AAIS Coverage Perspective--Contractors Equipment Insurance: Coverage & underwriting considerations

By Robert J. Prahl, CPCU

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.

Quarries Equipment

Power shovels, front-end loaders, stone crushing plants, drilling rigs and off-highway trucks

Key hazards

Collisions and overturns because equipment is operated over rough terrain, on steep inclines, and around sharp turns. Landslides are also a hazard because equipment is operated near unsupported earth and stone walls, which can collapse.

Underwriting considerations

1. Operator experience

2. Blasting controls

3. Exposure to and contingency plans for flooding

An acceptable risk will have operators with an average length of employment from 5 to 10 years, with low turnover. Blasting will be subcontracted out and the blasting contractor will provide a certificate of insurance. If the insureds do their own blasting, a formal safety program will be in place and safety meetings will be held regularly. All blasters should be certified. The loss experience of the risk should be clear of any frequency from collisions or overturns.

Junk Dealers/Metal Scrap Dealers/Garbage or Refuse Dumps Equipment

Shredders, compactors, cranes with magnets, and track-type loaders

Key hazards

Fire and explosion. A fire can occur when debris accumulates in the undercarriage of equipment and is ignited by the high engine temperatures. A fire loss can also occur when a dump has an uncontrolled fire, and equipment is not removed. Scrap and refuse can contain aerosol, gasoline, or other combustible materials in containers. When these materials are shredded or compacted, they can explode. A car with gasoline in its tank can explode when being shredded.

Underwriting considerations

1. Preloading or sorting procedures for shredders and compactors

2. Fire extinguishers mounted on all equipment

3. Regular removal of debris from undercarriages

An acceptable risk in this hazardous inland marine class will have fire extinguishers mounted on all equipment. Loss control would verify that there is no debris accumulation on the equipment. The policy would have a minimum deductible of $2,500 to control claim frequency.

Bridge/Elevated Highway Construction Equipment

Cranes, loaders, and backhoes

Key hazards

Theft and vandalism. Overturning is another key hazard, because equipment is often operated on embankments. Boom collapse is a key hazard to cranes. Boom collapse can result from operator error, soil settlement, or improper outrigger bracing of the equipment. When bridge work is done over water, cranes may be used on barges. Sinking is a key hazard when equipment is operated on a barge.

Underwriting considerations

1. Operator experience

2. Job site security

3. Condition of barges

Building Contractors Equipment

Pile drivers, tower cranes, mobile cranes, derricks, and excavators

Key hazards

Fire, vandalism, windstorm, collision of crane booms, collapse of crane booms, upset of excavating equipment and cranes.

Underwriting considerations

1. Job site security

2. Storage of equipment when not at job site

3. Maintenance of equipment

4. Fire extinguishers mounted on equipment

AAIS Contractors Equipment Program

Four coverage forms are offered, with varying levels of coverage. Two forms provide blanket coverage while two cover on a scheduled basis. One form is specifically designed to cover small tools owned by the insured and the tools of employees (and coverage is on a blanket basis). It is difficult, particularly for large contractors, to keep accurate records of all the equipment they use. For this reason, blanket coverage that applies to all equipment, owned and borrowed, is often desirable.

Optional endorsements are available, including Trailers and Spare Parts, Income Coverage, and Agreed Amount Valuation, to name a few. Losses caused by flood or earthquake are NOT excluded in these forms.

The following are excerpts from the blanket coverage form:


In return for "your" payment of the required premium, "we" provide the coverage described herein subject to all the "terms" of the Contractors' Equipment Coverage. This coverage is also subject to the "schedule of coverages" and additional policy conditions relating to assignment or transfer of rights or duties, cancellation, changes or modifications, inspections, and examination of books and records.


"We" cover the following property unless the property is otherwise covered, excluded, or subject to limitations.

"We" cover direct physical loss caused by a covered peril to:

a. "your" "contractors' equipment"; and

b. "contractors' equipment" of others in "your" care, custody, or control.


1. Aircraft or Watercraft

2. Automobiles and Trucks

3. Contraband

4. Underground Mining Operations

The table below compares the coverage provided in three of the AAIS contractors equipment forms and gives readers an idea of what is, and what can be, covered by this insurance. The limits shown in the table are base limits that can be increased by entry on the appropriate schedule.

For more information about AAIS programs, contact Robert Schnoll, AAIS marketing manager, at (800) 564-2247, extension 222, or by e-mail at: bobs@aaisonline.com.

Web site: www.aaisonline.com. *

The author

Robert J. Prahl, CPCU, is director of education for the American Association of Insurance Services.

AAIS Contractors Equipment Forms Comparison

Coverage FormBlanket FormScheduled Form (Broad)Scheduled Form(Limited)
Schedule Of CoveragesIM 7007 07 99IM 7005 07 99IM 7006 07 99
Equipment ScheduleNot ApplicableIM 7030 07 99 orIM 7031 07 99
(Blanket basis)IM 7030 07 99 orIM 7031 07 99
Property Covered
Owned and Non-Owned
Equipment Blanket Coverage On -- Equipment Schedule -- Equipment Schedule
All Equipment -- Schedule on File With
Prop. away from premisesCoverage followsCoverage followsCoverage follows
or in transitobject, not limited toobject, not limited to object, not limited to
Additional Property Coverages
Debris Removal$5,000$5,000$5,000
Pollutant Cleanup$25,000$25,000$10,000
Newly Purchased Not Applicable30% of Cat. Limit30% of Cat. Limit
Equipment (Blanket)
Equipment Leased orNot Applicable$25,000By endorsement
Rented From Others(Blanket)
Employee Tools$10,000$5,000By endorsement
Rental Reimbursement$5,000$5,000By endorsement
Spare Parts and Fuel$10,000$5,000By endorsement
Fraud and Deceit$50,000By endorsementBy endorsement
Equipment Leased or $50,000By endorsementBy endorsement
Rented to Others
Equipment Loaned to$50,000By endorsement By endorsement
Waterborne Equipment$50,000By endorsementBy endorsement
Fire Department Service $1,000Not AvailableNot Available
Construction Trailers$10,000 Any One TrailerBy endorsementBy endorsement
$50,000 Any One Loss
Recharge Of Fire$1,000By endorsementBy endorsement
Extinguishing Equipment
Reward for Recovery of$1,000By endorsementBy endorsement
Stolen Equipment
Actual Cash ValueIncludedIncludedBy endorsement
Replacement CostIncludedIncludedBy endorsement
Agreed AmountBy endorsementBy endorsementBy endorsement
Flat DeductibleIncludedIncludedIncluded
Percentage DeductibleIncludedIncludedBy endorsement
Split Deductible
CoinsuranceNot Applicable80%-90%-100%-Other80%-90%-100%-Other
Covered PerilsOpen perils - risksOpen perils - risksOpen perils - risks
not excluded basisnot excluded basisnot excluded basis