Insuring Your Property & Equipment
Written by Tom Dunn
A couple of areas of insurance that tree care companies probably don’t spend as much time considering as some other exposures is commercial property and equipment insurance. Those who deal with insurance for their companies are probably more likely to lose sleep thinking about property damage their crews might cause to a client’s property or an auto accident or perhaps a work related injury to one of the crew members, before they think of property and equipment insurance.
However, you should pay attention to this area of your overall insurance program and be knowledgeable on what these policies protect and how losses are paid out. It sounds pretty straight forward based on the names, but as anyone who has to deal with insurance on a regular basis, coverage is not always as it seems.
Let’s briefly summarize what the coverage is meant for and some considerations you need to be aware of.
Commercial Property Insurance covers damage to businesses’ buildings (Real Property) and contents (Business Personal Property) due to a covered cause of loss, such as a fire. The policy may also cover loss of income or extra expenses that result from the property damage.
Most commercial property policies cover buildings and personal property situated at your premises or within a short distance thereof (such as 100 feet) and include a number of coverage enhancements, for example accounts receivable, outdoor signs and property of others that will have their own sub-limits.
There are different methods for valuing and assigning coverage limits to a commercial property that determines the amount an insurance company will pay at the time of loss. Two of the most common follow.
- Actual cash value (ACV): The amount equal to the replacement cost minus depreciation of a damaged or stolen property at the time of the loss.
- Replacement cost (RCV): The cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation. Insurers typically will not pay on a replacement cost basis for any loss until the loss or damaged property is actually repaired or replaced.
Key differences in these two valuation methods are the scope and cost of the coverage. Replacement cost coverage will obviously cost a lot more as your limit will need to be listed at the value to replace the insured item, but will be worth it if you have a major loss and have to rebuild a property from the ground up.
Why else is ACV and RCV important? Insurance companies have taken steps to make sure their policy holders are insuring their property to value or at a level to generate enough revenue to pay for any losses that may occur. This is called co-insurance. Basically, the amount of coverage purchased must be equal to at least the co-insurance percentage times the value of the property. If it is not, the policy holder becomes a “co-insurer” for that portion of the value they didn’t insure to. A standard co-insurance percentage used is 80%, but again everyone will have different needs.
Causes of loss forms establish and define the causes of loss (or perils) for which coverage is provided. The special causes of loss form (CP 10 30) provides what is referred to as all risk coverage or coverage for loss from any cause except those that are specifically excluded.
Commercial property insurance policies will commonly have exclusions for certain perils like earthquakes and floods, unless those perils are specifically added and listed on the policy. Additional coverage for these contingencies can be obtained depending on where you live and the risks in your area of the country.
- Business Income coverage: Also called Business Interruption coverage. This covers the loss of income suffered by a business when damage to its premises by a covered cause of loss causes a slowdown or suspension of its operations. Coverage applies to loss suffered during the time required to repair or replace the damaged property.
- Extra Expense: Covers expenses beyond the normal day to day operating expenses that are necessary to keep a business going when recovering from a loss. For example, leasing equipment.
Notice I mentioned earlier that commercial property insurance may cover business income and extra expense. Talk to your agent to make sure it is properly addressed in the insurance company forms being used. Commercial businesses should operate with a Business Continuity Plan (read a past weekly tip on this topic here) Develop an action plan for catastrophic disasters and keep accurate records or prior year’s income and income results.
Equipment insurance is a generic name that is more appropriately called tools and equipment, contractor’s equipment, equipment floater, and/or mobile equipment. The common theme is they are all names for a type of insurance called Inland Marine insurance.
Why all the different names? Inland Marine insurance originally derived from ocean marine insurance, which protected property transported over water. Once on land, the coverage form changes to Inland Marine. It is also sometimes referred to as an equipment floater, because it covers property that “floats” or moves around, as opposed to staying in one place like the commercial property insurance. Think of your skid steers, stump grinders, and chippers here. Ok, enough of the name game. We will stick with Contractor’s Equipment going forward.
Most Contractor’s Equipment is written on an “all risk basis” and provide coverage for direct physical damage and loss for exposures like theft, fire, floods, equipment breakdown and vandalism. Contractor’s Equipment is also written on either a replacement cost or actual cash value basis and provides coverage on either a scheduled basis for larger pieces of equipment or blanket coverage basis for items like miscellaneous tools.
When looking at Contractor’s Equipment policies, tree care companies should consider the following additional coverages, which may already be included in a policy or may need to be added through an endorsement:
- Coverage for equipment leased, rented or borrowed from others. For many tree care companies, it doesn’t always make sense to own all of their equipment. Sometimes a business will lease equipment from someone else. An equipment lease typically makes the tree care company liable for damage to the equipment that occurs during the term of the lease.
- Rental reimbursement and continuing expenses. If equipment is damaged by a covered loss, many insurance companies will provide coverage for additional expenses related to the claim, such as rental or lease of similar equipment, overtime wages needed to complete the work and transportation of the rented equipment.
- Coverage for expediting expenses. Specialized or customized equipment that is compromised may not be easily replaced. To keep work on schedule, contractors often incur additional labor or freight costs to expedite delivery of replacement tools and equipment. Some forms of contractor’s equipment insurance can help cover these expenses.
Suffice to say, insurance coverage for a tree care company can be pretty technical but is critical to help keep your company in business. Knowing a little more about what it is and how it is covered can help you when you review your overall insurance program with your insurance agent.
If you are wondering whether or not you are properly covered, contact the ArboRisk team to set up a free Coverage Review or check out our Thrive Risk Management New Heights Package for more information on developing and growing your business.