In this first of four articles, David Shillingford addresses the size and nature of the equipment theft problem and how to align prevention with business goals and the function of management.
This article is the first of a series of four that deals with the growing problem of heavy equipment theft, the costs that result for insurers and owners of this equipment and what can be done by risk managers to reduce the costs associated with equipment theft. This article will deal mainly with an analysis of the size and nature of the problem and will discuss the first of four areas in which theft can be tackled: aligning theft prevention with your business goals and the function of management. The other three articles suggest solutions in three areas: physical measures to protect your equipment, using data to combat theft, and finally looking at the use of technology.
What is heavy equipment? For these purposes it relates to mobile off-road equipment, either self-propelled or towed, that is not subject to mandatory Department of Motor Vehicle (DMV) registration and licensing.
Accurate national statistics do not exist, but all indicators point to a huge problem that it is getting worse. Insurance reports to Insurance Services Office, Inc. (ISO), show an increase of up to 20 percent every year since 1996 and show theft as the most common cause of loss for heavy equipment-over 50 percent of all causes of loss combined. Inland marine theft losses alone reported to ISO in 1999 were over $120 million.
Some national surveys have suggested that the total figure could be as much as $1 billion each year in losses and associated costs such as rentals, downtime, wasted management time, and project overrun penalties. Perhaps the most worrying statistic for risk managers and insurers is that as little as 10 to 15 percent of stolen equipment is ever recovered.
Why Is Equipment Stolen? The answer is simple. The reward for the thief is greater than the risk taken. Heavy equipment has little physical (item or site) security and is valuable and easy to sell. The low recovery rate is a clear indication of the low risk for a thief. If the item is recovered, an arrest may not be made. Where an arrest is made a conviction may not be secured. Even where a conviction is secured, the penalty is likely to be light.
Why Is So Little Equipment Recovered? The best way to explain this is to compare equipment recovery to that of autos. The National Insurance Crime Bureau puts auto recovery rates at 62 percent. The staggering difference in recovery rates is less surprising when certain key factors are considered such as the timeframe of theft discovery, the availability of accurate data, the complexity of equipment identification, and the nature of the used equipment market.
Theft Discovery. The first problem in equipment recovery is the time lapse from theft to theft discovery. A car theft will be discovered hours, if not minutes after the crime. An equipment theft on a Friday night might not be discovered until Monday morning. Equipment owners with larger fleets or multi-site operations may not discover the theft for days, weeks, or in some cases months. This provides the thief with a window of opportunity when any investigation by law enforcement will not find a theft report. This is a particular problem as suspicious activity such as moving equipment at a strange time of day or on ill-suited transport is most likely to occur during this "window." The gap between autos and equipment widens further when the availability of ownership data is considered.
Data. If an officer stops a car in suspicious circumstances, even if the theft has not yet been reported, the true owner of the vehicle can quickly be determined. This cannot be done for heavy equipment, as there is no mandated registration system for off-road equipment. The next problem occurs when the theft is discovered.
There are a number of hurdles to a "successful" loss report unique to heavy equipment. Without registration or title documents the owner may not have a record of the Product Identification Number (PIN) or serial number, which is the fundamental information needed for an accurate theft report. The owner may have a PIN but it may be a shortened version on a warranty card, which may not be a unique identifier.
As there is no standard format for the numbering of heavy equipment, data entry error is common and there may be confusion as to whether to file the loss as an "article" or a "vehicle" in national police or insurance computers. (A standard format has been agreed for earthmoving equipment but will take many years to implement.) The standardized 17-digit auto VIN has an algorithm that can check the validity of the VIN which cannot be developed for the nonstandard PINs, indeed it is difficult for the officer or adjuster to even confirm that the equipment ever existed! An incorrect PIN renders the loss report almost useless.
Difficulty of Investigation. To identify a piece of equipment requires a level of expertise, which changes with the type of equipment and degree of sophistication of the thief. Even equipment that has not been "disguised" may have the PIN in any of hundreds of places, some harder to find than others, with many other ID numbers of parts and attachments to confuse the issue. Officers cannot be expected to have this level of expertise, especially given the low priority of what is perceived as a "victimless" crime. Officers know from experience that equipment investigations are time-consuming and often lead to nothing but frustration and are understandably reluctant to get involved in such investigations.
By contrast, the placement of VINs on autos is standard and the level of training in auto theft investigations is high and well funded. It should also be noted that physical, and to some degree legal, access to autos is much easier than for equipment on worksites.
Used Equipment Market Regulation. The lack of due diligence in the used equipment market is in stark contrast to that for autos. When buying a car, title documents are exchanged and services such as Carfax offer full vehicle histories. Until this year, nothing like this existed in the used equipment market. This is a key consideration for a thief in assessing the risk of getting caught. If equipment can be sold with impunity, not only does this reduce the risk of detection but it also allows stolen equipment to be sold at, or close to, market price.
Although it is almost impossible to stop a determined thief from stealing a piece of equipment, especially where equipment must be left in an unprotected and remote location overnight, there is much that can be done. In broad terms, theft deterrence falls into four categories: making deterrence part of the business plan; taking simple, low-cost theft prevention measures; using data to combat theft; and the use of technology. In this article, the first of these is discussed.
Align Theft Deterrence with Your Business Plan. Whether insured or self-insured, the cost of risk will be reflected by your theft experience. It is therefore important to measure the cost of theft and costs associated with theft like any other cost and make employees aware that the bottom line is affected, thus having an indirect impact on them.
Costs associated with theft include: equipment replacement, short-term rentals, the management time taken to deal with law enforcement and adjusters, wasted labor costs due to down time, and direct or indirect penalties that may arise if a project is delayed. Many of these will increase where rare equipment for specialized tasks is stolen.
Even if your equipment is recovered there may be a cost due to damage or salvage costs. If insured, some of the costs will be covered but the cost of the deductible and future premium increases should be considered. As the insurance market continues to harden, these effects are amplified and, in extreme cases, may lead to a loss of coverage that affects fire and damage coverage as well.
This impact can be made more visible by linking employee incentives to theft reduction. Further employee involvement can be encouraged by posting signs in work areas, informing staff of the effects of equipment theft, and offering rewards for information that leads to recovery. This may be more effectively done through a national program where reward funding can be coordinated and a 24-hour confidential hotline provided.
Once employees have been persuaded of the importance of theft prevention, suggestions from staff about security procedures should be encouraged as they are onsite and know what potential problems exist. Where positive action is expected from employees, it is important to allow time for such action to be carried out. Good managers will often visit worksites and if these are sometimes unannounced and random, this may also have a positive effect on theft prevention.
Consider joining local contractors' theft prevention organizations to exchange ideas and information about theft prevention and the pooling of resources. This may also be a good way of establishing a relationship with local law enforcement-officers who work with such organizations are more likely to take an interest in your security and actively investigate your losses.
The bottom line is that a coordinated approach to deterring equipment theft is part of good risk management, which is part of good general management. Theft prevention does not need to be a significant cost and far outweighs the cost of getting it wrong.
The next three articles in this series look at many of the cost effective measures that can be employed to deter theft.
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