Contractors equipment insurance: Coverage and underwriting considerations

Rough Notes, Jun 2001 by Prahl, Robert J

Contractors equipment is the largest class, in terms of premium volume, of commercial inland marine insurance. The commercial insured engaged in building construction projects purchases builders risk insurance to cover buildings and structures in the course of construction, and commercial auto insurance to cover damage to his/her automobiles and trucks. However, equipment such as bulldozers, forklifts, mobile tools, etc., is not covered by auto insurance because the equipment is not designed or licensed for road use. Nor is it covered by builders risk insurance. Furthermore, commercial property policies are limited in the coverage they provide for contractors equipment, as will be explained shortly.

Like builders risk insurance, contractors equipment coverage is an integral part of any construction project. The cost of this equipment varies, but larger machinery and equipment can be extremely expensive, with some worth hundreds of thousands of dollars or more. Contractors equipment insurance provides coverage for damage to mobile equipment, including tools and machinery, used in construction as well as in a variety of other activities. Builders risk policies do not cover such equipment, unless it is intended to be made a part of the building or structure.

Contractors, however, are not the only ones who need this insurance. Cities and towns that use mobile equipment for road maintenance and snow removal, as well as companies involved in landscaping, logging, or mining operations need insurance to protect their equipment and machinery. Even self-employed carpenters, who take on smaller jobs such as building decks, patios, screened-in porches, and the like, use tools and equipment that need to be insured. These smaller contractors might purchase a small tools form or an AAIS Artisans policy, the latter providing contractors equipment coverage as an option.

Contractors equipment coverage is not restricted to a location, so it applies at job sites, other locations, and while in transit. The perils of flood and earthquake are often covered in contractors equipment forms.

Endorsements can be added to provide coverage for income losses resulting from damage to covered equipment. A related coverage, rental reimbursement, pays for the cost of renting substitute equipment when the insured's regular equipment has been damaged by a covered peril.

There is no standard contractors equipment policy, so each form must be reviewed carefully.

What about commercial property coverage for contractors equipment?

Commercial property policies usually provide some coverage for contractors equipment, but there are two serious limitations to that coverage:

Transit coverage is ordinarily limited or nonexistent; and

Coverage for property away from premises is limited or nonexistent.

Insurance to value

Determining whether there is adequate insurance to value is a major challenge facing underwriters of contractors equipment risks. The value of used equipment may be affected by several factors, such as the condition of the equipment (i.e., wear and tear, maintenance) and the number of service hours. Also, some equipment can be so expensive that similar used equipment may cost as much as or more than the original.

To help determine the adequacy of equipment values, an underwriter can use these resources:

1. publications such as the "Green Guide" or "Blue Book"

2. trade journals that advertise equipment for sale

3. a local equipment dealer

Many contractors depreciate the values of their equipment very rapidly on a book basis for tax purposes. In some instances the contractor will use this book value for insurance purposes. Lower values, of course, mean less premium to be paid. Because most contractors equipment losses are partial rather than total, if the underwriter is not careful, a partial loss can result in payment of the full amount scheduled in spite of any coinsurance penalties that may apply.

Key hazards/underwriting considerations

Picture the kinds of equipment you might see at a construction site: bulldozers to clear the land; backhoes to dig trenches for utility lines, drainage, etc.; cranes to lift materials to build an office building or school.

Below are some examples of contractors equipment by type of contractor.

Street and Road Construction/ Street and Road Paving Equipment

Tractors, graders, backhoes, loaders, rollers and scrapers

Key hazards

Theft and vandalism because of the isolated location of many job sites and the versatility of the equipment.

Underwriting considerations

1. Job site security

2. Storage of equipment when not at job site

3. Maintenance of equipment

4. Exposure to natural disaster

A good risk will secure a job site by fencing or adding anti-vandalism devices, immobilizing equipment during nonbusiness hours, keeping a record of equipment maintenance, keeping a job site clear of brush and trees, and having a plan to evacuate the equipment in case of an uncontrolled fire, controlling all adverse property fire considerations in storage buildings and securing the storage yard.