Physical Damage Coverage for an Auto’s Equipment

Author: Mike Edwards

“I’m working on a quote for a piece of new business. Would appreciate your thoughts on an issue currently under review with the underwriter. The insured owns a large work truck which has about $20,000 of specialty equipment attached. The underwriter’s initial indication was to attach the Stated Amount endorsement. I’m not certain that is the best approach, as I have heard numerous instructors in seminars over the years urge caution about using the endorsement. Any suggestions?”

I agree with you – the Stated Amount endorsement (CA 99 28) is not my first choice, either. As you know, this endorsement deals with valuation, not coverage. More on that in a minute. I think the first key issue is whether or not the specialty equipment is covered for physical damage in the unendorsed Business Auto Policy. Here is the pertinent coverage excerpt in Section III Physical Damage [emphasis added]:

SECTION III – PHYSICAL DAMAGE COVERAGE

A. Coverage

1. We will pay for "loss" to a covered "auto" or its equipment under:

a. Comprehensive Coverage

b. Specified Causes Of Loss Coverage

c. Collision Coverage

As you can see, the specialty equipment is automatically covered as the auto’s “equipment.” Attaching the Stated Amount endorsement would have no effect on what is and isn’t covered by the BAP, only how a loss to such property is valued. What often confuses the issue is that the Personal Auto Policy (PAP) excludes certain “equipment” under Part D Coverage For Damage To Your Auto, such as “facilities or equipment for cooking, dining, plumbing or refrigeration, awnings or cabanas, a camper body or trailer, custom furnishings or equipment such as height-extending roofs,” and so forth.

However, the only types of equipment excluded by the BAP are specific electronic devices. Regardless of whether the equipment on this work truck was installed at the factory, or an after-market specialty shop, or by the truck’s owner, it is still covered by the unendorsed BAP.

Therefore, the main stumbling block for the underwriter probably is obtaining sufficient premium for the increased value of the equipment covered by the BAP. And since a key component of physical damage rating is based on “cost new and age group/model year,” determining the value of the additional equipment would have to be done on a case-by-case basis.

Here are three options I think could be considered to properly insure the truck and its equipment. To illustrate these in detail, assume the following: (1) the truck has a “cost new” value of $72,000; (2) it is 2 years old, and has an ACV of $60,000; and (3) the equipment has a “cost new” value of $23,000 and ACV is $20,000.

Option #1: Rate the truck on the combined cost-new value of the truck (chassis) and the equipment ($72,000 + $23,000 = $95,000), modified by age group/model year. This would be relatively easy if the vehicle came custom-fitted from a manufacturer or specialty conversion shop, such as a fire truck, TV satellite truck, mobile medical vehicle, etc.

Option #2: Write the truck in the customary way, and insure the equipment under an inland marine coverage form. Most are ACV, but some can be written on an agreed amount basis. (Agreed amount is different than stated amount – see below). It would be important to write both coverages in the same insurer. I’ve seen cases where the auto coverage and the IM coverage were placed with different insurers, and in situations where only the truck is damaged, and the undamaged equipment has to be removed in order the repair the truck, and neither insurer wanted to pay for the removal and reattachment of the undamaged equipment.

One additional advantage of using an inland marine form is that coverage is usually broader than the standard physical damage coverage in the BAP. This is especially important where the equipment is highly specialized, and/or incorporates high-tech electronics. Additionally, an inland marine form which values equipment on an agreed value vs. ACV is preferable.

Option #3: Write a BAP with the Stated Amount endorsement (CA 99 28), and schedule the amount of coverage as close as possible to the ACV of the truck and equipment. The danger in using the Stated Amount endorsement is how losses are valued. Here is the key excerpt [emphasis added]:

Limit Of Insurance

1. The most we will pay for "loss" in any one "accident" is the least of the following amounts:

a. The actual cash value of the damaged or stolen property as of the time of the "loss";

b. The cost of repairing or replacing the damaged or stolen property with property of like kind and quality; or

c. The Limit of Insurance shown in the Schedule.

Note that the endorsement never pays more than ACV, nor does it add specific coverage for equipment. Its sole purpose is to provide an alternative valuation method. In contrast, if an inland marine form was written on the equipment on an agreed value basis, ACV is not used, but instead the maximum amount payable is the valued agreed to by the insured and insurer.

While not part of your question, is there a potential for loss of business income if there is damage to the truck or the equipment? For example, some businesses depend heavily on their vehicles as the source of their income. This runs the gamut from food trucks to shredder trucks, to mobile medical, dental or veterinarian vehicles, and so forth. If so, there is an article on the VU titled “Business Income from Specialty Vehicles.”

Last Updated: November 1, 2016
November 26, 2013