In 15 years of insurance industry work before joining Pennsylvania Lumbermens Mutual Insurance Co. (PLM) in 1998, John K. Smith says he saw only two claims worth more than $1 million. Now, as president and CEO of a leading property and casualty insurer for dealers, he hears of at least one million-dollar claim per month.

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Those payouts help explain why, after several years in which property and casualty insurance rates trended downward, this year Smith says the LBM industry is seeing rate hikes of 1% to 3%. Insurance companies were able to keep rates low largely because, as late as 2006, they were paying as little as $92.50 for every $100 in premiums collected, according to Central Insurance Services (CIS), an insurance brokerage based in Louisville, Ky., that works extensively with lumberyards. But by 2008 that payout rose to $105, and in the first quarter of this year it stood at $103.30. When outgo consistently exceeds income, insurers ultimately have to raise rates.

"The insurance market has been soft, prices have been going down for premiums, and we're just now kind of starting to see where some of the insurance companies are starting to see claims," CIS vice president Rob Wessel Jr. says.

Reduced Exposure

Insurers also have felt pressure to keep rates down in part because the LBM industry has been giving them less and less to insure. Reductions in inventories combined with the closure, by ProSales' count, of more than 1,600 dealer facilities nationwide since 2008 mean construction supply companies had fewer buildings, goods, and equipment that were exposed to risk. One exception was those dealers that have gone deeper into installed sales and related services. In their case, their risk exposure has increased because so much of what they do takes place out in the field, away from the controlled environment of the LBM facility.

Only a handful of insurers cater strictly to the industry. PLM, Indiana Lumbermens Mutual Insurance Co., and Federated Mutual Insurance Co. are the headliners. ProSales reached out to all three for this article, and only PLM and Federated responded with interviews.

In and Out

Low premiums have enticed other insurance companies, with little experience dealing with lumberyards, into the LBM niche in recent years. "What happens in the insurance industry is people look for top-line growth and they see fairly low losses on an individual risk," says Smith.

But now, Smith adds, some of these companies have started to exit the industry. He has already had a few dealers come to him looking for policies after being dropped by inexperienced insurance carriers who couldn't take in enough dollars to cover the risk they were taking on.

Dealers, naturally, want to keep rates and premiums as low as possible. But given that their chief product burns so easily, eliminating exposure to risk is nearly impossible. And even if wood were fireproof, it still gets delivered via an even bigger insurance risk: a truck.

"From the liability standpoint, if they cause an accident and people get injured, [dealers'] primary auto limits, even if they carry a $1 million [limit], that's not going to be enough," says Wessel. "You have to have an umbrella policy."

Keep It Clean

There are some simple things, however, that can be done to limit events such as fires and keep insurance rates low, Wessel says. Good housekeeping goes a long way. Examples of good housekeeping include maintaining a clean yard, making sure workers follow proper safety procedures, providing adequate training of employees, and staying organized.

Wessel says clean and organized operations reduce the risk of events such as fires while boosting their efficiency. They also turn out to be the ones most likely to ask their insurer for help.

"Most dealers recognize the need to have an effective safety and risk management program," says Mike Russell, a national account executive with Federated Insurance. "They understand the importance of partnering with an insurance company that offers they services they need."

Smith also promotes good housekeeping, but notes that when dealers have to cut back, they usually cut positions responsible for many housekeeping tasks. PLM offers a few programs to help dealers reduce risks and reward them for working to reduce exposure on their own. For example, the company has more than 20 light loss field reps throughout the country. They also have at least 12 loss control safety officers who can help a dealer improve its current risk-exposure policies.

Wessel also suggests that dealers rethink which potential dangers are worst.

"When you think of lumberyards you think the biggest thing they are afraid of is fire, but quite frankly, the most common claim that we see across the country is from windstorms," says Wessel. "It's not as totally damaging [to a dealer] as a fire, but it can be if they get a direct hit."

When it comes to true losses, however, Smith says the building and inventory may be the least of a dealer's worry. He recalled a phone call he received a while back from a dealer whose yard had burned down. Smith says the man was upset about losing his inventory, but Smith reminded him that all that stuff can be rebuilt and restocked. It was his relations with his customers and suppliers that he really needed to rebuild. It can be easy to lose sight of that fact after a big loss.