard is contingent interruption insurance -- designed to protect businesspeople against problems that originate at their main supplier's or customer's offices. In theory, he's the ideal customer for this costly insurance, but Lockhart never relies on theory alone. "I treated it like any other strategic decision," he says, "and tried to take into account all the possible business ramifications. I know that Anheuser-Busch is not going to go bankrupt or default on me, so that's not a problem. And although something like a strike there would hurt me, I also know that they've settled their workers' contracts, so there's not going to be a strike. Then there's the possibility of a fire at one of their plants, but since I deal with five of them, I think I'm pretty well covered. So it doesn't make sense for me now."

The operative word is now. Few financial issues change as frequently as insurance matters do, especially for companies where risks are high. And if Lockhart succeeds in his goal of branching out into packaging for fast-food chains or consumer-goods manufacturers, insurance planning will turn into a whole new ballgame. In the meantime, though, he's ready. "I'm an optimizer at all things. And when it comes to my insurance, I have to know, day by day, that I'm paying as little as possible while doing as much as I can to protect my company."


How to do your own insurance audit

When Ron Lockhart's company, Julian B. Slevin Co., asked Price Waterhouse manager Larry Klein to perform an insurance audit, it passed with flying colors on cost, quality, and comprehensive protection. Here are some of Klein's tips for conducting your own audit.

* Tour your workplace. Evaluate risks the way an outsider would by observing workers, machinery, storage facilities, distribution networks, and so on.

* Check your records. Go back three to five years to identify the risks that have actually materialized into problems. If risk-control measures have been instituted, this is a good way to evaluate their effectiveness.

* Analyze the numbers behind current insurance policies. Be sure you are covered adequately at the upper end of expenses but not excessively on the lower end. Lockhart suggests setting deductibles at the corporate "threshold of pain" -- $25,000 in his case.

* Pay special attention to liability coverage. Some general guidelines: start-ups should be insured to cover at least the full value of investments, machinery, and less tangible assets such as technology rights. Older companies should probably also cover at least three years' worth of revenues.

* Evaluate carrier credentials. Companies may be out of luck if their carriers go belly-up before reimbursing claims -- there's no such thing as FDIC insurance for insurers, although some states have guarantee insurance. Many defaults occur in the property-casualty end of the business. To check an insurer's financial health, consult Best's Insurance Reports at your local library.

* Think insurance before undertaking new business ventures. This is especially important for acquisitions or mergers. Since there may be undetermined environmental risks, workers' compensation claims, or other costly matters, it makes sense to have an insurance expert evaluate the prospects before business decisions are made.