Contractors equipment Inland Marine insurance provides more commercial Inland Marine insurance premium than any other class, and also covers a wider variety of exposures than any other Inland Marine class.
Contractors Equipment Inland Marine insurance is a “world unto itself.” Contracting operations can be conducted in all kinds of situations and in a very wide variety of environment, such as above and underground, in forests, in mountains and hills, and just about anywhere where people build. Therefore, there are many insureds who are eligible for this type of coverage, including but not limited to:
Another long list could be provided of the types of equipment used by these various types of contractors, but some of the most common would include tractors, cranes, graders, forklifts, backhoes, front-end loaders, bulldozers, draglines, concrete mixers, and on and on. Smaller items used by contractors are also insured, such as jackhammers, portable generators and pneumatic tools, etc. Even shovels and rakes can be included.
To be covered by Inland Marine insurance, by definition the equipment must be of a “mobile or floating nature.” This has been interpreted quite liberally, as asphalt mixing plants and stone crushers have been found to be eligible for coverage under a contractors equipment insurance policy.
One area that has caused some difficulty in determining eligibility for this insurance, is that of highway use. According to the prevailing Nationwide Marine Definition, any vehicle that is designed for highway use is not eligible for coverage under an Inland Marine policy. However, some of the contractors equipment is mounted on rubber tires. The distinction seems to be based on the primary use of the equipment for which it is designed. If the equipment performs its duties at the site to which it is moved, then it is eligible, even though it may have rubber tires and can travel on highways.
Obviously, this causes some interesting problems. For instance, if a portable drilling rig is mounted on a truck chassis and is not separated from the chassis when drilling, then it would be eligible even though when going from site to site, it travels on a highway. The drilling rigs are generally mounted on a chassis that is designed for travelling over rough terrain, and the chassis becomes part of the drilling rig.
CONSUMER APPLICATION
Courtland Cement company provides ready-mixed concrete for large contractors at the worksites. They use large cement-mixer types of trucks, which cannot be insured under an Inland Marine form as they are classified as vehicles. They recently developed a large concrete mixer that is transported from location to location by a large truck tractor and is mounted on wheels so that the tractor can tow it to the work location. Once it is at the job site, the tractor leaves it, and the mixer remains until it is no longer needed at that location. Concrete and gravel are transported to the mixer by other trucks. In this case, the mixer would be eligible for coverage under the Inland Marine form.
This is a nonfiled class but most insurance companies have forms that they generally use and throughout the years have achieved some standardization. The provisions listed below are typical in most of the contractor equipment policies.
With the vast number of types of contractors equipment being used, it is necessary to spell out exactly what equipment is being covered by schedule, although it may be written for a single total amount of insurance as a blanket policy. Small items such as shovels and other hand tools, can best be covered by a blanket declaration (such as “23 long handled shovels, 34 concrete hoes, etc.), whereas large equipment would be scheduled individually. When equipment is scheduled, identification must be complete with identification number, model number, year and make of equipment.
Blanket policies may be used for those who have a rapid turnover in equipment. For underwriting purposes, the insurer will have to be furnished with a complete list of all equipment to be covered at inception of the policy, with provisions for annual adjustment. Loss payments are usually limited to a maximum on any one item insured.
If the equipment is rented or leased, it may also be covered. If the insured is unable to provide a schedule of equipment, then the equipment may be covered under a blanket policy, with limitations as to value of any specified item. The insured is required to report the cost of the rental or lease, and at a specified time, they must also report the value of the equipment.
Scheduled policies usually have a provision that allows coverage of newly acquired equipment, but such equipment must be reported within 30 days of acquisition. This equipment may be owned, leased or rented. Until the equipment is scheduled, it is usually covered for either a particular dollar amount, or a specified percentage of the total insurance amount.
CONSUMER APPLICATION
General Contractors, Inc., has a Contractors Equipment policy. They recently contracted for construction of an office park in an area that has unusually heavy clay soil. They decide that they need a newer type of trencher that can handle the clay better. The trencher was delivered on a Friday, so it was used over the weekend as General was on a 7-days a week schedule.
While using the trencher on Sunday, an abandoned culvert was crossed by the trencher, the trencher’s digging mechanism became entangled with a hole in the culvert which then collapsed, overturning the trencher and causing considerable damage to the equipment.
The insurance policies provision for covering new equipment prior to scheduling was either 25% of the total amount of the policy, or $50,000, whichever was less. The damage to the trencher was only $11,000, so it fit well within the limits of the provision.
The wording for these exclusions may vary from policy to policy, and may or may not include all of the following exclusion examples.
Contractors Equipment policies are written either on an All-Risks or Named Perils basis. The All-Risks policy uses typical wording for this provision: “all risks of direct physical loss or damage from any external cause” are insured, except as excluded. When the policy is a Named Perils, the following perils are covered, and since there is no standardized wording for these policies, there are variations.
Underground mining equipment would usually have added pertinent perils peculiar to underground work, such as the roof falling in, cave-ins, landslides, and the breaking of drilling equipment due to pressure from the material being drilled.
The excluded perils and the wording of these perils, are often quite different from policy to policy, but generally exclude the following:
There can be other exclusions, one of which could be any brush-burning exposure where a tractor or other machinery is used to push trash or debris into a burning pile.
The deductible in a Contractors Equipment policy is very important for underwriting as it can make the difference between profit or no profit on a policy. Deductibles can be applied to a covered loss or it can be applied to certain perils or insured property. A deductible can apply to a particular covered activity or equipment operations or location of equipment (such as while waterborne). They can be a flat amount, such as $100, $500, $1,000, $2,000 or more, or it can be expressed as a percentage, such as “1% of the sum insured, but not less than $1,000 nor more than $5,000.”
Contractors Equipment policies are usually valued on an actual cash value basis, taking into consideration depreciation. Replacement cost may also be used but many policies will apply replacement cost only if the insured item is actually replaced or repaired.
Scheduled policies usually have a limit of insurance that applies to each item insured. They will also frequently have a catastrophic limit that applies when two or more items are involved in the same loss, which may be less than the total of all of the scheduled items.
Coinsurance for blanket policies are usually 90% or 100%, scheduled policies are usually subject to at least 80%, and the coinsurance percentage applies to each item scheduled.
Other coverage can be added and some of the most often used are coverage for employee’s tools and clothing, debris removal, rental reimbursement, and business interruption and extra expense.
Perhaps as an oversimplification of a very complex issue, underwriting for this type of policy requires considerable knowledge of all of the various types of contracting operations that use mobile equipment, and knowledge of the perils that can cause damage or loss to the various types of equipment used in each operation.
There are many types of operations that use mobile equipment. just a few of which are mentioned below.
Road Building is an obvious operation that uses mobile equipment, such as graders, excavators, dithers, loaders, rollers, earthmovers, etc. Hazards are principally fire, theft, vandalism and upset, and in some cases, explosion if explosives are used. Equipment is usually spread around, reducing the maximum loss that could be occurred.
Strip mining is usually performed by draglines, drills, shovels, loaders, etc. Hazards of overturning the equipment and blasting are present.
Sub-level Quarry and Open-pit mining can become a substantial operation as they usually last a long time, with roads built into the sides of the evacuation. Equipment will be working down in the pit and also at the surface. In addition to the hazard of overturn, they’re also hazards of flooding, falling rock, flooding and explosion.
Stevedoring is the loading and unloading of cargo from ships, and covers forklifts, cherry pickers, cranes, lifts and other types of equipment built to handle material. The equipment is usually very well maintained, principal hazards are fire and equipment falling overboard.
Shipyard operations use equipment such as cranes, forklifts, mobile cranes, burning and welding equipment. Principal hazards are fire and windstorm.
Building contractors are perhaps the most common of the contractors using equipment that can be covered under this form, which would include pile drivers, cranes, derricks, excavators and similar equipment. Hazards are fire, windstorm, vandalism, collapse of cranes or contact with other structures, upset of evacuating equipment, etc.
Marine contractors use waterborne equipment such as cranes, compressors, pile drivers and other equipment usually carried on barges, and highly susceptible to falling overboard and sinking to the bottom of the water. An underwriter will have to determine the seaworthiness of the carrying vessel, and determine how securely the equipment is fastened down.
Logging operations present different kinds of exposures, and use such vehicles as tractors, graders, yarders, loaders and skidders, and other equipment designed for logging. There are hazards of sliding or skidding down a mountain, turning over, burning in forest or brush fires, theft, vandalism, turn-overs. The ability to move some of the equipment quickly has an effect on the probable maximum loss, as well as the condition and availability of logging roads.
Coal mining is another different field. Mining can be for bituminous, lignite or anthracite coal, and the coal can be mined underground, strip mining, or by “augur and punch-hole mining techniques. Each of these methods have their own peculiarities and hazards.
Oil and gas well exploratory rigs, and even well servicing equipment, can be insured. The major hazards are blowout and cratering. This equipment is very costly and in case of fire, it could be very costly. The servicing equipment is used for existing wells, and does not have the exposures that the exploratory rigs have. Their principal hazards are windstorms and fire.
Operations using cranes are another highly specialized field as there are many types of cranes and they can be used for many purposes. Because they are quite expensive and because they have the potential for substantial losses, the underwriter must be as thorough as possible.
The most common types of cranes are:
Overhead Cranes that travel on fixed overhead rails and are used principally in manufacturing and assembly operations.
Super (or Mast) Cranes are those with long booms – making them prime candidates for collapse. They can be mounted on trucks or rails or on treads.
Gantry Cranes are those that are mounted on travelling bridges or spans, used mostly at shipyards and docks. Windstorms are a particular hazard to these types of cranes.
Hammerhead or Tower Crane is really more of a derrick. A derrick has a fixed base, while a crane traditionally has a mobile base. These types of cranes are used for erecting large buildings and have a long boom with counterweight. Some of them are “climbing” cranes, which means they can move up as the high-rise building moves up. Even light winds can affect hammerhead cranes.
Hydraulic Cranes can be used for many functions as they can be mounted on wheels or crawler treads and they have a telescoping boom to which they can add extensions. Generally they appear to be a crane mounted on a truck – which they really are in most cases. Since they are telescoping, they can collapse, or turn over.
Boom Collapse is a definite hazard with booms as they represent a large part of the total value of a crane. The booms are made in sections and are moved up and down when additional sections are to be added or deleted, which can cause metal fatigue if it bent just a little during the dismantling of the boom. The principal cause of boom damage is improper operation, such as bumping the boom against another object. Any sudden stopping or movement of a boom can cause damage.
The probable maximum loss (PML) is used for underwriting for many Inland Marine forms. In the case of contractors equipment, the size, value and location of the equipment will contribute to the PML. Risks unique to the particular piece of equipment lend to the calculation of the PML, such the risk of roof collapse for equipment used for underground mining.
Contractors equipment insurance has a most unusual problem in attempting to place a value on the equipment. The value of used equipment has a tendency to appreciate in value, rather than depreciate. This makes it very difficult for underwriters to determine if the values on the policy are adequate. Underwriters must rely upon catalogs and guides to the value of equipment, to determine the values of used equipment.
Contractors will declare the value of equipment on their tax forms, which have been depreciated as much as the government will allow. Some contractors use their tax forms for valuation purposes when applying for insurance. If the underwriter is not careful, it would be quite possible that a partial loss may extend to the total limits of the policy.
In order to write the business interruption and extra expense coverage, the underwriter must make sure that there are contracts of insurance present that will support the limit of insurance requested. Business interruption can be written on either a single piece of equipment, or on an entire schedule.
Particular items of equipment that are essential to the operations of the contractor are usually those insured. For instance, a large crane is essential to a building contractor that erects multi-story buildings. The underwriter needs to ascertain if the insured equipment can be easily replaced or repaired in case of damage or loss. In any event, it will require considerable investigation.
Extra expense is the amount of money necessary for the contractor to continue operations in case of a total or partial loss. Sometimes there can be both loss of income (business interruption) and extra expense involved. Business interruption insurance usually includes extra expense to the extent that it will actually reduce the actual loss.
As with many Inland Marine coverages, the premium can be developed by applying a rate to the limit of insurance for each individual piece of equipment or to the entire schedule. The underwriter may apply rates for specific pieces of equipment, such as cranes and asphalt plants. Deductibles can be applied to all pieces of equipment, or just to specific pieces of equipment.
STUDY QUESTIONS
1. Contractors Equipment insurance provides more ____________________ than any other Inland Marine class, and also covers ___________________ than any other Inland Marine class.
A. exclusions - more property
B. commercial Inland Marine insurance premium - a wider variety of exposures
C. commission - larger insurance agencies block of business
D. losses - more risk
2. In order for contractors equipment to be covered under the Contractors Equipment form, the equipment
A. must be of a mobile or floating nature.
B. must exceed $100,000 in value for each identifiable scheduled item of equipment.
C. must be kept inside a covered building when not in use.
D. must be leased or rented.
3. If a contractor has a rapid turnover in equipment, the type of Contractors Equipment policy would probably be
A. a scheduled form.
B. a blanket policy.
C. a Commercial Crime policy.
D. a Commercial Property Policy.
4. Juniper Contractors is a road building contractor, covered by a Contractors Equipment policy. Their large road grader had very expensive and large tires. Asphalt being applied to a road near the grader was hit by lightning, setting the asphalt on fire, which in turn burned the grader but principally destroying the tires.
A. The tires would not be covered as they are specifically excluded from these policies.
B. The tires would be covered only if the lightning itself hit the tires.
C. The tires were damaged by a covered cause of loss, so the tires are covered.
D. These policies all exclude damage caused by asphalt or other flammable material.
5. The following losses occurred to Juniper Contractors on the same day: A contractor’s dump truck rated for 5 ton went through a bridge carrying a 7 ton load of rock. Lightning strikes a crane used for construction of a 10 story office building. While changing the oil and servicing construction equipment, a wrench hit a steel rod, causing a spark which started a fire, destroying the truck that was being serviced. When the gas tank on the truck caught on fire, the explosion destroyed an asphalt spreader. Would the Contractors Equipment policy cover these losses and if so, which ones?
A. Dump truck is not covered, every other loss would be covered.
B. All of these losses are generally excluded, so none of them would be covered.
C. The asphalt spreader loss is not the result of a direct loss (the adjacent truck catching on fire), so it alone would not be covered.
D. All of these losses would be covered as they were all the direct result of a covered peril.
6. Deductibles in a Contractors Equipment policy is important, and but normally cannot be applied
A. to a certain loss, certain peril, or insured property.
B. to a covered activity or equipment operations.
C. to the location of equipment.
D. to underwriting considerations, as underwriters are forbidden by law to take into consideration deductibles when underwriting – in many states they are not allowed to change the applied-for deductible in these forms.
7. Mast, Gantry, Hammerhead and Hydraulic are types of
A. bridges.
B. cranes.
C. heavy equipment earth movers.
D. tunnel construction equipment.
8. With a Contractors Equipment policy, Business Interruption coverage
A. is not available.
B. can be written only on an entire schedule of equipment to avoid anti-selection.
C. can be written on a single piece of equipment or on a schedule of equipment.
D. can be written, however any extra expense affiliated with loss of income can not.
9. Extra Expense coverage under a Contractors Equipment policy is
A. the amount of money necessary for the contractor to continue operations in case of a total or partial loss, and there may be both business interruption and extra expense involved.
B. the additional cost of insuring interim leased equipment to make sure the contractor meets his completion deadline.
C. the additional premium charged when there is either sudden increase in the size of the construction job, or there is an additional simultaneous construction job.
D. not available in most states.
10. When underwriting Contractors Equipment insurance, the PML is used to
A. determine the commissions paid on the policy based on the premium (Premium Masticulation Loading)
B. evaluate the experience and expertise of general contractor at time of underwriting, (Probable Methodology Limitations).
C. determine the probable maximum loss , taking into consideration the size, value and location of the equipment.
D. determine the formula for contributing to a loss in case of duplication of insurance.
ANSWERS TO STUDY QUESTIONS
1B 2A 3B 4C 5A 6D 7B 8C 9A 10C