By LeRoy Utschig, CPCU, CLU, ARM
Contractors' equipment coverage is considered by some to mean insuring miscellaneous tools for $5,000 or less. Bulldozers, earthmovers, backhoes, cranes, roadgraders and similar equipment also are insured with contractors' equipment coverage. Values for these items can be as much as several hundred thousand dollars each. Large equipment is exposed to loss situations that do not apply to smaller items. A number of these exposures can be insured by endorsing the Contractors' Equipment form. In this article I will write about typically uninsured contractors' equipment loss exposures and recommend how the exposures can be insured.
Misfortune of a bulldozer and trailer
The following is a real-life example of a loss involving a borrowed piece of contractor's equipment. Because of an above-average amount of rain during the spring, a firm we'll call Landscape Contractor, Inc. (LCI), was behind schedule. The crew was working overtime and weekends to complete all of the work LCI had contracted to do. One of the crews was in the midst of their largest job for the season. They were working feverishly to complete it, especially since the weather forecast said there were to be two days of sunshine to be followed by a week of heavy rains.
At the work site, Landscape Contractor's only bulldozer was being driven by their most experienced machine operator. Drive wheels make a bulldozer move inside the tracks. While doing a routine maneuver, a drive axle broke. Without the drive axle, the bulldozer would not move. The owner of Landscape Contractor, Inc., then called the owner of another firm we'll call Diggers Unlimited (DU) and asked him if he would lend one of their unused bulldozers to him. The Diggers Unlimited owner said, "Sure. But my trailer for the bulldozer is in use. You'll need to rent another trailer to haul it."
Landscape Contractor's president drove into town to an equipment rental firm, which was one he had done a lot of business with in the past. When he got to the rental firm, there were many customers ahead of him. When he asked the rental firm's owner if he could have one of his trailers, the rental firm owner told him that he could. Because they were so busy, he went behind the counter and helped himself to a trailer ball to put on his truck so he could pull the trailer to where the Diggers Unlimited bulldozer was. He attached the trailer ball-hitch, backed up to a trailer, hooked it up, put on the safety chains and left. Going to where his friend's bulldozer was, he loaded the bulldozer onto the trailer. Going around one of the downhill curves on the route, the trailer lifted off of the ball-hitch, went straight down a steep embankment and slid to a stop with a rear drive wheel hitting a huge granite rock.
This accident happened because the ball-hitch was too small. There did not seem to be any damage to the bulldozer, so he loaded it back onto the trailer and drove on to Landscape Contractor, Inc.'s, job site.
After the bulldozer was unloaded, it was put to use under full power. Everything went fine for about 15 minutes when the hairline cracks caused by the bulldozer hitting that granite rock caused a drive wheel to completely break.
Landscape Contractor, Inc., reported this loss to their insurer. Within a few days, the insurance company responded by saying there was no coverage for the borrowed piece of equipment. Here is the wording from American Association of Insurance Service's (AAIS) Form IM 810, Contractors' Equipment Coverage:
"We cover only those described items for which a coverage amount is shown ..."
As the borrowed bulldozer was not listed on LCI's Contractors' Equipment form, there was no coverage for it.
Upon hearing that Landscape Contractor, Inc.'s, insurer would not pay for the damage, Diggers Unlimited reported the loss to his insurance carrier. The adjuster and DU agreed on the value of the damage. When the adjuster brought Diggers Unlimited the check, he also had some forms to sign. When DU asked what the forms were for, it was explained to him that these were papers that would allow the insurer to subrogate against Landscape Contractor, Inc. In other words, the insurer intended to recover from Landscape Contractor, Inc., all that the insurer paid Diggers Unlimited. When he heard this, DU's president said that he did not want the insurance company do that.
After refusing to sign the papers necessary to execute a subrogation recovery, the adjuster told Diggers Unlimited that now there was no coverage for the damage to the bulldozer. He quoted the following from AAIS's Form IM 100, Agreement, that is attached to all of AAIS's Inland Marine policies:
"Subrogation. If we pay for a loss, we may require the insured to assign to us the right of recovery against others. We will not pay for a loss if the insured impairs this right to recover..."
This scenario is possible for every contractor whom you insure. When you ask contractors if they ever borrow equipment or lend their equipment to other contractors, most of them will respond that they do. Coverage can be provided for the contractors who lend their equipment to others. American Association of Insurance Services Leased, Loaned or Rented Property, Form IM-810-5 states:
"Coverage is extended as follows: We cover property while it is leased, loaned, or rented to others."
This is the form that Diggers Unlimited needed on their policy to cover the damage while their equipment was on loan to Landscape Contractor, Inc. Coverage also can be provided to automatically protect against damage to leased or hired equipment. Form IM-810-14, Hired Equipment Coverage from AAIS states:
"We cover contractors' equipment that belongs to others which you lease or hire."
Hired equipment coverage should have been on Landscape Contractor's policy to cover the damage to Diggers Unlimited's bulldozer.
Since contractors both borrow and lend their equipment, my recommendation is that both endorsements, "Hired Equipment Coverage" and "Leased, Loaned or Rented Property" should be on every contractor's equipment policy.
There are other coverage pitfalls involving contractors' equipment. Another actual loss situation involved a Fort Wayne, Indiana, company we'll call Rigging Contractor (RC). This company was lifting a large piece of machinery to the roof of a tall building. Several chains were attached to the machine, and the hook from the crane's lifting cable was hooked to those chains. One of the chains broke as the machine they were lifting neared the roof. With one of the chains broken, the remaining chains were not strong enough to bear the weight of the machine. In a matter of seconds, the other chains broke and the machine came crashing to the ground. Due to the sudden release of the weight of the machine, the crane's boom snapped backwards over the crane's cab damaging the boom and the cab.
Rigging Contractor submitted a claim to their insurer. In a matter of days, the insurance adjuster called and told them there was no coverage for the damage to the boom. This is the clause the adjuster cited from AAIS's Form IM-810:
"For booms that exceed 25 feet in length, we cover direct physical loss to this property caused only by fire, lightning, windstorm, hail, earthquake, flood, smoke, explosion, aircraft, self-propelled missiles..."
While the Contractors' Equipment form was written on a "direct physical loss" basis, this form provided only named perils coverage on the boom. Chain breaking or a boom snapping backwards was not one of the perils named.
The agent was not aware of this limitation in the Contractors' Equipment form. When the agent asked his underwriter about it, his underwriter told him that covering the boom on a risk of direct physical loss basis could be done by adding AAIS's Form IM-810-4, Boom Coverage. The Boom Coverage endorsement says:
"For booms that exceed 25 feet in length, we cover direct physical loss to this property..."
As soon as it was repaired, Rigging Contractor began to use the crane. There were several cable guides on the crane to make sure the cable wound and unwound from the main drum and that the cable would not jump off of any of the pulleys. No one from Rigging Contractor's crew noticed that one of the cable guides had been incorrectly installed during the repair process. Several weeks went by, and they decided to use the crane to lift a particularly heavy machine. Rigging Contractor knew the capacity of the crane and the weight of the machine. The boom's position while lifting the load gave the crane a lifting capacity of twice the machine's weight. The connecting cables were attached to the machine, the large hook from the crane's cable was attached, and they began to lift the machine.
When the machine reached the proper height and they were moving it sideways to put it in place, it happened! First the machine dropped a couple of inches. The operator thought that maybe he had not properly set the brake on the cable drum. He started to raise the machine the short distance it had fallen. Then, there was a snap and almost a roar as broken cable raced through cable guides and over pulleys. The machine hit the ground first with a loud crash, followed by the boom's swinging backwards over the crane's cab and then hitting the ground with an equally loud crashing noise. Because of the amount of damage and the tremendous weight of the machine and the boom, neither the crane, boom or damaged machine could be moved.
Rigging Contractor reported the loss to their insurance company. The adjuster came out to look at the damage and made notes about what had happened. A day later, the adjuster called Rigging Contractor to tell them that there was no coverage for the loss as the crane was lifting something in excess of its rated capacity. This is the clause the adjuster quoted from AAIS's Contractors' Equipment form:
"We do not pay for a loss if one or more of the following excluded perils apply to the loss...we do not pay for a loss that results from...the weight of a load when it exceeds the designed capacity of a machine to lift or support the load from any position..."
As they had calculated the load and the angle at which the boom would be when the load was being lifted, Rigging Contractor knew they had not overloaded the crane. When they recognized that the adjuster's mind was made up, as it was the first commercial marine loss the inexperienced adjuster had ever seen, Rigging Contractor knew that they would need assistance to aid the adjuster in changing his mind. The dean of the engineering school at a nearby college was a friend of Rigging Contractor's owner. Because it was summertime, when very few classes were being taught, the dean had the time to help out his friend. He thought it would be a good problem for the summer class students to work on. So, the dean, the class professor and the entire class visited the accident scene. Their task was to determine if the crane had been overloaded.
Working independently, each of them measured the distance the machine was out from the base of the crane. As it had to be moved anyway, the machine was weighed. The manufacturer's specifications of what weight the crane could lift were reviewed. When they were finished, calculations from each of the students, the dean and the visiting professor were compared. Their calculations were within 1% of each other's. Indeed, as Rigging Contractor had calculated, the crane could have lifted twice the weight of the machine.
Rigging Contractor told the adjuster about their calculations. The adjuster said that he would not recognize the calculations done by the engineering students. Now Rigging Contractor knew they needed even more help. Their agent then said he would try to get the information to someone in a higher position in the claim department of the insurer. The vice president of claims was told about the calculations done by the students and the dean, who was a recognized authority in the field. The vice president of claims looked at the file and saw the engineering calculations. He had studied engineering himself while in college and knew that the calculations were correct and that there was no way to override them. The adjuster was told to adjust and settle the loss.
My experience has been that the "overweight exclusion" is a factor in many contractors' equipment losses and it is usually a difficult situation. American Association of Insurance Services has an answer to this problem. Coverage for Overloading, Form 810-810-1 states:
"We cover direct physical loss to covered property caused by the weight of a load when it exceeds the designed capacity of a machine to lift or support the load from any position."
Attaching Form IM 810-1 eliminates any problems due to the weight of a load or alleged weight carried by a machine.
These are my coverage recommendations for any contractors' equipment form that covers machinery such as cranes, bulldozers, backhoes and similar items:
* Add coverage for lending equipment to others.
* Add coverage for hired or borrowed equipment.
* Include coverage for overloading machinery.
* Be sure that all of the items are covered on a "Risks of Direct Physical Loss" basis. Watch for and eliminate any clause that covers any item for only named perils. *
©COPYRIGHT: The Rough Notes Magazine, 1997