Summary: The contractors equipment form provides open perils coverage for mobile machinery, equipment and tools that contractors use in their trade. Because the form does not restrict coverage to a particular location, it can cover contractors equipment at job sites, owned locations, or in transit.
Two different forms are available from AAIS for contractors equipment, IM-7000 and IM-7001. The differences lie in the property covered, perils excluded, and additional coverage sections. This treatment examines in detail form IM-7000, with notes as to the differences in form IM-7001.
Topics Covered:
Underwriting and rating
Insuring agreement and definitions
Covered property
Property not covered
Additional coverages
Perils and exclusions
Insured's duties in case of loss
Valuation
Amount payable
Loss payment
Other conditions
Endorsements
Underwriting and Rating
A contractors equipment floater covers the machinery, equipment, and tools that contractors use in the performance of their trade. According to the 1976 Nationwide Marine Definition such equipment must be of a “mobile or floating nature” and can not be: 1. on sale or consignment; 2.in the course of manufacture; or 3. designed for highway use.
The following information about the contractor is necessary in order to properly underwrite the risk:
1. type of contractor and work performed;
2. a schedule of equipment that includes the following information:
a. the value of each item
b. name of manufacturer
c. year of manufacture
d. model and identification numbers
e. serial number
f. full descriptive data
3. number of years the applicant has been in business
4. financial condition of the risk
5. loss prevention measures employed
6. loss experience of the risk
A contractors equipment floater is rated based on the total value of the equipment being insured. The base rate may then be modified with credits or debits for the following: deductible, loss experience, management, security, and fire protection.
Insuring Agreement and Definitions
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 “declarations” and additional policy conditions relating to assignment or transfer of rights or duties, cancellation, changes or modifications, inspections, and examination of books and records.
Endorsements and schedules may also apply. They are identified on the “declarations”.
Refer to Definitions for words and phrases that have special meaning. These words and phrases are shown in quotation marks or bold type.
1. The words “you” and “your” mean the persons or organizations named as the insured on the “declarations”.
2. The words “we”, “us”, and “our” mean the company providing this coverage.
3. ”Declarations” means all pages labeled Declarations, Supplemental Declarations, or Schedules, which pertain to this coverage.
4. ”Limit” means the amount of coverage that applies.
5. ”Pollutant” means:
a. any solid, liquid, gaseous, or thermal irritant or contaminant;
b. electromagnetic (visible or invisible) or sound emission; or
c. waste, including materials to be disposed of as well as recycled, reclaimed, or reconditioned.
6. ”Sinkhole collapse” means the sudden settlement or collapse of earth supporting the covered property into subterranean voids created by the action of water on a limestone or similar rock formation. It does not include the value of the land or the cost of filling sinkholes.
7. ”Specified perils” means aircraft; civil commotion; explosion; falling objects; fire; hail; leakage from fire extinguishing equipment; lightning; riot; “sinkhole collapse”; smoke; sonic boom; vandalism; vehicles; “volcanic action”; water damage; weight of ice, snow, or sleet; and windstorm.
Falling objects does not include loss to personal property in the open or to the interior of buildings or structures or to personal property inside buildings or structures unless the exterior of the roof or walls are first damaged by a falling object.
Water damage means the sudden or accidental discharge or leakage of water or steam as a direct result of breaking or cracking of a part of the system or appliance containing the water or steam.
8. ”Terms” means all provisions, limitations, exclusions, conditions, and definitions that apply.
9. ”Volcanic action” means airborne volcanic blast or airborne shock waves; ash, dust, or particulate matter; or lava flow. It does not include the cost to remove ash, dust, or particulate matter that does not cause direct physical loss to the covered property.
Analysis
The AAIS contractors equipment promises to provide the coverage described in exchange for payment of the premium. The agreement goes on to make the coverage subject to the declarations, policy conditions, and any attached endorsements and schedules.
The terms defined are defined as in most other property policies: you and your; we, us, and our; declarations; limit; pollutant; sinkhole collapse; specified perils; terms; and volcanic action.
Note that the terms earth movement and flood are not defined, as in other policies. The AAIS contractors equipment floater does not exclude these perils, thus they are not defined.
Like the AAIS EDP floater see Electronic Data Processing (EDP) Coverage, the contractors equipment floater employs a broader definition of “pollutant.” In addition to the typical types of pollutants, the policy adds “electromagnetic (visible or invisible) or sound emission.”
The contractors equipment floater defines sinkhole collapse as the sudden settling or collapsing of earth supporting covered property into voids in the earth. By virtue of this definition, sinkhole collapse does not include the value of the ground, itself, nor the cost of filling sinkholes.
The definition of “specified perils” is similar to the broad form causes of loss supported by ISO and includes aircraft; civil commotion; explosion; falling objects; fire; hail; leakage from fire extinguishing equipment; lightning; riot; sinkhole collapse as defined in the policy; smoke; sonic boom; vandalism; vehicles; volcanic action as defined in the policy; water damage; weight of ice, snow, or sleet; and windstorm.
The definition of volcanic action is comparable to the term as used in standard ISO property policies. It includes airborne shock waves, ash, dust, and lava flow. However, it does not include clean-up costs of ash or dust if there hasn't been any direct physical loss to covered property. Dirt from a volcanic eruption is not included in this peril unless the dirt causes direct physical loss to covered property.
Covered Property
1. Scheduled Equipment – When Scheduled Equipment is indicated on the “declarations”, “we” cover direct physical loss caused by a covered peril to:
a. ”your” contractors equipment and
b. equipment of others in “your” care, custody, or control described on the “declarations”.
2. Schedule on File – When Schedule on File is indicated on the “declarations”, “we” cover direct physical loss caused by a covered peril to:
a. ”your” contractors equipment; and
b. equipment of others in “your” care, custody, or control that are listed in a schedule which “you” must submit to “us” and “we” keep on file. The schedule must contain a description of each item to be covered and a “limit” for each item.
Analysis
The AAIS form covers equipment belonging to the insured. It also covers the equipment of others in the insured's care. Such equipment may either be scheduled on the policy or be listed on a schedule kept on file by the insurer. Form IM 7001 does not provide the option of a schedule to be filed with the insurer.
Property Not Covered
1. Aircraft or Watercraft – “We” do not cover aircraft or watercraft.
2. Automobiles and Trucks – “We” do not cover automobiles, motor trucks, tractors, trailers, and similar conveyances designed for highway use and used for over the road transportation of people or cargo. However, this does not include:
a. self-propelled vehicles designed and used primarily to carry mounted equipment; or
b. vehicles designed for highway use that are unlicensed and not operated on public roads.
3. Contraband – “We” do not cover contraband or property in the course of illegal transportation or trade.
4. Loaned, Leased, or Rented Property – “We” do not cover property that “you” loan, lease, or rent to others.
5. Underground Mining Operations – “We” do not cover property while stored or operated underground in connection with any mining operations.
6. Waterborne Property – “We” do not cover property while waterborne except while in transit in the custody of a carrier for hire.
Analysis
The form also lists six types of property not covered:
1. Aircraft or Watercraft.
2. Automobiles and Trucks. However, this does not include:
a. vehicles designed and used primarily to carry mounted equipment;
b. vehicles designed for highway use that are unlicensed and not operated on public roads.
3. Contraband.
4. Property that the named insured loans, leases, or rents to others.
5. Underground Mining Operations. There is no coverage while the property is stored or operated underground at a mine. In this regard the AAIS form is broader than some. Other insurers' forms exclude coverage while the property is stored underground or used in “underground operations.” Such operations may certainly be much broader than just mining.
6. Waterborne Property. There is coverage for property while waterborne, but only while in transit in the custody of a carrier for hire.
Additional Coverages
1. Newly Purchased Equipment – In the event that “you” purchase additional equipment during the policy period, “we” extend coverage to the additional purchased equipment for up to 60 days.
The most that “we” pay for any one loss under this additional coverage is the lesser of:
a. the actual cash value of the covered property; or
b. the “limit” for additional purchased equipment indicated on the declarations. If no “limit” is indicated, then 30% of the Catastrophe Limit indicated on the “declarations”.
This additional coverage will end when any of the following first occur:
a. this policy expires;
b. 60 days expire after “you” purchase the additional equipment; or
c. ”you” report the additional purchased equipment to “us”.
2. Rental Reimbursement – In the event of a loss by a covered peril to covered property that “you” own, “we” reimburse “you” for “your” expense to rent similar equipment while “your” equipment is inoperable. The most “we” reimburse “you” is $2,500 plus the “limit” for rental reimbursement indicated on the “declarations”.
”We” will continue to reimburse “you” for the rental of equipment after the expiration date of this coverage, provided the loss occurred before the expiration date.
”We” will not reimburse “you”:
a. for the rental of equipment until after 72 hours have passed since the covered property was rendered inoperable. After 72 hours have passed “we” will only reimburse “you” for the rental expense that “you” actually incur.
b. if “you” can continue or resume “your” operations with similar equipment that is available to “you” at no additional expense to “you”.
c. for the rental expense of any equipment unless “you” make every reasonable effort to repair, replace, or rebuild the inoperable equipment after the loss by a covered peril occurs.
The deductible amount indicated on the “declarations” does not apply to a loss covered under this additional coverage.
3. Debris Removal – “We” pay the cost to remove the debris of covered property that is caused by a covered peril. This coverage does not include costs to:
a. extract “pollutants” from land or water; or
b. remove, restore, or replace polluted land or water.
”We” will not pay any more under this coverage than 25 percent of the amount “we” pay for the direct loss. “We” will not pay more for loss to property and debris removal combined than the “limit” for the damaged property.
However, “we” pay an additional amount of debris removal expense up to $5,000 when the debris removal expense exceeds 25 percent of the amount “we” pay for direct loss or when the loss to property and debris removal combined exceeds the “limit” for the damaged property.
”We” do not pay any expenses unless they are reported to “us” in writing within 180 days from the date of direct physical loss to covered property.
4. Pollutant Cleanup and Removal – “We” pay “your” expense to extract “pollutants” from land or water if the discharge, dispersal, seepage, migration, release, or escape of the “pollutants” is caused by a covered peril that occurs during the policy period. The expenses are paid only if they are reported to “us” in writing within 180 days from the date the covered peril occurs.
”We” do not pay the cost of testing, evaluating, observing, or recording the existence, level, or effects of “pollutants”. However, “we” pay the cost of testing which is necessary for the extraction of “pollutants” from land or water.
The most “we” pay for each site or location is $10,000 for the sum of all such expenses arising out of a covered peril occurring during each separate 12 month period of this policy.
This is an additional “limit”.
Analysis
The AAIS form contains four additional coverages:
1. Newly Purchased Equipment—sixty days coverage on an ACV basis for such equipment. Form IM 7001 provides coverage for up to thirty days, valued at the lesser of: a. the ACV of the covered property; b. 25 percent of the Catastrophe Limit indicated on the “declarations”; or c. $100,000.
Note that this provision is for newly purchased equipment. The form, apparently, does not provide any automatic coverage for newly leased equipment. Also note that the grant of coverage is somewhat broader than other similar forms. The AAIS form provides coverage for newly purchased equipment of any kind. Other forms often limit this coverage to newly purchased equipment similar to the kind already insured.
2. Rental Reimbursement—pays for the insured to rent replacement equipment if the owned property is damaged by a covered peril. The limit is $2,500 plus whatever is shown on the declarations page for this coverage. No dollar deductible applies to this coverage; rather, there is a waiting period of seventy-two hours. This coverage is not available on form IM 7001.
3. Debris Removal—25 percent of the amount of direct damage coverage is available for debris removal. If the total of direct damage and debris removal equals the limit of liability, then an additional $5,000 is available for debris removal.
4. Pollutant Cleanup and Removal—an annual aggregate amount of $10,000 per site or location is available.
This limit is in addition to the limit of liability. The limits for the first three additional coverages are included within the limit of liability.
Perils and Exclusions
“We” cover external risks of direct physical loss unless the loss is limited or caused by a peril that is excluded.
PERILS EXCLUDED
1. ”We” do not pay for loss if one or more of the following exclusions apply to the loss, regardless of other causes or events that contribute to or aggravate the loss, whether such causes or events act to produce the loss before, at the same time as, or after the excluded causes or events.
a. Civil Authority – “We” do not pay for loss caused by order of any civil authority, including seizure, confiscation, destruction, or quarantine of property.
”We” do pay for loss resulting from acts of destruction by the civil authority to prevent the spread of fire, unless the fire is caused by a peril excluded under this coverage.
b. Nuclear Hazard – “We” do not pay for loss caused by or resulting from a nuclear reaction, nuclear radiation, or radioactive contamination (whether controlled or uncontrolled; whether caused by natural, accidental, or artificial means). Loss caused by nuclear hazard is not considered loss caused by fire, explosion, or smoke. “We” do pay for direct loss by fire resulting from the nuclear hazard.
c. War – “We” do not pay for loss caused by war. This means:
1) declared war, undeclared war, civil war, insurrection, rebellion, or revolution;
2) a warlike act by a military force or by military personnel;
3) the destruction, seizure, or use of the property for a military purpose; or
4) the discharge of a nuclear weapon even if it is accidental.
2. ”We” do not pay for loss or damage if one or more of the following exclusions apply to the loss.
a. Criminal, Fraudulent, or Dishonest Acts – “We” do not pay for loss caused by or resulting from criminal, fraudulent, dishonest, or illegal acts alone or in collusion with another by:
1) ”you”;
2) others who have an interest in the property;
3) others to whom “you” entrust the property;
4) ”your” partners, officers, directors, trustees, or joint adventurers; or
5) the employees or agents of 1), 2), 3), or 4) above, whether or not they are at work.
This exclusion does not apply to acts of destruction by “your” employees, but “we” do not pay for theft by employees.
This exclusion does not apply to covered property in the custody of a carrier for hire.
b. Loss of Use – “We” do not pay for loss caused by or resulting from loss of use, business interruption, delay, or loss of market.
c. Missing Property – “We” do not pay for missing property where the only proof of loss is unexplained or mysterious disappearance of covered property, or shortage of property discovered on taking inventory, or any other instance where there is no physical evidence to show what happened to the covered property. This exclusion does not apply to covered property in the custody of a carrier for hire.
d. Pollutants – “We” do not pay for loss caused by or resulting from release, discharge, seepage, migration, dispersal, or escape of “pollutants” unless the release, discharge, seepage, migration, dispersal, or escape is caused by a “specified peril”. “We” do pay for any resulting loss caused by a “specified peril”.
e. Voluntary Parting – “We” do not pay for loss caused by or resulting from voluntary parting with title to or possession of any property because of any fraudulent scheme, trick, or false pretense.
3. “We” do not pay for loss or damage if one or more of the following exclusions apply to the loss. But if loss by a covered peril results “we” will pay for the resulting loss.
a. Contamination or Deterioration – “We” do not pay for loss caused by contamination or deterioration including corrosion, decay, fungus, mildew, mold, rot, rust, or any quality, fault, or weakness in the covered property that causes it to damage or destroy itself.
b. Mechanical Breakdown – “We” do not pay for loss caused by any:
1) structural, mechanical, or remodeling process; or
2) structural, mechanical, or electrical breakdown or malfunction.
c. Temperature/Humidity – “We” do not pay for loss caused by humidity, dampness, dryness, or changes in or extremes of temperature.
d. Wear and Tear – “We” do not pay for loss caused by wear and tear, marring, or scratching.
Analysis
The AAIS contractors equipment form is written on an open perils basis, subject to certain exclusions. Under this form, coverage is inferred if covered property at a scheduled location is damaged by a covered peril. A peril is “covered” unless it is limited or excluded elsewhere on the form. Therefore, an insurer must identify an exclusion or limitation in order to deny coverage based on the cause of loss.
Section 1 of the perils excluded section states that there are three exclusions that eliminate coverage, regardless of whether other causes or events contribute to or aggravate the loss. This type of wording is known as the concurrent causation doctrine, which is discussed extensively elsewhere in this volume. See Concurrent Causation. Print users will find this analysis beginning on page M.20-1 in the Miscellaneous Property section of the Fire & Marine volume. These three exclusions are for actions of civil authority, nuclear hazards, and war. There is an exception to the civil authority exclusion, which permits coverage for loss caused by civil authority in trying to prevent the spread of fire, unless the peril that causes the loss is excluded elsewhere:
Section 2 incorporates nine excluded perils. The first of these excludes coverage for criminal, fraudulent, or dishonest acts by the insureds; others who have interests in the property; anyone the insured has entrusted with the property; partners, officers, directors, trustees, or joint adventurers of the insured; or employees of any of the above. This exclusion specifically deletes coverage for theft by employees, although destruction of covered property by employees is covered. There also is an exception that permits coverage for covered property that is in the custody of a carrier the insured has hired;
Form IM 7000 provides no coverage in the event of exclusions 1 through 3, “regardless of other causes or events that contribute to or aggravate the loss.” It provides certain exceptions to exclusions 4 through 8; and covers any ensuing loss not otherwise excluded under numbers 9 through 12.
Form IM 7001 moves exclusions 9 and 11 into the second group, with no exceptions to them. It adds the following two exclusions to the second group:
1. Puncture, Blowout, and Road Damage of tires—such damage is covered if caused by one of the “specified perils.”
2. Weight of Load—there is no coverage if a piece of machinery is damaged while the insured is operating it under conditions that exceed its “registered lifting capacity.”
Insured's Duties in Case of Loss
1. Notice – In case of a loss, “you” must:
a. give “us” or “our” agent prompt notice including a description of the property involved (“we” may request written notice); and
b. give notice to the police when the act that causes the loss is a crime.
2. Protect Property – “You” must take all reasonable steps to protect covered property at and after an insured loss to avoid further loss. “We” do pay the reasonable costs incurred by “you” for necessary repairs or emergency measures performed solely to protect covered property from further damage by a peril insured against if a peril insured against has already caused a loss to covered property. “You” must keep an accurate record of such costs. However, “we” do not pay for such repairs or emergency measures performed on property which has not been damaged by a peril insured against. This does not increase “our” “limit”.
3. Proof of Loss – “You” must send “us”, within 60 days after “our” request, a signed, sworn proof of loss. This must include the following information:
a. the time, place, and circumstances of the loss;
b. other policies of insurance that may cover the loss;
c. ”your” interest and the interests of all others in the property involved, including all mortgages and liens;
d. changes in title of the covered property during the policy period; and
e. estimates, specifications, inventories, and other reasonable information that “we” may require to settle the loss.
4. Examination – “You” must submit to examination under oath in matters connected with the loss as often as “we” reasonably request and give “us” sworn statements of the answers. If more than one person is examined, “we” have the right to examine and receive statements separately and not in the presence of others.
5. Records – “You” must produce records, including tax returns and bank microfilms of all cancelled checks relating to value, loss, and expense and permit copies and extracts to be made of them as often as “we” reasonably request.
6. Damaged Property – “You” must exhibit the damaged and undamaged property as often as “we” reasonably request and allow “us” to inspect or take samples of the property.
7. Volunteer Payments – “You” must not, except at “your” own expense, voluntarily make any payments, assume any obligations, pay or offer any rewards, or incur any other expenses except as respects protecting property from further damage.
8. Abandonment – “You” may not abandon the property to “us” without “our” written consent.
9. Cooperation – “You” must cooperate with “us” in performing all acts required by this policy.
Analysis
In the event of a loss, the policy requires the following:
1. Notice. The insured must give prompt, written notice of the loss to the insurer. However, “prompt” is not defined.
2. Protect property After a loss, the insured must use “reasonable” means to protect covered property from further loss. The insurer pays for these “reasonable” measures.
3. Proof of loss. The insured must provide the insurer with a signed, sworn proof of loss within sixty days after the insurance company requests it. The policy outlines what must be included in the proof of loss.
4. Submit to an examination. The insurer retains the right to examine the insured under oath about the loss. If more than one individual is involved or affected by the loss, the insurer may interview the individuals separately from one another. (In order to avoid possible collusion in a fraudulent claim.)
5. Produce all records that pertain to the value of the lost or damaged property. Such records might include canceled checks and tax returns.
6. Exhibit the damaged property to the insurer, as often as the insurer requests. The insurer may inspect both damaged and undamaged property.
7. The insured may not volunteer payments, except at his or her own expense, other than to protect the property from further damage.
8. Abandonment. The insured may not abandon property to the insurance company unless prior permission, in writing, is obtained.
9. Cooperation. The last condition requires the insured to cooperate with the insurer in carrying out the requirements of the policy.
Valuation
1 Actual Cash Value – The value of covered property will be based on the actual cash value at the time of the loss (with a deduction for depreciation) except as provided in paragraphs 2. and 3. under Valuation.
2. Pair or Set – The value of a lost or damaged article which is part of a pair or set is based on a reasonable proportion of the value of the entire pair or set. The loss is not considered a total loss of the pair or set.
3. Loss to Parts – The value of a lost or damaged part of an item that consists of several parts when it is complete is based on the value of only the lost or damaged part or the cost to repair or replace it.
Analysis
Both forms (IM 7000 and IM 7001) value the lost or damaged property at actual cash value, subject to the “pair and set” and “parts” clauses. Both forms pay the loss, subject to the following: insurable interest of the insured; deductible; coinsurance; multiple coverages; and multiple policies.
Loss of one part of a set is not considered a total loss of the set; the value is determined at a reasonable proportion of the total value of the set. In like fashion, the value of a lost or damaged part of an item that has several parts is based on only the value of the damaged part; it is not considered a total loss.
Amount Payable
1. Insurable Interest – “We” do not cover more than “your” insurable interest in any property.
2. Deductible – “We” pay only that part of “your” loss over the deductible amount indicated on the “declarations” in any one occurrence.
3. Loss Settlement Terms – Subject to paragraphs 1., 2., 4., 5., and 6. under How Much We Pay, “we” pay the lesser of:
a. the amount determined under Valuation;
b. the cost to repair, replace, or rebuild the property with material of like kind and quality to the extent practicable; or
c. the “limit” that applies to the covered property.
However, the most “we” pay for loss in any one occurrence, regardless if the loss is total or partial, is the Catastrophe Limit indicated on the “declarations”.
4. Coinsurance – “We” only pay a part of the loss if the “limit” is less than the percentage of the value of covered property that is indicated on the “declarations”. “Our” part of the loss is determined using the following steps:
a. multiply the percent indicated on the “declarations” by the value of the covered property at the time of loss;
b. divide the “limit” for covered property by the result determined in 4.a. above;
c. multiply the total amount of loss, after the application of any deductible, by the result determined in 4.b. above.
The most “we” pay is the amount determined in 4.c. above or the “limit”, whichever is less. “We” do not pay any remaining part of the loss.
If there is more than one “limit” indicated on the “declarations” for this coverage part, this procedure applies separately to each “limit”.
If there is only one “limit” indicated on the “declarations” for this coverage, this procedure applies to the total of all covered property to which the “limit” applies.
5. Insurance Under More Than One Coverage – If more than one coverage of this policy insures the same loss, “we” pay no more than the actual claim, loss, or damage sustained.
6. Insurance Under More Than One Policy – “You” may have another policy subject to the same “terms” as this policy. If “you” do, “we” will pay “our” share of the covered loss. “Our” share is the proportion that the applicable “limit” under this policy bears to the “limit” of all policies covering on the same basis.
If there is another policy covering the same loss, other than that described above, “we” pay only for the amount of covered loss in excess of the amount due from that other policy, whether “you” can collect on it or not. But “we” do not pay more than the applicable “limit”.
Analysis
This section explains how much the insurer will pay in the event of a covered loss. The first requirement limits the insurer's responsibility to only the insured's insurable interest in the property. Therefore, the insured only will be reimbursed for the portion of loss in which an insurable interest is held, regardless of the limits of insurance purchased. This type of provision is common in first party insurance contracts.
Losses are reduced by the amount of deductible shown on the declarations. The deductible applies per occurrence.
Losses are settled at ACV, as determined under the valuation section, discussed previously in this article. Under both forms (IM 7000 and IM 7001), the insurer must notify the insured which one of the following four options it will choose to pay the claim:
1. Pay the value of the loss.
2. Pay the cost of repairing or replacing the loss.
3. Rebuild, repair, or replace with property of like kind and quality, to the extent practicable, within a reasonable time.
4. Take all or any part of the damaged property at the agreed or appraised value.
Both forms agree to adjust claims with the insured. If the covered property belongs to someone other than the insured, the insurer may settle directly with that other party.
There is a coinsurance penalty if the limit of insurance purchased is less than required by the coinsurance percentage chosen and indicated on the declarations. The coinsurance percentages that are available are 80, 90, or 100 percent. The insurer will pay the lesser of the amount determined by employing the coinsurance formula included in this clause or the limit of insurance. The coinsurance formula requires that the value of the covered property—at the time of loss—be multiplied by the coinsurance percentage shown on the declarations to determine the limit of insurance that should have been purchased. The limit actually purchased then is divided by the amount that should have been carried. The resulting percentage is multiplied times the amount of loss minus the deductible to determine the recovery.
As an example, a coinsurance percentage of 90 percent is shown on the declarations, and the limit of insurance for the contractor's equipment is $150,000. At the time of a total loss, the equipment actually is worth $250,000. The insured bought $150,000 of coverage (the limit the insured “had”), but $225,000 of coverage was required (90 percent x $250,000 value at time of loss—what “should” have been purchased). There is a $1,000 deductible per occurrence. This results in the following settlement:
Had x (Loss – Deductible) = Recovery
Should
$150,000 x ($250,000 – $1,000)
$225,000 = $166,000 recovery
In the event that more than one policy coverage applies to the same loss, the insurer will pay no more than the actual claim, loss, or damage sustained. This again restricts payment to only what actually is lost by the insured.
The last provision deals with situations in which coverage is available under more than one policy. If the terms of coverage on the other policy are the same as those contained in the AAIS form, the AAIS insurer will pay the portion of the loss that the applicable limit under this policy bears to the limits of all policies covering on the same basis. This is called pro-rata sharing by limits. If the other policy does not have the same terms as the AAIS form, then the AAIS policy will be excess of the amount due from the other policy whether the coverage is collectible or not. In any event, the policy will not pay more than the applicable limit on the covered property.
Loss Payment
1. Our Options – “We” have the following options:
a. pay the value of the loss;
b. pay the cost of repairing or replacing the loss;
c. rebuild, repair, or replace with property of like kind and quality, to the extent practicable, within a reasonable time;
d. take all or any part of the damaged property at the agreed or appraised value.
”We” must give “you” notice of “our” intent to rebuild, repair, or replace within 30 days after receipt of a duly executed proof of loss.
2. Your Losses – “We” adjust all losses with “you”. Payment will be made to “you” unless another loss payee is named in the policy. An insured loss will be payable 30 days after a satisfactory proof of loss is received, and the amount of the loss has been established either by written agreement with “you” or the filing of an appraisal award with “us”.
3. Property of Others – Losses to property of others may be adjusted with and paid to:
a. ”you” on behalf of the owner; or
b. the owner.
If “we” pay the owner, “we” do not have to pay “you”. “We” may also choose to defend any suits arising from the owners at “our” expense.
Analysis
At the time of a loss, the insurer has four settlement options: pay the value of the loss; pay the cost to repair or replace the damaged property; rebuild, repair, or replace the damaged property with material of like kind and quality to the degree that is practical within a reasonable time; or take all or any of the damaged property at the agreed or appraised value. The insurer must notify the insured of its decision to rebuild, repair, or replace the property within 30 days after receiving a duly executed proof of loss.
Regardless of which option is chosen, the insurer does not owe more than the insured's insurable interest in the property. Once again, the insurer retains the sole right to choose the option; the insured has no contractual right to negotiate the option chosen.
The insurer adjusts all losses with the insured. Payment must be made to the insured with 30 days after receiving an acceptable proof of loss and establishing the amount of settlement. That amount may be decided through either a written agreement between the insured and insurer or the filing of an appraisal award with the insurer.
The insurer retains the right to adjust losses to property of others with either the insured or the owner of the property. If the insurer elects to deal with the owner, there is no obligation to pay the insured. If the owners of property sue the insured, the insurance company may choose to defend the suit at its expense. The policy is silent on who bears the cost of defense if the insurer elects not to defend the insured in such a situation.
Other Conditions
1. Appraisal – If “you” and “we” do not agree on the amount of the loss or the actual cash value of covered property, either party may demand that these amounts be determined by appraisal.
If either makes a written demand for appraisal, each will select a competent, independent appraiser and notify the other of the appraiser's identity within 20 days of receipt of the written demand. The two appraisers will then select a competent, impartial umpire. If the two appraisers are unable to agree upon an umpire within 15 days, “you” or “we” can ask a judge of a court of record in the state where the property is located to select an umpire.
The appraisers will then determine and state separately the amount of each loss.
The appraisers will also determine the value of covered property items at the time of the loss, if requested.
If the appraisers submit a written report of any agreement to “us”, the amount agreed upon will be the amount of the loss. If the appraisers fail to agree within a reasonable time, they will submit only their differences to the umpire. Written agreement so itemized and signed by any two of these three sets the amount of the loss.
Each appraiser will be paid by the party selecting that appraiser. Other expenses of the appraisal and the compensation of the umpire will be paid equally by “you” and “us”.
2. Benefit to Others – Insurance under this coverage shall not directly or indirectly benefit anyone having custody of “your” property.
3. Conformity With Statute – When a condition of this coverage is in conflict with an applicable law, that condition is amended to conform to that law.
4. Estates – This provision applies only if the insured is an individual. On “your” death, “we” cover the following as an insured:
a. the person who has custody of “your” property until a legal representative is qualified and appointed; or
b. ”your” legal representative.
This person or organization is an insured only with respect to property covered by this coverage.
This coverage does not extend past the policy period indicated on the “declarations”.
5. Misrepresentation, Concealment or Fraud – This coverage is void as to “you” and any other insured if, before or after a loss:
a. ”you” or any other insured have willfully concealed or misrepresented:
1) a material fact or circumstance that relates to this insurance or the subject thereof; or
2) ”your” interest herein.
b. there has been fraud or false swearing by “you” or any other insured with regard to a matter that relates to this insurance or the subject thereof.
6. Policy Period – “We” pay for a covered loss that occurs during the policy period.
7. Recoveries – If “we” pay “you” for the loss and lost or damaged property is recovered, or payment is made by those responsible for the loss, the following provisions apply:
a. ”you” must notify “us” promptly if “you” recover property or receive payment;
b. ”we” must notify “you” promptly if “we” recover property or receive payment;
c. any recovery expenses incurred by either are reimbursed first;
d. ”you” may keep the recovered property but “you” must refund to “us” the amount of the claim paid, or any lesser amount to which “we” agree; and
e. if the claim paid is less than the agreed loss due to a deductible or other limiting “terms” of this policy, any recovery will be pro rated between “you” and “us” based on “our” respective interest in the loss.
8. Restoration of Limits – A loss “we” pay under this coverage does not reduce the applicable “limit” unless it is a total loss to a scheduled item. In the event of a total loss to a scheduled item “we” refund the unearned premium on that item.
9. Subrogation – If “we” pay for a loss, “we” may require “you” to assign to “us” “your” right of recovery against others. “You” must do all that is necessary to secure “our” rights. “We” do not pay for a loss if “you” impair this right to recover. “You” may waive “your” right to recover from others in writing before a loss occurs.
10. Suit Against Us – No one may bring a legal action against “us” under this coverage unless:
a. all of the “terms” of this coverage have been complied with; and
b. the suit has been brought within two years after “you” first have knowledge of the loss. If any applicable law makes this limitation invalid, then suit must begin within the shortest period permitted by law.
11. Territorial Limits – “We” cover property while it is in the United States of America, its territories and possessions, Canada, and Puerto Rico.
Analysis
Both AAIS contractors equipment forms contain the following 11 conditions:
1. Appraisal. This condition provides for an appraisal in the event that the insured and insurer disagree on the amount of the loss or the value of the property. Either party may demand the appraisal, in writing. After that written demand, each party chooses an independent appraiser and notifies the other party of its choice. This must be done within 20 days of the receipt of the written demand. The two appraisers then select an umpire. If the two appraisers cannot agree on the umpire within 15 days, either the insured or the insurer may ask a judge to intervene and select an umpire. The appraisers separately determine the amount of loss. If the appraisers agree, the amount agreed upon is the amount of the loss. However, if they cannot agree, the amount of the difference must be submitted to the umpire. Written agreement of two of the three sets the amount of loss. Each party pays its own appraiser, with the expenses of the umpire, as well as other expenses of the appraisal, shared between the parties.
2. Benefit to Other. There is to be none.
3. Conformity with Statute. Any condition that is contrary to law is amended to reflect the law.
4. Estates. Applies only if the insured is an individual. Upon the insured's death, one of the following becomes an insured under the policy: either the person who has custody of the insured's property until a legal representative is appointed; or the insured's legal representative. The coverage applicable to the estate does not extend past normal policy expiration.
5. Misrepresentation, Concealment or Fraud. Voids the coverage. Condition 5 specifically outlines what is considered a misrepresentation, concealment, or fraud. This includes the insured willfully concealing a material fact or the insured's interest in the coverage. It also includes “false swearing” by any insured relating to the insurance.
6. Policy Period. Stated on the policy declarations.
7. Recoveries. The insured and the insurer are obligated to inform the other party if lost or damaged property is recovered after the insurer has paid for it. In this event, recovery expenses incurred by either party are reimbursed first. The insured may keep the recovered property. If the insured chooses to keep the recovered property, he or she must reimburse the insurer for the amount of the claim paid or any lesser amount the insurer agrees to. If a deductible or other policy limitation decreases the claim paid to less than the agreed loss, any recovery is pro-rated between the insured and insurer based on their respective interest in the loss.
8. Restoration of Limits. A loss that is paid under the policy does not decrease the applicable limits of insurance, unless it is a total loss. In that case, the item is deleted from the schedule and the remaining premium is refunded.
9. Subrogation. The ninth condition permits the insurer to require that any subrogation rights of the insured be assigned to it. The insured must do all he or she can to secure the insurer's subrogation rights. The insurer may refuse to pay a loss if the insured impairs its subrogation rights. However, the insured may waive recovery rights from others in writing prior to a loss.
10. Suit Against the Insurer. The insured may not sue the insurer, unless he or she complies with all coverage terms. Such a suit must be brought within two years after the insured first knows about the loss. If a law invalidates this limitation, then suit must be brought within the shortest period permitted by law.
11. Territorial Limits. United States, its territories and possessions, Canada, and Puerto Rico.
Endorsements
The AAIS contractors equipment program has several endorsements available to modify the basic policy:
1. Rental Reimbursement—since this coverage is automatically included in form IM-7000, it must be added via endorsement IM-7014 to form IM-7001. The insured may purchase up to $15,000 of rental reimbursement coverage.
2. Boom Restriction—endorsement IM 7016 removes coverage for booms that exceed twenty-five feet in length. It does, however, still cover such booms in transit when damaged by a specified peril.
3. Percentage Deductible—instead of a flat dollar deductible, this option (IM 7018) allows the insured to choose a selected percentage of the value of an insured item as the applicable deductible. This amount is then subject to a minimum and a maximum dollar amount.
4. Split Deductible—form IM 7021 allows the insured to select two different deductible amounts for different covered perils (e.g. $2,500 deductible for vandalism losses and $1,000 for all other covered perils).
5. Equipment Leased or Rented From Others—form IM 7012 extends coverage for equipment that has been leased or rented from others, but is not on the schedule. The AAIS guide suggests that the basic rate for the covered property be increased by $1.50 to $2.00 for this coverage, subject to a minimum premium of $250.
6. Replacement Cost—endorsement IM 7020 amends the adjustment of losses from ACV to replacement cost.
7. Small Tools—endorsement IM 7015 extends coverage to the “small tools” of the insured and his or her employees. A separate deductible applies to this endorsement.
8. Waterborne Coverage—endorsement IM 7019 removes the exclusion of waterborne property.
9. Weight of Load Exclusion—endorsement IM 7017 amends form IM 7000 to include the wording from IM 7001 that there is no coverage when a piece of machinery is being used beyond its registered lifting capacity.
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