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Factory closure can create new risks for plant owners

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The tally is sobering: 6 million jobs lost and nearly 42,000 factories closed in the past decade.

And despite optimism in some manufacturing quarters, continuing economic uncertainty may encourage additional plant shutdowns in 2012.

For risk managers of the entities that own these vacant buildings, the challenges are complicated. Not only are abandoned structures subject to vandalism and arson, they are magnets for thieves because of the high prices paid for copper and other metals used in flashing, wiring and pipes (see related story).

These risks make the abandoned buildings difficult to insure. Depending on the schedule or number of buildings owned by an entity, coverage may be available only in the excess and surplus lines market, and full coverage is not guaranteed.

How worrisome is a vacant building from a risk management standpoint? The problem was exacerbated with nearly 42,000 manufacturing facilities closing and nearly 6 million workers losing their jobs during the decade that ended in 2010, according to an April 2011 study by the Washington-based Information Technology & Innovation Foundation.

Sara Sirotzky, managing director and Midwest manufacturing practice leader at Marsh Inc. in Chicago, cites a December 2010 event in the Windy City that points up the threat.

“A laundromat in a blighted area was closed by the owner, who had no money to upgrade it and no one to buy it,” she said. “In effect, his hands were tied.”

Then, a group of area homeless people battered by the city's frigid winter conditions tore down the vacant building's boarded-up windows and burned the wood inside it for warmth. The building erupted in flames that soon engulfed adjacent structures.

“As firefighters fought the blaze, the roof collapsed and killed two of them,” Ms. Sirotzky said. “The owners now confront both criminal and civil liability.”

Additionally, the shuttering of factories fosters the closure of neighboring businesses in urban and rural areas across the country. Selling a building or even renting it becomes difficult as the area becomes deserted, a sad collection of hulking ruins. The problem was exacerbated with nearly 42,000 manufacturing facilities closing and nearly 6 million workers losing their jobs during the decade that ended in 2010, according to an April 2011 study by the Washington-based Information Technology & Innovation Foundation.

Even giving a building away is problematic.

“Some owners will offer the structure to the local municipality or city, but not many want it,” said John P. Wood, senior vp and senior property client adviser in Marsh's Chicago office. “The costs—in this economy—of upgrading it are deemed too high.”

If an owner can't sell or even give away an abandoned building, it nonetheless retains the title, along with the liabilities and potential litigation exposures that ownership may bring. There are three recourses to limiting these exposures: demolition, security and insurance. Demolition doesn't absolve liability entirely, however. As Mr. Wood explained, “You still have title.”

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That leaves security and insurance, neither worry-free.

“Some owners have vacant buildings that show a replacement cost of $3 million on the "Statement of Value,' but it is currently worth nowhere near that amount,” said Jay Little, vp of commercial insurance at Kansas City, Mo.-based broker Lockton Cos. L.L.C. “Meanwhile, they're paying premiums and taxes based on this value. And they're still vulnerable to a wide array of risks. I've got 60 accounts dealing with these problems right now.”

Even if the owner has property insurance, this does not guarantee full coverage. The Insurance Services Office Inc. property form restricts coverage for vandalism, theft, water damage and other losses for a building that has been vacant for more than 60 consecutive days, so negotiations with carriers to assure coverage after 60 days must start during this period.

“Standard markets will still write vacant buildings, but it's getting tiresome for them,” said Mr. Little. “If you (own numerous buildings), you can get away with a couple vacant structures. If you don't, carriers will try to restrict certain perils like vandalism or theft.”

Mr. Wood agreed: “It all depends on the underwriting guidelines—where the building is located, the type of property and what it's made of, the percentage the building represents in the total schedule, and so on. In some cases you can get coverage; in others you can't, in which case you need an excess and surplus lines approach.”

Even this can become knotty. “The E&S market may slap on coverage restrictions—actual cash value rather than replacement coverage, or replacement costs minus physical depreciation,” Mr. Wood said.

Consequently, the most secure way to limit liability and loss appears to be prudent risk management. Cal Beyer, head of commercial manufacturing for Zurich North America in Edina, Minn., recommends that risk managers “establish first your plans for the property—are you just mothballing it until operations can resume, or fully prepared to shut it down?” he said. “Each has different considerations from a loss prevention standpoint, and both are subject to an array of different (building) ordinances.”

Once this question has been answered, Mr. Beyer advises developing a vulnerability analysis—a checklist of potential losses and related mitigation strategies, prioritized according to the frequency and severity of each risk. Mitigation runs the gamut and begins with contacting the local police and fire departments about the anticipated abandonment of a building.

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“In many municipalities, firefighters will provide a risk assessment free of charge and even board up the vacant building for you,” said Thomas LaCorte, assistant vp and senior property specialist for the Eastern territory at Chubb Corp. in Warren, N.J. “They will also hang a "Keep Out' sign on the building, warning firefighters that it is vacant. This way, if a fire breaks out, they'll know to attack it from the exterior and not the interior, which is much safer.”

Other best practices include fencing the building, hiring a security guard to patrol it, and installing surveillance cameras and alarm systems. If the related expense is considered onerous, however, sources recommend routine surveillance by company personnel to check on the building's condition and status, in addition to having neighbors alert the owner regarding suspicious activity at the site.

It is also advisable to maintain proper temperatures in the facility to keep pipes from freezing and prevent mold from forming in air conditioning systems; ensure the smoke detection system is operable; and keep the water on if the building has a sprinkler system to contain a possible fire.

Frank Westfall, vp of Philadelphia-based ESIS Inc., the environmental, health and safety unit of ACE Ltd., recommends a final best practice: “If you have hazardous chemicals or other regulated substances in the vacant building, they should be inventoried and moved to another operating location of the business, or removed and disposed of properly. Tanks and process lines also should be purged of fuels or chemicals and disposed of properly. It's just one less thing to worry about.”

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