By: Mike Winstanley, Head of construction and engineering, CIB.
Plant all risk is a highly niched product that requires careful thought, both at the implementation and renewal stage.
Advisors should be aware of a number of key considerations before entering into agreements with construction and engineering clients to ensure the right levels of cover are in place and to reduce the risk of frustration at the claim stage.
Plant and equipment constitute a considerable amount of a contractor’s investment in any project. As insurance practitioners, we all want to make sure a policyholder’s
expectations are met when it really matters, which is invariably when a claim is submitted. This is where we promise to uphold our contractual obligation to place the
insured in the same position they were in before suffering a loss. This is also a key touchpoint where we are judged by our clients, so it’s important that there are no
As a niche offering, plant all risk insurance should be structured to meet the specific needs of a policyholder, whether they operate in the civil, electrical or mechanical
A key consideration is the basis of indemnification. Plant insurance offers a choice in its basis of indemnification, which is intrinsic to how claims will ultimately be handled, be it through a partial or total loss.
There is an important difference between plant and private vehicles and, to some extent, commercial vehicles – which makes plant vehicles, and the market they operate in, unique. The plant models may have a very long life span, where certain basic models may be upgraded to accommodate developments in safety, technology and legislation. It’s not unusual to find a plant that’s still in good working order after 20 years.
These circumstances lead to potential large differences between the new replacement value and the actual value of a plant item. If you combine this with the provision to rate plant policies on replacement value, it culminates in a disproportionate premium when compared to the actual value of the aged machine.
This has forced underwriters to re-examine certain parameters when it comes to the basis of indemnification, which led to the choice of agreed or market value as the basis
on which to rate the policy.
New replacement, market and agreed value options have implications that may influence the choice a prospective policyholder makes when implementing or renewing a policy.
It is therefore vital to ensure that the appropriate bases of indemnification are applied to meet the specific needs of each prospective policyholder. Choosing the wrong basis could lead to unpleasant arguments at the claim stage, especially on partial losses, which make up most of the losses in the market. This is seen most often when indemnity is limited to the proportion that the sum insured bears to the new replacement value when new parts, spares and components are required to return the machine to working order.
How do we avoid these disagreements at claim stage? Firstly, it’s imperative that policyholders are made aware of any potential shortfall. Insurers cannot be expected to place the insured in a better position after suffering a loss. But most importantly, whatever basis of indemnification you have chosen, it’s imperative to make sure each
plant item sum insured reflected on the schedule is as close as possible to the actual market or new replacement value of each item.
What would be the best way to try and ensure this outcome? A strong case can be made at policy issuing stage and on renewal each year to employ a professional evaluator to
determine the market and new replacement values on each plant item. Although there will be a cost to go through this process, often it will be far less than a potential shortfall the insured may suffer at claim stage if plant items are found to be heavily underinsured.
If a plant item has been valued correctly, insuring on replacement value would be the best option. If this route is pursued, no betterment would be imposed in the event of a
partial loss when new parts are required to replace second-hand parts in order to return the machine to working order. But again, the specific needs of the prospective
policyholder would need to be considered. The premium implication to insure items on a higher new replacement value when compared to the market value of the same item in question, may not be affordable. This goes back to ensuring that the policyholder is made aware of the potential shortfall on a partial loss when betterment may be required, replacing old parts with new parts, if the policyholder chooses to insure on market value.
Contractors often choose to hire in items to assist with the completion of a project. Depending on the conditions of hire, they could be responsible for insuring the
machines in question. It is important to note that hired-in plant is not automatically covered by a standard all risk policy. A separate section has to be incorporated and rated individually.
It is important for policyholders to obtain contractual security when entering into a hire agreement, notably around the issue of who is responsible for taking out the insurance – the hiring company or the contractor. Policyholders are advised to refer to the Contractors Plant Hire Association (CPHA) hiring conditions clause within their policies to provide clarity in this regard.
At the end of the day, the best course of action for brokers is to consult a construction and engineering insurance specialist to assist in navigating the nuances of plant all risk
With clear communication and sound advice – and being cognisant of the specific insurance requirements of each individual policyholder – we can meet and even
exceed client expectations every time.