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August 2, 2016
In a time where construction activity has exceeded prior high watermarks, contractors are increasingly utilizing owned and rented equipment for projects. From an insurance standpoint, there are key areas of coverage that need to be addressed when structuring a contractor’s equipment program. Continued rental expense and rental reimbursement are a few coverage areas that deserve consideration.
Over the past 5 years, rental companies have incorporated continuing rental expense language into equipment contracts. If rented equipment is damaged/destroyed/stolen while in your care, custody, and control, the contractor is still responsible for the rental expenses until the equipment is put back to its intended use.
Even though your policy may have a specified leased/rented equipment limit, this does not include coverage for the continued rental payments while the equipment is being repaired/replaced. Insurance carrier forms typically provide a small sublimit for this exposure, if coverage is offered at all. Oftentimes the baseline is $5,000 for each occurrence, not per item. This limit can be inadequate to cover moderate to large scenarios, especially if high valued and/or multiple pieces of equipment are involved.
For example, a contractor rented a specialized piece of equipment to lift heavy loads of materials for a project. The contractor’s employee operating the equipment exceeded its weight capacity, causing irreparable damage. Because the equipment was manufactured overseas, there wasn’t a comparable item available locally for purchase and replacement. Although the contractor’s policy reimbursed the equipment’s owner for replacement, the manufacturer still required 16 months to build and deliver it. The contract required continued rental payments until the equipment was returned to the owner, and the contractor’s continued rental expense coverage was not enough to reimburse the payment for the first month. This left the contractor responsible for over $100,000 in payments to the owner over the course of the 16 month down time.
Rental reimbursement coverage comes into play when owned equipment is damaged by a covered loss. Contractors often need to rent similar equipment while theirs is being repaired. Consider the situation facing a site work contractor who rented and used owned equipment for a large project. A large fire caused damage to multiple pieces of both the owned and rented equipment. The contractor was responsible for the continued rental expense while the damaged pieces were being repaired, as well as the rental expenses associated with renting new equipment to use in their place in order to complete the project on time. The continued rental expense and rental reimbursement limits provided by their policy were insufficient, forcing the contractor to pay out of pocket for a majority of the costs.
Inland marine policies insuring equipment usually extend coverage to reimburse the contractor for the rental expenses incurred in this scenario, however, the limit provided can be as small as $5,000, if provided at all. The average monthly cost for equipment, such as loaders and excavators, can range from $1,500 to $5,000. Depending on the extent of the damage, amount of equipment affected, and duration of repairs, the standard $5,000 limit may not be sufficient.
As construction continues to reach/exceed post-recession levels, equipment use is more prevalent. Paying special attention to coverage details such as these can speak volumes in a loss scenario. Having a broker who addresses these nuances and negotiates enhancements to important coverage extensions can be critical if a claim occurs.
The views and opinions expressed within are those of the author(s) and do not necessarily reflect the official policy or position of Parker, Smith & Feek. While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or changed circumstances of any information herein or for the consequences of any reliance placed upon it.