How to insure equipment and tools for a contracting business

A contractor's equipment is the part of the business most likely to be stolen or damaged and the part most often insured by assumption. The truck is insured, so the tools in it must be; the shop is insured, so the compressor that spends its week on a jobsite must be. Neither is true. Commercial auto physical damage covers the vehicle and its permanently attached equipment, not the cargo. Commercial property or the business personal property section of a business owners policy covers contents at the address on the declarations page, with a small allowance for property temporarily elsewhere. A skid steer on a site in Meridian, a trailer of tools parked overnight in a Tucson driveway and a laser level left in the cab all fall outside both.

The policy written for property that moves is inland marine, and for a contractor it takes the form of a contractors equipment floater, with companion forms for materials awaiting installation and for equipment rented from others. This guide is the sequence for buying it properly: inventory, valuation, the scheduled and blanket split, the add-ons that catch the common losses, and the conditions that decide whether a theft claim is paid.

What to gather first

The floater is written from a list, and the list is the evidence at a claim.

• A full inventory of equipment and tools with make, model, serial number, year, purchase price and current replacement cost, sorted by value; photographs of each larger item with its serial plate.
• Purchase invoices, financing or lease agreements, and the lender's or lessor's name where equipment is not owned outright, since they will need to be shown as loss payee.
• Rental agreements for equipment you hire, with the damage waiver and insurance terms marked, and a rough figure for the most expensive item you rent in a year.
• A description of how equipment is stored: shop, yard, trailer, truck, jobsite; whether overnight; and what security exists at each.
• The value of materials you typically hold at a jobsite before installation, and whether the general contractor's builders risk policy covers them or expects you to.
• Your current auto and property declarations pages, to see what small off-premises or tool allowances already exist and where they stop.

Step one: inventory and sort by value

Walk the shop, the yard and every truck and trailer with a phone, and record everything worth more than a modest threshold you choose, with a serial number where one exists. Sort the list into heavy equipment and machinery, meaning excavators, skid steers, compressors, generators, trenchers and lifts; larger tools with individual value, such as welders, saws, surveying instruments and cordless kits; and the mass of small hand and power tools that no one would list individually. Add the trailers themselves if they are not on the auto policy, and any equipment attached to trucks that the auto carrier has confirmed is not in the vehicle's insured value.

For each item, record replacement cost as well as what you paid. Used equipment is common in the trades and its market value is what a carrier will pay under an actual cash value form; a new-for-old replacement cost form pays more and costs more. The inventory total against each basis is the first number that tells you what the floater will need to carry.

Step two: split the list between scheduled and blanket coverage

A contractors equipment floater insures items two ways. Scheduled items are listed individually with a value each; the schedule is precise, a claim on a scheduled item is settled against its listed value, and the premium is rated per item. Unscheduled or blanket coverage insures the mass of smaller tools as a single limit, often with a cap on any one item, without listing them. The usual division is to schedule anything above the per-item cap on the blanket, which typically catches the heavy equipment and the expensive instruments, and to put everything else under the blanket at a limit equal to its total replacement cost.

Then set the valuation. Actual cash value is the default on many floaters and is reasonable for heavy equipment whose used market is deep, since a five-year-old excavator can be replaced with a five-year-old excavator. Replacement cost is worth paying for on the blanket tools, where a claim after a trailer theft is a shopping trip for new tools and depreciation on a hundred small items is a real shortfall. Watch for a coinsurance clause, which penalises a claim if the schedule or the blanket limit is below the true value of what you own; keeping the inventory current is how you avoid it. Employees' own tools can be added as a separate small limit, and it is the difference between a crew that returns after a break-in and one that does not.

Step three: add rented equipment, materials and transit

The three losses that fall outside a basic floater are the ones contractors meet most often. First, equipment rented or leased from others: the rental agreement makes you responsible for the machine from pickup to return, and the rental yard's damage waiver is expensive and full of exceptions. A rented-from-others limit on the floater, set at the value of the most expensive item you hire, covers it and lets you decline the waiver. Second, materials and fixtures delivered to a jobsite but not yet installed, which sit in a gap between your floater, which covers your equipment, and the general contractor's builders risk, which may or may not extend to a subcontractor's materials; an installation floater covers them from delivery through installation until the owner accepts the work. Third, property in transit, which most floaters include but some restrict; confirm that equipment on a trailer between the yard and the site is covered, and at what limit.

Where a lender or lessor has an interest in a machine, the financing agreement requires them to be named as loss payee, and a claim cheque will be made out jointly. Where a general contractor's contract requires you to insure your own materials, that is the installation floater, and the contract will usually name the value or ask you to carry enough for the largest delivery on the job.

Step four: read the theft conditions and set the deductible

Theft is the loss that pays for floaters, and floaters have conditions about it. Many exclude theft from an unlocked vehicle, or from a vehicle where there is no visible sign of forced entry, which means a tool bag lifted from an open truck bed at a supply house is not covered. Some restrict or exclude theft from an unattended jobsite overnight unless the equipment is inside a locked building or fenced compound, or unless a tracking device is fitted. Some exclude mysterious disappearance, so a tool that is simply not there at the end of the week is not a claim. Read these before deciding how equipment is stored, because storage habits that fit the conditions are cheaper than the premium for a form without them. Tracking devices on heavy equipment and locked, alarmed job boxes on site often earn a credit as well as satisfying the condition.

Set the deductible with the blanket tools in mind. A high deductible makes sense on a floater that only has to respond to the theft of a machine; on one that also insures thousands of small items, it means the loss of a single saw is never a claim, which may be exactly what you want, provided the limit is still there for the trailer full of tools. Check the territory too: a floater rated for one state may exclude or limit a job across the line in Nevada or Utah, and a contractor who follows work between states should say so at binding.

Common mistakes

Equipment claims are denied or paid short for a handful of recurring reasons.

• Believing the auto policy covers the tools in the truck.
• Leaving tools that live on jobsites under a property policy written for the shop address.
• Scheduling the excavator and forgetting the blanket, so a trailer break-in that takes forty small tools pays nothing.
• Letting the schedule go stale, so a new machine is uninsured and an old one still pays premium, and a coinsurance penalty appears at the claim.
• Buying the rental yard's damage waiver at every hire instead of a rented-from-others limit on the floater.
• Assuming the general contractor's builders risk covers your delivered materials.
• Storing equipment in a way that breaches the theft conditions, then learning about the conditions from the denial letter.
• Insuring everything at actual cash value and replacing the tools at new prices out of pocket.

A worked example

Suppose an electrical contractor in Idaho Falls with three trucks inventories the business and finds a $45,000 trencher, a $12,000 trailer-mounted generator, $9,000 of surveying and testing instruments, and roughly $60,000 of hand and power tools spread across the trucks and the shop. She buys a contractors equipment floater scheduling the trencher, the generator and the instruments at replacement cost for $66,000, with a blanket limit of $60,000 on unscheduled tools at replacement cost and a $2,500 per-item cap, a $10,000 rented-from-others limit, a $25,000 installation floater for switchgear delivered ahead of installation, transit included, and a $1,000 deductible. Say the premium is $2,800 a year. In the autumn a locked job trailer is cut open overnight on a fenced site and $18,000 of tools are taken; the forced entry and the fenced compound satisfy the theft conditions, and the blanket pays $17,000 at replacement cost. The following spring a rented lift is damaged by a falling pallet and the rental yard bills $6,500; the rented-from-others limit pays it less the deductible. Under the auto and property policies she previously relied on, the first loss would have been limited to a small off-premises allowance and the second would have been hers entirely. All figures are hypothetical.

How to use this

Send us the inventory, the rental agreements and the current declarations pages, and we will set the scheduled and blanket split, the valuation basis and the add-on limits against them and quote the floater across the carriers we represent in Arizona, Nevada, Utah and Idaho, reading the theft conditions against how you actually store the equipment. If an existing floater already carries the inventory at the right values and the conditions match your yard and your trucks, the recommendation is to update the schedule for anything bought since and leave the rest alone.