Contractors and lenders are increasingly exposed to a financial gap that has nothing to do with damage itself, but with how equipment is valued after a loss, according to Gary Hirst (pictured), CEO of CHES Special Risk Inc.
The problem starts with how replacement value is typically calculated, Hirst said. When a newer piece of equipment suffers a total loss, standard coverage often pays out based on depreciated value rather than the cost of replacing it with something equivalent and new, leaving the insured to cover the difference out of pocket.
"It's all very well trying to save some money by saying, well, the item equipment's a year old now, it's not valued, it's not going to cost me $250,000, I can buy secondhand at $150,000," Hirst said. "But what if you can't?"
CHES built its product specifically to close that gap, Hirst said, by offering full replacement of newer equipment rather than a depreciated payout.
"Our products can offer full replacement of a brand-new machine up to three years old," Hirst said. "Or we can go further than that as well."
The equipment itself has also become more expensive and specialized, Hirst said, which raises the stakes when coverage doesn't reflect true replacement cost. Much of the newer machinery now entering the market is computerized and, in some cases, difficult to source given limited global supply.
"There is a lot more sophisticated equipment coming in, and more often than not, it's computerized, and it's extremely expensive," Hirst said. Rarity compounds the issue as well, he said, since some specialized machines simply aren't readily available to replace quickly if something goes wrong.
Beyond the cost of the equipment itself, Hirst pointed to a second financial exposure that's easy to overlook: the income a piece of equipment generates while it's working, and what happens to that income stream if the equipment is damaged and taken out of service.
"This machine is expected to work every day of the week," Hirst said. "If it has damage and it needs to be repaired, the contractor could well still owe the bank an ongoing payment every month." CHES addresses that exposure directly through lease payment protection, he said, so a contractor isn't left covering loan payments on equipment that's sitting in a repair shop and earning nothing.
The mismatch between financing and depreciation is where Hirst said the real financial risk tends to concentrate, since a loan is typically issued against the full new value of a piece of equipment, even though that value starts dropping the moment it's put into use.
"It can be the same with an item of equipment" as it is with a car, Hirst said, "and yet you've still got a loan that is 100% of the new value." Left unaddressed, that gap means an insured could still owe far more on a machine than a standard depreciated payout would ever cover.
Hirst said brokers generally do a strong job managing client relationships, but the bigger gap sits with insureds themselves, particularly around risk mitigation practices that are simple to check but often overlooked. Operator training on specific equipment is one example, he said, along with whether safety features already built into modern machinery are actually being used.
Many machines now come equipped with overload alarms designed to warn an operator when a load exceeds safe limits, Hirst said, but those alarms are sometimes disabled outright because they're considered a nuisance.
"A lot of contractors will disconnect those alarms because they make annoying noises," Hirst said. "And now all of a sudden, the machine's trying to lift something up onto a roof perhaps, and it topples over or drops the item."
Ultimately, Hirst said the goal of CHES's approach is to push brokers and clients to look more closely at real replacement cost and financial exposure, rather than defaulting to depreciated valuations to save on premium in the short term.
"Not everyone wants to spend the premium, and that's a different conversation," Hirst said. "But we're trying to come to the market with a really useful product, and also just be a bit thought-provoking, asking the brokers, have you considered this scenario? What happens if you can't get a replacement in? What happens if it is a total loss?"
