January 04, 2023
By Robin Effinger
Senior Underwriter, Inland Marine, AXA XL
Ongoing supply chain disruptions, labor shortages, and economic inflation, currently hovering around 7.5 percent, are having quite an impact on the contractors’ equipment market. As production of new equipment slowed and demand for used equipment shot up, the market value for both new and used equipment climbed.
On the used front, that’s certainly contrary to what contractors are used to. We’ve all heard how a new car depreciates in value as soon as it’s driven off the lot. Depending on the make and model, it can depreciate anywhere between 10 – 15 percent. As a result of short supplies during the pandemic, however, that hasn’t been the case. According to auto industry stats, used vehicles are now 67% more expensive than before the pandemic hit in 2020, with prices rising by 21% a year.
Construction equipment has also seen a without the normal depreciation. With demand for equipment high, but supplies limited, used equipment values are likely to remain high too, in both the resale and auction segments. Overall, the industry has seen a lower level of resale activity, which seems to indicate that contractors are holding on to their equipment longer. With limited availability of used equipment on the market, this could result in elevated values for a while.
Underestimating the repercussions
The challenges around inflation and the supply chain bottleneck aren’t going away overnight. Demand for contractors’ services will likely pick up even more, especially given passage of such laws as the $1 trillion Bipartisan Infrastructure Deal, which calls for significant new construction, remediation, and renovation projects over the next eight years. Hence, there will be plenty of opportunities for contractors if they are fully equipped to take them on.
Part of being fully equipped will be making sure their equipment is insured to value. Some contractors may like to low ball equipment valuations, fearing the increase in insurance rates. However, when seeking inland marine insurance to protect equipment, it’s very important for contractors to make every effort to ensure that they are insuring their equipment at an adequate value according to today’s market conditions, not based on passed depreciation experience.
Contractors cannot afford to overlook inflation’s impact on equipment values that could leave them vulnerable to being underinsured. In the current market, if a backhoe, forklift, or crane is damaged or even totaled, it will cost more for parts or new equipment. If undervalued in an insurance contract, when it does become damaged or suffer a total loss, a contractor could be stuck with costs that take a significant bite out of already slim profit margins, not to mention delays in getting work done because parts and new equipment are harder to acquire.
Contractors cannot afford to overlook inflation’s impact on equipment values that could leave them vulnerable to being underinsured. In the current market, if a backhoe, forklift, or crane is damaged or even totaled, it will cost more for parts or new equipment.
Insuring to value
There are different ways for contractors to conduct equipment valuations. Formal appraisers can conduct a valuation, or they can access reliable, up-to-date valuations tools for free via online resources. Including auction houses, equipment re-sellers or websites like . Another online option is . is also well known for its valuation services for buildings.
Some contractors understand that the probability of a partial loss is greater than a total loss. Others choose to insure equipment for a total loss, despite a lower probability. Contractors who choose to insure for a total loss are shouldering a higher percentage of any equipment loss compared to those who insure their equipment only up to the more probable partial loss limit.
Having skin in the game
Most inland marine policies include a coinsurance clause, but there are other alternatives to coinsurance.
The intent behind coinsurance is to avoid inequity and to encourage contractors to carry a reasonable amount of insurance in relation to the value of their property or equipment. If the value that the insured reports to the insurance company does not meet the specific coinsurance level, their claim will not be paid in fullshould they incur a loss.
If the contractors' equipment policy is written on a replacement cost basis with a 90% insurance-to-value requirement, then all equipment must be insured to 90% of what it would cost to replace it, subject to the valuation provision. Failure to do so can result in a coinsurance penalty, or in other words, a reduced claim payment.
Avoiding a penalty
Many contractors could not conduct business without the right equipment. That’s why it is so surprising they might undervalue these critical tools needed to carry out their jobs. That’s not the worst of it. Undervaluing equipment and other property could carry penalties, coinsurance penalties.
Consider this scenario. A contractor insures a piece of equipment for $100,000. The insurer requires a coinsurance minimum of 80%. The equipment suffers a loss of $40,000. When the insurer appraises the equipment, it’s valued at $250,000. Because the contractor has only insured 50% of the value of the item, the amount paid for this loss is only $20,000 minus the deductible. Given today’s slim profit margins in construction, such a financial hit could be particularly painful.
The right information, including current equipment values, allows inland marine underwriters to evaluate and price risk appropriately and supply contractors with an effective insurance product. Undervaluing the property to be insured defeats that purpose. Instead, buying adequate insurance is the best strategy for prudent contractors wanting to make themselves whole again after an unexpected equipment loss.
About the Author
Robin Effinger is a senior underwriter with AXA XL’s Inland Marine insurance team. She can be reached at robin.effinger@axaxl.com.
