Risk Management

Forgetting to cover a crane?

Floater is most favorable option for contractor's leased equipment

By Donald S. Malecki, CPCU

On occasion a dispute arises between an owner or lessee of equipment and an insurer issuing a builders risk policy. The issue is generally over the lack of coverage after the equipment is damaged or destroyed at a construction site.

What usually happens is that the owner or lessee of the equipment forgets to include the equipment within its contractors equipment floater, to the extent one already exists and, therefore, has only one other alternative, which is the builders risk policy.

This argument that the builders risk policy covers the damaged or destroyed equipment is possible only when such a policy covers the contractor's equipment subject to certain conditions. Not many builders risk policies will cover contractors' equipment, and the ones that do generally require that the value of such equipment be included in the project cost.

Considering that many construction projects involve numerous change orders, there is a tendency sometimes to undervalue the changes, making the overall project co-insurance deficient. When that happens, the expectancy of full coverage for contractors' expensive equipment will turn out to be a big disappointment.

One of the problems with this method of covering contractors' equipment under a builders risk policy is that simply adding the equipment's value to the project cost is not enough. Underwriters also should insist on a statement of values showing clear intent that certain equipment is being covered. When this is not an underwriting requirement, disputes will likely occur.

Depending on the kind of the contractor's equipment, another possible way to argue for coverage when there has been an oversight about specifically purchasing a contractors equipment floater or adding the equipment to an existing floater is to maintain that the equipment is a temporary structure.

It is not necessary here to go into a long dissertation on temporary structures. The nature of the equipment is that it has to be temporarily connected to the realty. One would think that it would be unlikely for someone to forget to insure an overhead crane or some kindred equipment. Yet, there have been instances where, because of the preoccupation in setting up a major project, that has happened.

When a piece of equipment collapses or is otherwise damaged or destroyed, seeking coverage as a temporary structure under a builders risk policy is an alternative that puts the insurer at a disadvantage. The reason is that the term "temporary structure" is not a commonly defined term of the builders risk policies and can include some contractors' equipment. The only defense the insurer might have is when temporary structures are covered subject to a sub-limit.

Another possible alternative for locating coverage in a pinch is when a project is also covered by a difference in conditions (DIC) policy. The DIC policy was originally introduced as an "all-risk" property policy that was to apply over a property policy written on a named perils basis.

The idea was that the DIC policy would probably cover a loss when the covered property was damaged or destroyed by some peril not specifically named by the more limited property policy. The DIC policy, in other words, applied to the difference between a named peril and an all-risk property policy.

Now that most commercial property policies, and certainly builders risk policies, are written on an "all-risk" or special causes of loss basis, the significance of a DIC policy is not as great. In fact, the DIC policy is comparable to the commercial umbrella liability policy: It is leaky.

In any event, there was just such a case where a leased crane was damaged in the amount of $225,000 during a construction project, and coverage was sought under the DIC policy when none was found to apply under the builders risk policy.

The case is Ajax Building Corp, et al., v. Hartford Fire Insurance Co., 358 F.3d 795 (U.S. Ct. App. 11th Cir. 2004). It was the general contractor who leased the crane and had a subcontractor operate it. While the subcontractor was an insured under both policies, neither such policy, the insurer maintained, covered the damage to the crane.

Insofar as covered property was concerned, the DIC policy included "property of others used or to be used in, or incidental to the construction operations, for which you may be responsible or shall, prior to any 'loss' for which you make a claim, have assumed responsibility."

It was undisputed that the damaged crane initially fell under the "covered property" provision of the DIC policy, since the crane certainly was considered "property of others used or to be used in, or incidental to the construction operation."

The DIC insurer, however, claimed that the crane was excluded under the "property not covered" provision, which precluded coverage for "equipment or other property which will not become a permanent part of the structure."

In ruling against coverage, the court held that simply because one provision of the policy gives a general grant of coverage and another provision limits the coverage does not mean there is an ambiguity between the two provisions. It is the nature of an insurance policy's structure; that is, to provide coverage but to include exclusions to modify or otherwise limit the policy's scope.

The floater is the key

Apart from the foregoing circumstances, the key for proper coverage is a contractors equipment floater. Of course, even these coverage forms generate coverage disputes from time to time, but the floater is likely to be the "savior of coverage" in most instances.

As a non-filed inland marine form, its provisions will vary by insurer. Producers who write these floaters, however, can eventually get used to what these floaters do by having them issued from among the same insurers that producers represent.

Producers, however, still must exercise caution when selecting the appropriate floater and in handling a contractor's insurance needs. For example, scaffolding, construction forms, falsework, and fences may be covered by a builders risk policy. But the coverage could be limited from the standpoint of the amount of insurance, perils insured against, and the conditions under which coverage may apply.

If there is any question about coverage, it might be better to single out the contractors equipment floater to fulfill that specific need, particularly since the producer may not be in a position to review the builders risk policy purchased by a project owner or the owner's commercial property policy relied on for construction coverage as well.

The choice of a contractors equipment floater, of course, hinges on the underwriter's willingness to cover such equipment. Unfortunately, scaffolding and kindred construction equipment have a high susceptibility to theft and are not a favorite of inland marine underwriters.

What would be a great help to producers regarding these floaters is to be able to collect the endorsements that can be issued to these floaters drafted by the American Association of Insurance Services (AAIS) and the Insurance Services Office (ISO).

With endorsements in hand, producers could make a checklist as a reminder of the kinds of coverages to be added to these floaters.

Short of that, producers will have to rely on the exclusions or some other publication which discusses how these floaters can be modified.

Most prevalent problem

It is relatively easy to find fault with these floaters. The most prevalent problem area with the contractors equipment floater is with borrowed and loaned equipment.

Entities other than those in the business of renting or leasing contractors' equipment sometimes forget to inquire about the necessary protection that should be in place when equipment is borrowed from, or lent to, others until after something happens.

This can be financially disconcerting, particularly since most contractors equipment floaters either do not provide automatic protection or provide some limited protection automatically but subject to certain conditions and in an amount that may be insufficient to cover a single loss.

However rarely an entity borrows or lends equipment, the producer is usually the last to know about it. It may make good sense, therefore, to inquire about adding some blanket automatic coverage to the floater in the event someone forgets to inquire about insurance.

This kind of precaution could have prevented the uninsured conclusion in the case of Safeco Insurance Co. v. Marion, et al., 676 F.Supp.197 (U.S. Dist. Ct. E.D. Mo.). The contractors equipment floater here excluded coverage for damage to property rented or bailed to the insured. Nonetheless, the insured rented a hydraulic truck crane which, while being operated by its employee, was damaged when it overturned. The court ruled in favor of the insurer based on the floater's exclusion.

A number of cases could be discussed dealing with this subject. However, the above-cited case should suffice to make the point about the importance of this subject and the precautions necessary to see that some coverage is in place. As mentioned, producers seldom are advised about the day-to-day activities of insureds, particularly those involved with contractors' equipment exposures. It therefore behooves producers to exercise caution with what is the leading cause for problems dealing with these floaters.

It is not possible to discuss all of the problem areas with these floaters. But be sure to determine the extent to which coverage is provided for lifting capacity limitations. As a general rule, an endorsement is likely to be necessary to obtain coverage. Also, in reviewing these floaters, check to see how many of the exclusions make ensuing loss exceptions. It is the same drill producers take when reviewing nonstandard property policies.

The final point to keep in mind is that, while inland marine floaters, as a class, are historically broad in scope, producers should not automatically assume that all floaters fall into that category. Each such floater must be viewed carefully.

The author

Donald S. Malecki, CPCU, has spent more than 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.