Why contractors should factor inflation into their equipment valuations

Why contractors should factor inflation into their equipment valuations | Insurance Business America

Why contractors should factor inflation into their equipment valuations

This article was produced in partnership with Amwins.

Bethan Moorcraft of Insurance Business sat down with Heather Frain, Senior Vice President and Head of Inland Marine for Amwins Specialty Logistics Underwriters, to discuss the importance of equipment valuations for contractors.

The COVID-19 pandemic and ensuing supply chain disruptions, labor shortages, and economic inflation have created a perfect storm in the contractor’s equipment market.

Demand for equipment is very high, but supply is limited – and this has a knock-on inflationary effect on equipment values and the limits of insurance that contractors should buy to protect themselves.

“The COVID-19 pandemic was the launching point,” said Heather Frain (pictured), Senior Vice President and Head of Inland Marine for Amwins Specialty Logistics Underwriters (ASLU). “With disruptions and bottlenecks in the supply chain, production of new equipment slowed, and demand for used equipment skyrocketed.”

According to the Associated General Contractors of America (AGC), the producer price index (PPI) for construction machinery and equipment jumped 10.1% in 2021, compared to a 1.1% jump in 2020. It is important that contractors acknowledge those price increases in their equipment valuations so that they are not left underinsured, Frain told Insurance Business.

“A big part of taking care of our clients is making sure that they’re valuing their equipment correctly on their equipment schedules,” she explained. “My biggest fear is that someone feels they're not taken care of properly when a loss occurs because they didn't realize they weren't insured to the correct value.

“A business owner needs to think: 'What if my forklift is totaled, or my crane is totaled? What insurance coverage do I need in place, to be able to get this equipment replaced?' The insurance carrier is only going to pay up to the limit the insured has purchased. Whether an insured has actual cash value coverage, or replacement cost coverage, or a coinsurance clause on their policy – it’s very important for them to ensure they have the correct equipment valuation in case there is a loss.”

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There are different ways for contractors to conduct equipment valuations. They can pay for formal appraisals, or they can access reliable, up-to-date valuations tools for free via online resources like auction houses and equipment re-sellers.

“As an underwriter, that helps me to say: ‘When they renewed this account, or I wrote this account, their equipment valuations were accurate at the time.’ We’re not looking to impose penalties [if the price fluctuates suddenly], especially when they’ve tried their best to provide accurate equipment schedules,” said Frain.

Inflation is not only impacting new and used equipment pricing; it is also affecting equipment maintenance. Contractors are struggling to secure the parts they need to maintain their equipment, and the parts they need are more expensive today than they were a few years ago.

All of this has an impact on claims. The top three claims that Frain sees in the ASLU Inland Marine – Contractor’s Equipment Program are theft, fire, and operator error.

“When I review an account, I’ll ask: Are you properly maintaining your equipment?' Can you even get all the parts you need to properly maintain it?” she said. “I like to know who is operating the equipment, especially if it’s a complicated piece of equipment like a crane. Is that operator qualified? How many years of experience do they have? If they’re doing land clearing, for example, do they know how to clean their equipment so that it doesn’t catch on fire? Are they storing equipment in a secure yard? Do they have markings on it that show its their equipment?”

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This type of underwriting scrutiny around equipment operator and maintenance is particularly relevant for larger accounts, according to Frain. “They’re two really big ticket items,” she said. “Without them, losses will follow.”

The challenges around inflation and the supply chain bottleneck are unlikely to dissipate quickly. The United States Congress passed the $1 trillion Bipartisan Infrastructure Deal in November 2021, which promises a huge surge in new construction, remediation, and ablation projects over the next eight years.

“Obviously, the demand for equipment is still extremely high,” said Frain. “It all comes down to the supply chain, and when we’re going to be able to get rid of the bottleneck and get back to where we need to be production-wise. There are just so many factors in play at the same time.”

In challenging times, Frain emphasized the importance of “good communication between the retail agents and the underwriters,” where everyone is on the same page as to what information is needed (e.g. up-to-date equipment valuations) to enable the most thorough underwriting and supply the contractor with adequate insurance coverage.