Insurance for a contractor’s equipment is usually underwritten on a non-standard form, typically referred to as an inland marine policy, and this coverage may vary widely among insurance companies. Contractors equipment coverage may also be included as part of a master property program insuring permanent property, contents, builder’s risk, installation floater, etc. Both methods are acceptable.
Arranging proper coverage for equipment and related assets starts with the “all risk” insuring agreement. The policy form is designed to insure for direct physical loss or damage caused by a “covered cause of loss,” except as excluded. Reviewing the insuring agreement on the contractors equipment policy is critical, but don’t ignore other policy terms such as the “property not covered” section, the exclusions and, finally, the loss valuation clauses. Each of these sections have some relevance on coverage provided under the policy and what is ultimately paid on a claim.
The property not covered section is one of the most important, as it will identify specific types of property not designed for coverage under the form, such as automobiles, motor trucks, tractors, aircraft and watercraft. Equipment loaned or rented to others may not be included for coverage unless an endorsement providing for such coverage has been attached to the policy.
The inland marine form for contractors’ equipment may contain specific coverages subject to different deductibles. For instance, a policy may have a $10,000 deductible for all perils of loss, except for losses to cranes or asphalt plants, which could be subject to a deductible of $25,000. The contractor should pay particular attention to whether the deductible is “per-item” or an “occurrence.” In the event of a claim involving multiple pieces of damaged equipment from an event like a windstorm, the occurrence deductible is much preferred over a per-item deductible.
In most policies, separate and larger deductibles are applicable to floods or earthquakes. In coastal regions, windstorm deductibles could be applied as a percentage of the loss.
Items for Review
The following coverage checklist for a contractor’s equipment policy should be carefully reviewed:
Accurate inventory - Claim problems occur when a piece of equipment has been inadvertently left off the initial schedule of values. Underwriting relationships are vital when problems like this surface, particularly when it is an honest mistake by the contractor. Some underwriters will include an endorsement called “unintentional error or omission” to address potential mistakes like this. However, some policy forms have a provision in the property not covered section excluding equipment owned at the inception of the policy but not listed on the schedule submitted for underwriting. Special care should be taken if this clause is contained in the policy.
Blanket limit of liability - Arranging for coverage on a blanket basis is a must. A list of equipment and values are submitted at policy inception, with all newly acquired equipment automatically insured from the date of purchase. These acquisitions are usually subject to specific sub-limits, so make sure they are sufficient to cover the exposures.
At the expiration of the policy, a new list of equipment and values is submitted to underwriting, whereby an audit will be conducted. Usually the underwriter will average additions and deletions from the original schedule, which produces a premium adjustment resulting in a credit or debit, depending on the circumstances.
If the contractor’s use and location of equipment are spread over several states, it is wise to consider a “loss limit” approach in which the underwriter will provide coverage on a per-occurrence loss basis, rather than charging a full rate on the schedule of values. For instance, if the schedule values total $25 million but no more than $5 million are exposed under any circumstance, the policy provides a loss limit of $5 million, not the full $25 million.
Valuations of equipment - Coverage should be underwritten on either a replacement cost or an agreed amount basis. Avoid the actual cash value (ACV) valuation when negotiating terms. In some cases, however, an ACV valuation may apply to older equipment.
Rented equipment - The policy form should include all rented and borrowed equipment, with a specific sub-limit applicable to this category. For instance, all rented and borrowed equipment may be insured to the terms of the policy and subject to a limit of $100,000 per rented item. This sub-limit can be increased or decreased based upon the contractor’s exposures. This blanket and automatic provision eliminates the potential for claim problems arising out of failure to notify the insurance company of rented/borrowed equipment exposure.
Co-insurance - A topic that is often misunderstood, co-insurance is a means of making sure the values submitted for coverage are within certain percentages, typically 80 percent. If the value submitted is not at least 80 percent, for example, a claim will be adjusted with a potential penalty assessed to the insured contractor for “undervaluing” the equipment. For example, if a crane valued at $100,000 was only insured for $50,000, with an 80 percent co-insurance, the contractor would recover only 5/8ths of the claim.
Waterborne - This is a typical exclusion in many inland marine/equipment forms, so coverage should be negotiated if the contractor has any exposure to projects involving barges or the use of watercraft. This exclusion should be eliminated entirely if a contractor performs bridge construction over waterways. Some forms exclude coverage for equipment while airborne as well.
Underground - Many insurance companies will exclude equipment stored or operated underground in connection with mining operations.
Temporary forms, scaffolding, shoring and false work - Usually, this category is a sub-limit in the inland marine policy. Coverage for forms, scaffolding, shoring and false work is necessary and should be carefully reviewed when analyzing total exposures. Other pieces of equipment for review include office trailers, fencing and cribbing. These items are often overlooked in creating the inventory list and can represent a large portion of a claim.
Transit exposure - Make certain the policy form includes full coverage for equipment during transit. Some underwriters provide coverage for this exposure within a sub-limit, but most will insure subject to the policy deductible only.
Rental reimbursement and continuing expenses - If equipment is damaged by a covered loss, many insurance companies will provide coverage for additional expenses related to the claim, such as rental or lease of similar equipment, overtime wages needed to complete the work and transportation of the rented equipment. Usually provided in the policy as a sub-limit, the coverage must be set at a reasonable amount. Often an afterthought by the contractor, the limit may not be enough to cover all related expenses.
Boom - Many policy forms insuring equipment will contain an exclusion regarding the collapse of a boom on a crane from overweight. This exclusion should be eliminated if applicable.
Exclusions - Policy exclusions will vary by insurance company, but most forms contain similar language. Typical exclusions include flood and earthquake, wear and tear, rust or corrosion, inherent vice, dishonest acts, loss of market, shortage of inventory and war. Restrictions of coverage may be inserted within different sections of the policy—not necessarily the exclusions section alone.