Risky Business: Managing the mitigating risk in the equipment rentals business

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SCREEN AFRICA EXCLUSIVE:

In the film and television production business – where equipment is expensive, and all kinds of mishaps and malfunctions may occur – it is a blunt fact that players need to take steps to manage and mitigate risk wherever possible.

Risk – most effectively understood here as the likelihood of losing something valuable – is a defining feature of the equipment rental industry, an ever-present shadow hanging over the operations of both established businesses and start-ups alike. In fact, as Visual Impact’s Goran Music points out: “I think, unfortunately, the less resources people have starting out, their appetite for risk actually gets bigger. This is because playing safe entails going with the best backup and support, full insurance – but not many people can afford this in today’s world.”

For this feature, Screen Africa spoke to rental equipment companies and insurance underwriters to identify the key risks of this market sector, and to discover the steps individuals and businesses take – or should take – to limit their exposure to risk.

  1. GEAR IS DAMAGED

The most common problem, “as equipment has become more technical” – in John Harrison of Southern Lighting’s words – “it has also become more prone to getting damaged on set.”

As Denise Hattingh of KEU Underwriters explains, “In the case of damages, the issue is always why the equipment has been damaged. If it is accidental and not negligent, then it is covered by the policy.  So we work closely with the market and it is very quick, usually, to determine why the damage reports have been provided and you can then move forward on the basis of that.

“Where it becomes problematic,” she continues, “is when they are damages to the camera, for instance, and the production crew didn’t take enough care.  For some reason, they did not know that if you are filming in humid conditions at the coast then you need to actively prevent water damage or rust and so forth. “

To point things in perspective, she says: “But with damages, I would say 95% of cases are covered by the damage report and the process is straightforward. Most often, people trip and fall: it’s heavy equipment and they work in rugged terrains. As an insurer, you work with people you’ve known for years, it’s a reputational issue and most of the time it’s quick to finalise.”

John Harrison shares his thoughts about the frequency of damages in the rental equipment environment: “Is the crew on shoot actually qualified to use this equipment? Do we ask production companies to send around a list of everyone involved, so I can verify that they are all qualified? It’s an impossibility: you can’t do that in each and every case. It could be the old ‘rent a car syndrome’ – let’s just put our foot down, and who cares? Or it could be that some people on set entrusted with the gear don’t know what they’re doing.”

Hattingh also picks up on the necessity for greater training in the industry to preserve and protect its vital equipment: “The older generation of equipment – the big setups where you had physical film going through – I think demanded more respect, because it was big and heavy and very specific, highly skilled things needed to happen. Now, with the new generation of cameras, anyone can use them – or more accurately, they think they can use them. We’ve seen examples where new technology comes out, and a crew member will switch off the fan to eliminate the noise – and then the system overheats. I would say one of the biggest recommendations is that youngsters entering the industry have a proper grounding in how to use and maintain the equipment on set safely.”

However, when all is said and done, the only way for reputable rental companies to manage this risk effectively is to ensure they can provide an alternative solution when things break down. In addition to large inventories, many rental companies have on site workshops and Harrison reflects on the importance of this aspect of Southern Lighting’s operations: “A client engages you in good faith because they need something to do the job. From our side, we need to guarantee them that we can provide back-up so they can do that job. That’s why we’ve been in business for 50 years: not because we’ve got the latest equipment, but because we work person to person and get them on the go.”

  1. STOCK BECOMES OBSOLETE

A related risk – because one ends up with stock on the floor that can’t (or won’t) be used – is the issue of obsolescence.

Interestingly, obsolescence may pose a threat in two distinct ways. Products may become obsolete simply because of the ‘here today, but better tomorrow’ nature of technological developments in the industry, where perfectly serviceable, three-year-old LED lights, for example, will be disregarded because they don’t have the ‘latest’ range of features or mobile app integrations. This is where sound buying decisions and inventory nous are crucial.

However, perhaps even more concerning, is the issue of built-in obsolescence: what to do about gear that has been designed not to be fixed?

As Goran Music explains: “Through the years we became official distributors for Sony, at first, and then Arri lights and cameras, and as such we have had to honour the warrantees and carry out services. That skill is quite unique, and the engineers we have are truly the last of their kind. Their experience is irreplaceable. Equipment, these days, is built not to be fixed – which doesn’t stop us from fixing it – but training is no longer conducted on a component level. If something on a board is blown, just throw it out, they say – put in a new board. But the skill of being able to fix things saves the day in our pressurised environment,” he says, and recounts an international shoot in Mpumalanga where a lightning storm blew out 20 of 40 operating cameras, leading to a heroic on-site repair mission conducted by the Visual Impact team.

  1. GEAR GOES MISSING

Turning now to the unsavoury aspects of risk in the equipment rental industry, one real vulnerability is that the gear you rent out simply never comes back.  Legally termed “absconsion”, Denise Hattingh explains that it is an all-too-common phenomenon – and something that rental companies must purchase additional cover for.

“We processed many claims last year to do with absconsion. It is a standard exclusion on all policies, but the person insured then has the option to bring it back into the policy at an additional premium, and subject to some terms and conditions and checking-points in place.”

According to Frank Meyburgh of the Magic Light Company, it is “unfortunate that these checking-points have had to get more and more severe over the years, but scamming is a key vulnerability for our business.”

John Harrison shares a story from just last year when Southern Lighting “had a new client come in and they furnished us with IDs, company registration certificates, B-BBEE certificates and an email copy of proof of payment. We did our checks – and not one of those documents was genuine.”

  1. VIOLENT CRIME

Far more harrowing was to hear every one of the respondents share stories of violent crime in the equipment rental business.

It is a truism that crime cuts across every industry and affects all people in society, but in the film production environment – where so much is going on, where attention is split in so many different directions and where a single minivan could be housing millions of rand’s worth of equipment – violent, opportunistic crime, in Frank Meyburgh’s words, is “the single greatest concern” when gear goes out.

He says, “We’ve had crews working in Soweto where we’ve had to bring in new gear twice in one week – because they’ve been hit more than once. In KZN three months ago, a production minivan was targeted and all the equipment taken along with it. It’s just thank goodness that none of the shots that were fired hit any of the crew members.”

Hattingh, who deals with a “shocking” amount of these cases, describes a responsive, dynamic criminal market, characterised by groups who “go around the rental market targeting specific lenses and cameras, almost like they have a shopping list.” With Eskom’s recent load shedding woes, “we’ve started to see generators go missing from film sets at a greater-than-average rate.”

While there is only so much individuals can do to limit their exposure to acts of criminality, Meyburgh describes how he has adapted to “being personally available for late-night deliveries, rather than having the equipment transported and housed somewhere unsafe and unalarmed overnight. That’s one way we manage this risk on the back end and try be our own loss adjusters on that level.”

  1. YOU DON’T GET PAID

Although it may seem counter-intuitive – at least to an outsider – issues of non-payment are not associated with insurance policy agreements in the equipment rental industry. “That’s a trade issue,” as Hattingh says.

John Harrison explains, “This is becoming more and more prevalent following the downturn of the SABC. They give out contracts, guaranteeing to pay the filmmaker – and then they don’t. And as the renter, sometimes you don’t know who’s telling the truth. You might have already invested costs into the production, such as labour and fuel, but your debt is not coming back. And if you multiply this by a number of companies, the situation can get quite grim.”

He says that to get recourse in these instances, “you go through legal channels and get the company blacklisted. And then the only way to overcome a blacklisting is to pay off your debt.”

However, somewhat incredibly, Harrison explains that even this system seems to be skewed in favour of the defaulter and to the rental company’s detriment. “These bad debt payments are interest-free. Even if you’ve defaulted 10 years ago, you pay back that original amount. Which is obviously less in real terms than it would have been if it was received when it was duly owed.”

  1. YOU DON’T UNDERSTAND YOUR RESPONSIBILITIES

Although established rental companies have ‘been around the block’ and are familiar with their policies and exclusions, Hattingh says that individuals who rent out their own equipment – such as “DoPs who come on set with their own camera as part of a package deal” – are often guilty of bad assumptions about the insurance process.

“The biggest piece of advice is to be clear from the outset who is responsible for the insurance of the equipment. Don’t just assume the production company will be responsible. You need to be clear about this before filming starts.”

Frank Meyburgh, meanwhile, speculates on the “generational aspect” of being caught without adequate cover – or, in the worst cases, with no cover at all.

“A lot of young people in the industry – the Instagram generation, I believe they’re called – they buy their own equipment, but see insurance itself as a kind of scam. It hasn’t happened once or twice, it’s happened a dozen times, where someone will come in and buy a new camera on a credit card – and within a week of purchasing it, it’s been dropped or stolen. And we feel so sorry for them, because this equipment has always been bought on a budget – but there’s nothing we, as the retailers, can do about it.”

At a minimum, Hattingh says, “You need to make sure your equipment is protected when it’s not in use. If your house is broken into, for example, that is solely your responsibility – and if you already booked a job that’s depending on you to be there with that equipment the next morning, you can land yourself in a lot of trouble. People lose a lot of money by not thinking through the process carefully and protecting themselves for things like loss of income.”

  1. THE CLAIMS PROCESS

Although the claims process, by definition, is a beneficial function of the insurance policy – from the point of view of rental companies, it contains its own risks and potential pitfalls.

As Goran Music puts it: “It’s a numbers game” – and, again, it was striking how many similar stories and scenarios were described to me by the respondents.

Going into detail about excess payments (the standardised cost that rental companies must pay for each insured item claimed), Frank Meyburgh quips: “Let’s say 10 Super Speed lenses get stolen, each with an excess of R10,000 – overnight, you have to come up with an excess payment of R100,000 for the pleasure of having your equipment stolen.”

Worse still, what if the loss or damage was due to client negligence, and – already being on a shoe-string budget – they have no money to cover this excess payment?

John Harrison describes innovative ways of trying to overcome this “double-risk” of enormous excess payments, on the one hand, as well as the need to externalise them onto the client, on the other. “At the moment, we’ve got it defined that a shoot is one claim, not every item of equipment on that shoot. This is to protect our clients – and frequently we don’t lodge claims, as we can fix most problems relatively inexpensively on our side.”

In this way, Harrison says, “Insurance is a bit like Medical Aid: you don’t lodge each and every complaint, but you have it in the background for catastrophic incidents. You could make the client pay all the time, but then they won’t be a client anymore – they’ll be too busy paying insurance costs. In our view, it’s better to absorb some of these costs and keep the client.”

This view was uniformly expressed by the respondents, and yet – despite these countless incidents where claims were not made and losses were simply absorbed by the rental company – every one of the interviewees described a “cycle” where, after needing to lodge some big claims in quick succession, they found their insurance policy promptly cancelled by their providers.

This, of course, affects the company’s risk profile – and, as Goran Music puts it, “Now you’re left in a position where you have 30 days to find another insurer, and they’re going to charge you double the previous premium.”

  1. EVOLVING BUSINESS MODELS

The final risk for equipment rental companies in our survey is future-orientated, but it is growing out of the current conditions of South Africa’s production landscape.

Music says, “The national broadcaster really hasn’t performed to its mandate and has decimated the production environment. Small companies used to be able to get by from commission to commission – making small-scale, interesting and independent work and getting paid for it. But now consolidation has happened: only big companies with economies of scale can make it work anymore; they can take on five or six commissions at a time and just float the business if payment is late.”

In Music’s view, this trend will put increasing pressure on small- to mid-size rental companies in the future, and might also see the emergence of “peer-to-peer rental models; like Airbnb for film equipment.”

He does concede that this model might be “problematic in South Africa, because our risk profile is so unique” – and this view is supported by Melissa Warner, an underwriter at KEU, who confirms that business models like this are emerging in the industry, but also that they are “extremely problematic from an insurance point of view, because responsibility becomes so hard to establish.”

With so many risks facing rental insurance companies – and with so many of these potential dangers either beyond their control or else, seemingly, administrated under unfavourable terms – Goran Music describes the need for a Rentals Company Association.

“At the moment, we don’t have a basic code of conduct, or any legal body to represent us and our interests and to lobby for certain things on our behalf. So far it’s six of us that have come together, but we want to get everyone involved and we’re getting closer to registering that Association – as a union, of sorts. It’s a shifting-sand environment, the equipment rental business, and I think it’s very important that we start to take care ourselves and each other.”

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