Contractors’ Plant and Equipment insurance in international markets

Contractors’ Plant and Equipment insurance in international markets

Contents

Intoduction 5

1 Definition of Contractors’ Plant 7and Equipment insurance (CPE)

1.1 The benefits of CPE insurance 71.2 The advantages of CPE insurance compared 8

to Machinery Breakdown insurance

2 Important marketing aspects 102.1 Quality service as an essential basis 102.2 Risk managment consultation as an opportunity 102.3 Marketing recommendations 10

3 Insurable objects 123.1 Mobile construction machinery (Contractors’ Plant) 123.2 Temporary buildings 123.3 Stationary equipment 133.4 Tools and tackle 13

4 Cover available under CPE insurance 154.1 Particularities 154.2 Insured perils 164.3 Excluded perils 164.4 The sum insured as the basis for indemnity 174.5 Excess 18

5 Risk assessment and selection 215.1 Risk selection 215.2 Special checks for major risks 225.2.1 Mobile cranes 225.2.2 Machines used in underground work 235.2.3 Land-based drilling rigs 235.2.4 Floating equipment 235.2.5 Agricultural equipment 235.2.6 Camps, hutments, storage facilities 235.3 Rating 245.4 Provisional cover and quotation 255.5 Annual covers – the pillar of CPE business 255.6 Inspections by the insurer 25

6 Claims settlement 286.1 Claims investigation as a reliable 28

source of information6.2 Loss settlement in accordance 28

with general principles6.3 Underinsurance – problems for insurers 29

and insured

7 Loss examples 327.1 Faulty erection 327.2 Tower crane collapses 327.3 Bulldozer taken by joy-rider 337.4 Broken axle leads to collision 337.5 Track dozer crushed 337.6 Gravel-cleaning machine derailed 34

8 Future trends 35

Introduction

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The following publication deals with an inter-nationally widespread form of Plant and Equipmentinsurance1 (CPE). The advantages compared toMachinery Breakdown insurance are described andCPE is recommended for markets where the insurerdoes not have the appropriate technical expertsavailable at the right location to enable him tosuccessfully offer a Machinery Breakdown insurancefor contractors’ machinery as well.

“Contractors’ Plant and Equipment Insurance inInternational Markets” provides insurers in less-developed markets with the required know-how tobuild up a profitable plant and equipment in-surance portfolio. Insurers operating in the indus-

1 Comparable to the form of cover com-mon in Germany in accordance withthe “Allgemeine Bedingungen für dieKaskoversicherung von Baugeräten”(General Conditions of Insurance forContractors’ Plant and Machinery), butnot, however, with “Maschinen- undKaskoversicherung von fahrbarenGeräten (ABMG)” (General Conditionsof Insurance for Mobile Vehicles).Similar forms of insurance cover alsoexist in Switzerland and Austria.

trialised German-speaking markets can learn howcontractors’ machinery and site installations can be more profitably insured in developing countriesunder CPE and why classic Machinery Breakdowninsurance generally yields poor results for internalbreakdown claims. Emphasis is therefore given to the main differences between CPE and MachineryBreakdown insurance.

1 Definition of Contractors’ Plant and Equipment insurance (CPE)

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1.1 The benefits of CPE insurance

Plant and equipment often constitute a considerablepart of a building contractor’s investment. Accidentsresulting in the loss of plant or equipment or which cause severe damage can have a serious effecton his business. The contractor relies on being ableto deal with such losses quickly and without havingto pay attention to costs. Small and medium-sizedcompanies in particular are especially prone to theconsequences of such losses:• A limited fleet of vehicles and equipment used at

full capacity make it impossible to replacedefective plant with reserve machines.

• The losses incurred cannot be fully covered dueto insufficient financial reserves.

CPE insurance guarantees a fast settlement ofclaims at reasonable prices. In addition, theinsurance premium can be deducted from thecompany’s tax payments as part of operating costs.

Even large contractors generally prefer to take outinsurance with a fixed calculable premium, thusavoiding the risk of reducing the company’s profitsby setting aside too much in reserves.

CPE insurance covers damages of an accidentalnature affecting machines and equipment as a resultof fire, water, collision, overturning, falls, storm,theft, or malicious damage. The insurance does not,however, cover internal machinery breakdowndamages unless these are due to an external cause ofan accidental nature covered by the CPE insurance.

This is the case, for example, when a heavy truckcareers off the road due to a defective brake system.In this case the crash damage would be paid, butnot the repairs to the defective parts of the brakesystem – if it is indeed at all possible to identifythese as the cause of the accident. If, however, thebrake system is damaged and no consequential lossresults, the loss is not covered by the CPEinsurance.

CPE insurance is a type of engineering insurance. It is very similar to German plant insurance inaccordance with the “General Conditions of Insur-ance for Contractors’ Plant and Machinery” (ABG– Allgemeine Bedingungen für die Kaskover-sicherung von Baugeräten) but markedly differentfrom the “General Conditions of Insurance forMobile Vehicles” (ABMG – Allgemeine Bedingun-gen für die Maschinen- und Kaskoversicherung vonfahrbaren oder transportablen Geräten).

1.2 The advantages of CPE insurance compared

to Machinery Breakdown insurance

Machinery Breakdown insurance mainly providescover for internal damage to stationary and mobileplant and equipment caused, for example, byplacing an excessive load on engines, hydraulic sys-tems, bearings, gears or machine frames.

It is not advisable to insure plant and machineryunder a Machinery Breakdown policy unless an in-surance company has specialists in this area. If thisis not the case, this type of insurance should beavoided and the policy should be limited to coverexternal damage to plant and equipment, sinceMachinery Breakdown insurance often results inlosses for the insurer. The reasons for this are asfollows:

Figure 1.1Contractors’ Plant and Equipment as a separate branch of insurance

Contractors’

All Risks (CAR)

Erection

All Risks (EAR)

Contractors’

Plant and

Equipment (CPE)

Engineering

insurance

Property

insurance

Machinery

Breakdown

(MB)

MarineFire

Computer

All Risks

(LOWV)

Boiler and

Pressure Vessel

Explosion (BOIL)

Business Interruption (BI)

• The harsh working conditions cause greater wearand tear, increasing the likelihood of MachineryBreakdown claims.

• Damages arising purely from wear are excluded,yet these are still indirectly indemnified by theinsurer when, for example, worn parts fractureand he is called upon to compensate for theresulting losses on other parts.

• The premium rates for Machinery Breakdowninsurance are insufficient to indirectly cover a large part of the normal maintenance costsassociated with poorly serviced machines via costs incurred for damage repairs.

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2 Important marketing aspects

In the long run, CPE insurance can only be prof-itable for the insurer if attention is given to certaincriteria: first-class customer services, professionaladvice, broad know-how, well-founded and consci-entious risk-control and the rules of marketing.

2.1 Quality service as an essential basis

For the insurer, providing quality service meansoffering technical expertise combined with goodservice as well as guaranteeing sufficient insurancecapacity and financial resources.

Specialists who are successful as CPE insurers:• have know-how as risk managers;• are able to competently assess the particular risks

regarding individual machines and the area inwhich they are used;

• devise policies with clauses which take account of the insured’s individual requirements;

• evaluate and settle claims;• make a precise analysis of losses and use this

experience to devise preventative measures.

The time invested in loss analysis is worthwhilesince not only is time saved for examining andsettling claims but claims costs are reduced as well.

2.2 Risk management consultation

as an opportunity

Experienced engineers with risk-management know-how are important in providing an insurancecompany with valuable support. Their main tasklies in the reliable assessment of all risks and inworking out appropriate, up-to-date solutions forsuitable insurance cover. They motivate their clientsto implement individual and practical preventativemeasures, in particular to reduce the frequency ofmajor losses.

2.3 Marketing recommendations

In establishing a healthy CPE insurance portfolio,as in other branches, certain rules should befollowed:

A clear strategy in acquiring clientsA satisfactory result can only be achieved by thoseinsurers who assemble their portfolio consciously,actively seeking out “good” risks – companies with well-organised and properly maintained plantand equipment who aim at a low frequency ofbreakdowns and losses.

Optimal availability of machines can be guaranteed:• with regular maintenance, either after a certain

number of hours of use or at certain regularintervals;

• when each large vehicle is entrusted to one driveronly, ie the machine is only used by the driverallocated to it.

Insurers who acquire their clients in an unsystem-atic manner will almost certainly take on an above-average number of “bad” risks in their portfolio. In fact, they are often contacted by contractors whofind themselves under pressure as a result of seriouslosses or who may even have had their cover with-drawn by another insurer.

Appropriate technical requirementsCPE insurance should not serve as a playing fieldfor imprecise policy regulations and unconsideredcover extensions, although this is often the waythings are in the international market. The policyshould give attention to the following primaryconditions:• The insured’s excess must be sufficient to cover

at least the most frequent small losses (such as adamaged bumper on mobile machinery).

• It is vital that the sum insured be adjustedannually to the new replacement value.

• According to the market and the composition ofthe plant and vehicle fleet insured the policyshould even stipulate for indemnificationpurposes an annual depreciation for certain typesof machine or for parts which are particularlyprone to wear.

Adequate technical controlIt is vital that the plant and equipment be inspectedbefore the policy is issued and that every claimarising be investigated. All of the insurer’s market-ing efforts are useless if he fails to undertake suchnecessary technical checks.

Mobile and stationary plant and equipment can be insured as well as temporary buildings and siteinstallations (accommodation huts, office units,workshops). This plant and equipment may be thecontractor’s own property or be rented by him.

3.1 Mobile construction machinery

(Contractors’ Plant)

“Mobile machinery” is taken to mean self-propelledplant or construction machinery. The mostcommon of these being:• bulldozers• loading vehicles fitted with wheels or tracks• dump trucks• (conventional) excavators• scrapers• floating excavators• road-surfacers• rollers• mobile cranes• mobile drilling machinery.

3 Insurable objects

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3.2 Temporary buildings

Temporary buildings include:• accommodation huts and stationary caravans• workshops• office buildings• storage buildings• other temporary buildings erected by the site

contractor to allow construction work to becarried out efficiently.

3.3 Stationary equipment

This group includes:• conveyor systems• gravel processing plants• concrete batching plants• asphalt mixers• tower cranes, hoists• electrical generators and transformers

for building sites.

3.4 Tools and tackle

It makes sense to set the excess so high as to excludeportable tools such as shovels, axes, portable saws,drills and grinding machines. Often the targets ofpetty theft, such small tools generally ought to beregarded as expendable items and should not beinsured.

It is relatively difficult to determine which tools areuninsurable. Some policies use the definition“exchangeable tools and fast-wearing machine partssuch as drills, crusher jaws and hammers, sawblades, screens, clam shells, chains, cables, crawlertracks, conveyor belts, ropes or tyres”.

Most policies generally exclude parts subject to wearbut do cover losses concerning these parts wherethey arise in connection with an insured lossinvolving an insured machine. In such cases werecommend reducing the compensation to reflectthe remaining service of such parts.

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4 Cover available under CPE insurance

Above and beyond this, on major building sites it isoften the case that insurance is required for plantand equipment belonging to several consortiumpartners. A CAR policy with CPE extended covertherefore leads to greater simplicity: companies thenhave no difficulty omitting the plant used fromtheir existing CPE policy for the duration ofoperations. A separate CPE policy for an individualmajor site can also be concluded. Nevertheless,individual companies still require the CPE annualpolicy for the remaining plant, regardless ofwhether this is in transit between two sites, in useon small sites, in storage or in the workshop beingoverhauled. This part of the machine fleet mightconstitute the largest share of the contractor’sinventory.

It can be seen then that the CPE policy offers thebest cover for protecting a contractor’s investmentin building plant – regardless of whether themachinery is rented, used primarily on a few majorsites or on several small sites, in workshopsundergoing repair or in storage.

The main differences between CPE and MachineryBreakdown insurance are illustrated in the followingtypical cover exclusions.

4.1 Particularities

CPE insurance covers either: • individually listed insured perils (named perils);

or• all perils apart from those specifically excluded

(all-risks policy).

The all-risks policy has become the norm in inter-national markets. Both variations cover onlyaccidental losses, regardless of the policy wordingused.

The CPE policy covers insurable machines andequipment• on the site or en route to a site – whether by rail,

road, or boat on inland waterways. Machineslicensed for use on normal roads are excluded.These are subject to vehicle insurance in accord-ance with prevailing legislation.

• in a machinery park or workshop.

Tunnelling machinery, mining machinery usedunderground and plant used at the water’s edge, onbarges, or on pontoons are only covered by specialagreement.

CPE-type cover is also available as a special endorse-ment under internationally available Contractors’All Risks (CAR) policies. However, such CPE en-dorsements do not provide the same comprehensiveinsurance cover given by a dedicated CPE policy.(Germany, Austria and Switzerland are exceptions inthis regard.)

These extensions of CAR cover only apply at thesite of the insured project and have no validityeither outside the site, en route to it, or in repairshops. In addition, a contractor insured under aCPE-type endorsement would be required to insureany machines used on several different sites duringany one year under several separate, site-specificCAR policies. This procedure is complicated, makesit difficult to keep track of individual items andleads to increased costs. For this reason the CPEcover endorsement under a CAR policy is onlyrecommended for major projects where machinesare often used for several years at a time, andvirtually all costs (including insurance premiums)can be allocated directly to that project.

4.2 Insured perils

An all-risks policy contains the cover clause “coveris provided for any loss arising from any cause otherthan those specifically excluded”. Nonetheless it isstill important to inform the client by means ofdetailed examples of the protection available andwhich perils are covered. (Examples: collision,landslide or rockfall, vehicles or equipment on siteoverturning or falling into ravines or excavations,fire where vehicles are parked, storm, flood, earth orboulders falling onto plant and vehicles, subsidence,earthquake or any other cause of loss not excluded.)

4.3 Excluded perils

Generally common exclusionsThe general exclusions which are a necessary part of any property policy apply equally to the CPEpolicy:• wilful acts committed by the insured;• damage and contamination as a result of a

nuclear accident;• war or warlike events.

Specific exclusionsSpecific exclusions differentiate CPE cover in detailfrom other types of insurance. The most importantof these is the exclusion of commonly occurringmachinery breakdown without visible evidence ofexternal force (see Figure 2). Machinery breakdown,ie damage to gears, pistons or motors as well asstress fractures on vehicle chassis, are commonplacedue to the harsh conditions in which suchequipment is used. Contractors therefore oftenincorporate “normal” repair costs into theirmaintenance budget and only insure their fleetagainst major losses – using a CPE2 policy with alower premium than a Machinery Breakdownpolicy.

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2 Despite this observation, cover inGermany is usually in accordancewith the ABMG.

Figure 2:Differences in coverbetween CPE andMachineryBreakdown (MB)insurance

Internal mechanical orelectrical breakdownsuch as rupture, crackingor deformation due tooperational failure, strainor other internal failure.

These exclusions arecovered under theMachinery Breakdownpolicy. (In the event ofan accident due tointernal failure, such as a crash, collision or fire,the consequential loss iscovered under CPEinsurance.)

These exclusions arecovered under the CPEpolicy.

Fire, lightning,explosion, flood,earthquake, tsunami,landslide, subsidence,rockfall, avalanche(corresponds to AMB inGermany – althoughthese are covered underABMG).

CPE exclusions: MB exclusions:

As explained above, losses of an accidental natureaffecting plant and equipment are also coveredwhen these are revealed to have been caused byinternal mechanical breakdown, provide furtherargument in favour of CPE insurance. Losses due tofalls, collisions, and fires are insured, for example, if they are due to a broken steering column or aruptured brake line.

The ability to clearly communicate these circum-stances to the client is decisive for the success of aCPE policy.

4.4 The sum insured as the basis for indemnity

In the case of CPE insurance the new replacementvalue is taken as the sum insured. Every item ofmachinery must be listed in the policy togetherwith the cost of its replacement. An undifferentiated total makes it impossible in the event of a claim tocheck whether the client is underinsured. The newreplacement value of a machine comprises the costof a machine of the same type together with thecosts of replacement such as freight, customs andother duties and taxes, as well as the necessaryinstallation costs. In some international policies,however, works accommodation, workshops,scaffolding and formwork materials etc are onlyinsured at their market value at the time the policyis concluded. This deviation from the generalprinciple is questionable.

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Clients often query why the premium is based onthe new replacement value of a machine when inthe event of a major loss it is at most the actualvalue which is indemnified, even if the repair costsare greater.

The reason for this ruling is that the greater part of loss payments are for partial losses which areindemnified in full provided they are below theactual value (which is usually the case). Spare partsare always more expensive than their share of thewhole value of the new machine; in addition towhich labour costs are paid at ever-increasing rates.Moreover, the repaired machine is often in bettercondition than it was prior to the accident.

If there is a total loss or one involving high repaircosts in excess of the actual market value, theindemnity will be limited to the actual valueimmediately prior to the accident. The followingexample shows the effect of the “new replacementvalue” approach compared to the “actual value”approach on premium and claim/premium ratio:

Example:

Original data:Purchase price USD 100,000Year of purchase 1992Premium rate 1.5 % pa.Loss costs USD 1,200Loss year 1992Period under consideration 1992 to 1997Yearly rate of inflation 10 % (assumed)

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The following table tracks the increase of the suminsured (“new replacement value”), premium andthe claim amount over the years based on anassumed annual inflation of about 10%. Attentionshould be given to the relation between loss amountand premium.

Table: New replacement value as sum insured

New Claim Premium Claim/replace- premiumment ratiovalue

1992 100,000 1,200 1,500 0.801993 110,000 1,320 1,650 0.801994 121,000 1,452 1,815 0.801995 133,100 1,597 1,996 0.801996 146,410 1,757 2,196 0.801997 161,051 1,933 2,416 0.80

All amounts in USD

The following table shows the relation between loss amount and the premium with the premiumcalculation based on the actual market value.

Table: Actual market value as sum insured

Actual Claim Premium Claim/market premiumvalue ratio

1992 100,000 1,200 1,500 0.801993 85,000 1,320 1,275 1.041994 70,000 1,452 1,050 1.381995 55,000 1,597 825 1.941996 40,000 1,757 600 2.931997 25,000 1,933 375 5.15

All amounts in USD

When using the new replacement value, the claimover premium ratio remains constant, whereas if thepremium calculation is based on the actual marketvalue, a huge discrepancy arises with a rapid declinein the premium received and an increase in repaircosts (materials and wages) due to inflation. Repaircosts normally rise faster than the cost of newmachinery as they are not balanced out by a growthin productivity.

The actual market value of a machine is notidentical with the value in the insured contractor’sbooks as adjusted for depreciation, but is defined asthe “market value of a machine of equal conditionson the second-hand market”. Suppliers of both newand second-hand machinery are usually reliablesources of actual market values, though it may bedifficult to establish the market value in the case ofspecial machines. Nevertheless, the new replacementvalue should be taken as the sum insured. If a majorloss occurs, a “fair” actual market value must beestablished as the highest amount of compensationpayable.

4.5 Excess

An excess must be stipulated for CPE policies aswell. This should be based on local repair costs andinsurance market practice. An adequate excessexcludes the numerous small claims which causerelatively high claims handling costs. Furthermore,the excess improves the moral risk by giving theinsured a vested interest in avoiding claims.

A minimum excess is usually stipulated for eachclass of machine and a percentage is definedapplicable to all machines (for example 20 % ofeach claim). This means that for every claim, theinsured pays a 20% share – and at the very least a“minimum excess” of USD 2,500 (example). Anupper limit can be set on the percentage excess too(eg: the insured bears 20% of each loss, with aminimum of USD 2,500 and a maximum of USD 50,000). The maximum excess – in ourexample USD 50,000 – should be fixed with a viewto the insured plant’s loss potential and the insured’sfinancial strength. The prospect of paying the 20%excess on a million-dollar loss, a sum which wouldplace a heavy burden on the insured contractor, is almost certain to increase his willingness toundertake preventative measures.

A higher excess also has a positive effect on theinsurance premium, ie it falls. There are, however,cases involving unusual dangers or risks where anincrease in the excess is necessary in order to make afleet of plant and vehicles insurable at all. Inaddition, the excess must be adjusted to account forinflation.

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Figure 3Various excess options. An increased excess increasesthe insured’s interest in lossprevention and eliminatesmuch of the effort involved in claims analysis and claimssettlement. In turn the insu-red’s premium is reduced.

is based on the exactcomposition of the plant orequipment to be insured inorder to exclude small claims.Where loss experiencerequires the minimum excessto be raised in order to makeplant and equipment insurableat all, the premium is not thenreduced.

should be set with a view tothe insured’s financialstrength. This is usually higherthan the minimum excess.

if not otherwise required (ie no submission of manysmall claims or unusualhazards), entitles the insuredto a reduced premium.

is a percentage of each claimsubmitted, and entitles theinsured to a reduced premium.If the excess calculated in thismanner is smaller than theminimum excess, theminimum excess is applicable.

Minimum excess An appropriate excess

An increased excess Proportional excess

5 Risk assessment and selection

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Medium-sized contracting firms clearly representthe most attractive risks:• They are usually badly affected by major losses

and therefore more likely to take appropriatepreventative measures.

• It is relatively easy to monitor the use andmaintenance of the equipment.

• Machine operators are often well-trainedmechanics.

Contractors who train their own machinists areattractive clients. There is a major Europeancompany whose track record is exemplary. Thiscompany, by means of qualified machinists andfirst-class organisation, has achieved a rate ofavailability as well as an average equipment servicelife which is unprecedented. The individual driverbrings the equipment to the workshop and carriesout all maintenance himself. He receives a bonusfor the extended life and availability of theequipment and he works – depending on the siteand conditions – for performance-related pay or fora fixed hourly wage.

Selective insuranceIf a contractor only wishes to insure several items of equipment in his inventory, it can reasonably beassumed that these are most often used for hazard-ous work. We advise against such anti-selectiveinsurance since this renders it impossible to achievea balanced portfolio.

Rental machinesRental and leasing agreements need to be closelyexamined. Maintenance costs should not becombined with repair costs as it is quite easy –where well-organised planning and checks are madeby the leasing company – to carry out maintenancework at the same time as repairs. If the policy isconcluded in the name of a leasing company, it isimperative for the insurer to carry out regularchecks. It is easier to monitor risks if the leaseholderconcludes the policy himself.

5.1 Risk selection

Profitable business can only be concluded when theinsurer is able to correctly assess contractors, theirlevel of organisation, regional risk factors (such asmountain ranges), the nature and condition of theplant and equipment and the conditions underwhich it is used.

Experience shows that large contracting firmsnormally represent good acquisition targets for theinsurer, even though they may not necessarily offer“good” risks, since the range and amount of theirplant and equipment often exceeds the point whereclose supervision of drivers and maintenance ispossible. The workforce’s performance-related payscheme often leads to carelessness in their handlingof the equipment and excessive speed sometimesresults in serious accidents.

Well-organised companies are often difficult toacquire as clients. They know the repair costs oftheir insurance claims and are in a position tocompare these to the costs of the insurance offeredto them. Furthermore, they often do not acknowl-edge that their plant and equipment might fallvictim to major losses (fire, falls, collision etc).

Important arguments in such cases are that with ahigher excess – which makes sense in the case of alarge fleet of plant and equipment – the premiumcan be reduced considerably and, as mentionedpreviously, can be deducted from the contractor’stax on profit.

For smaller contractors, good and bad risks more orless balance each other out. Some contractors areextremely careful with their equipment whilstothers only put their equipment in for maintenancewhen it malfunctions. The assumption that this ismore economical is false, indicating a blinkered andshort-term attitude.

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5.2 Special checks for major risks

The following are regarded as major risks:• mobile cranes• plant and equipment used underground• excavators or cranes mounted on pontoons or

floating platforms• earthmoving equipment used in mountainous

terrain.

Though human error remains the main cause ofaccidents, many losses are due to internal mechan-ical breakdown involving, for example, the steer-ing mechanism or brake system. In such cases theindemnification and the paperwork regarding theloss must be checked to exclude repair costs relatedto internal mechanical breakdown which are notcovered by the CPE policy.

Particular attention should be given to companiescontractually bound to leaving their plant andequipment behind for a nominal sum after com-pleting a project, such as completion of a damconstruction project abroad. In such cases there isoften little incentive to enforce protective measuresand little effort is made to repair or maintainequipment in view of its limited remaining use.

5.2.1 Mobile cranes

Over recent years mobile cranes have increasedconsiderably in size and become both more efficientand stronger. They are, however, highly prone toovertoppling and the claims arising are correspond-ingly high. The danger of major losses should betaken into account by the insurer and include theappropriate reinsurance.

The main reasons for overtoppling have to do withthe different sites where these cranes are used andthe varying soil conditions. Mobile cranes usespecial lateral supports to provide stability. The soilunderneath, however, is often unstable or too soft.Even when used to lift medium-sized weights it isno longer the crane’s ability to bear the load whichis important, but the stability of the soil beneaththe outer supports.

Very large mobile cranes need to be assembled anddisassembled at every site (unless they are telescopiccranes) – another reason for the greater losspotential.

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5.2.2 Machines used in underground work

An assessment of the soil geology is a prerequisitefor insuring tunnelling machines. The followingclause might offer a certain guarantee against acontractor’s disregard for the geological risk:

“Damage due to collapse of a tunnel or shaft iscovered provided the machine can be salvaged fromthe underground site and brought to a repair shop.The costs of salvage, removal of debris and fallenmaterial will only be indemnified if specificallyinsured for a specified amount.”

The premium rates for machines used undergroundare twice as high as for the average risks for thosemachines used above ground. Nevertheless the lossfrequency is generally high. The main dangers arethe collapse of tunnels or cave ceilings, rockfalls andflooding.

5.2.3 Land-based drilling rigs

The standard CPE policy wording needs to beextended with specific clauses to limit cover andtherefore keep any claims that occur withinmanageable limits. Losses affecting machinerycaused by blowouts are, however, normally coveredby a special clause.

Only experienced contractors should be regarded asclients worthy of interest for the insurer. It isimportant that they provide information on theirprevious loss experience. In the absence of com-prehensive information insurers would do well toavoid taking on such risks – either from com-petitors or directly from a contracting company.

5.2.4 Floating equipment

Purely “aquatic” equipment such as pontoons, ships,floating work platforms etc, is not covered underCPE policies but under marine or transport insur-ance policies. By contrast, contractors’ equipmentsuch as excavators can be insured for use afloat bymeans of special clauses.

These special clauses stipulate that claims due towater, machinery running aground or beingsubmerged, are only covered if the insured equip-ment can be salvaged and that salvage costs willonly be paid if they have already been explicitlyinsured for a certain amount. The cover onlyapplies to places where work is carried out. Coverfor plant and equipment in marine transit comesunder marine insurance.

5.2.5 Agricultural equipment

Agricultural equipment is often subject to small andmedium claims, the main reason being insufficientmaintenance, particularly neglected brake andsteering systems. The consequences of this are thatthe machines crash or topple over. There is anabove-average risk of fire as machines are frequentlytreated with grease or lubricant oil and kept inwooden sheds.

5.2.6 Camps, hutments, storage facilities

Fire losses occur frequently in this area. In addition,attention should be paid to the danger of stormsand flooding. The insurer is obliged to insist on fire

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safety measures and the enforcement of a no-smoking rule. Although fire constitutes the mainrisk, only the actual value and not the new replace-ment value should be guaranteed. Insurers must not dispense with the need for an excess in the caseof fire risks, even though no excess is agreed in fire policies in many markets.

5.3 Rating

Swiss Re provides its treaty partners with specialCPE rating guides. The following procedure mustbe followed for setting the correct rating:• Check questionnaire and list of plant items

submitted by the contractor to verify that alldetails are correct. If information is incompleteand a provisional quote is requested, premiumoffers must be clearly designated as non-binding.

• Every insured item in a class of equipmentshould be clearly allocated to a rating group sothat the appropriate basic premium rate and theminimum excess can be ascertained.

• The premium rate is reduced for each item ofequipment in accordance with the upper limit ofthe absolute excess and the size of the percentageexcess per loss.

• The premium rates should be adjusted to reflectwhether the insured items are used on varioussites or on only one fixed site with regard to thefollowing factors:

a) use on various sites (throughout the country)• possible short-term insurance• periods where machines are idle• large plant inventories• regional or national repair facilities• contractor’s loss history.

b) use on fixed sites (all year round)• possible short-term insurance• periods where machines are idle• large plant inventories• topography (important for mines and quarries)• natural perils• repair facilities• plant utilisation• contractor’s loss history.

The base premium rate for equipment used on fixed sites amounts to 80% of that for plant usedon varying sites. For every item (or group of similar items) the insurance sum is multiplied by the appropriate premium rate.

The total premium amount comprises the total ofthe individual premiums.

The procedure for calculating the premium isrepeated for every excess variation. In this way theparticularities of the plant and equipment fleet canbe taken into account.

The premium always applies for a period of 12 months unless an agreement to the contrary has been made. Policies with two or three-yearterms carry the same premiums as one-year terms (no reduction).

Short-term insurance cover may be provided. Suchpolicies are, calculated in absolute terms, somewhatcheaper than annual policies but are more expensivecompared to the actual length of cover. This isunderstandable considering the insurer has littleinterest in only insuring items when they are in useand hence particularly exposed to risk. At the sametime the administration involved in processing ahalf-year policy is, for example, just as high as for a full year policy.

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5.5 Annual covers – the pillar of CPE business

CPE business can be profitable if:• the rules of healthy technical underwriting are

adhered to;• a qualified team of technical inspectors is

available;• premium rate and excess per loss event are based

on long-term experience.

For the insurer, annual policies offer advantagescompared to project-specific CPE endorsementsincluded in a CAR policy:• premium rates and conditions can be adjusted

annually, whereas CAR policies are generally fixedfor two to five years;

• with the appropriate acquisition strategy and thesupport of a reliable technical service team, it ispossible to achieve a large and balanced businessvolume;

• anti-selection can be better avoided, as insurersoften only purchase restricted cover of plant andequipment on building sites where the risk-exposure is high;

• the portfolio is easier to manage.

5.6 Inspections by the insurer

The insurer can only set the definite premium rateafter a detailed inspection has been carried out.During this inspection a comprehensive list of allitems to be insured is compiled. In some countriesit is the insurer – not the insured – who is respon-sible for ensuring that the list is correct. The in-sured is nonetheless obliged to provide all requiredinformation. The list should show which equipmentis insured and at which new replacement value. Inaddition to providing an assessment of the con-dition of the equipment, the insurer’s technical ex-pert evaluates the quality of maintenance and thetechnical expertise of the contractor’s ownpersonnel.

The factors applied when calculating short-terminsurance premiums also apply where:• a short-term insurance is to be extended

(eg from 7 to 9 months);• a policy is cancelled before the end of year;• the insured applies to have the cover partially

cancelled for a limited period. This may, forexample, be desired where contractors’ equip-ment is in storage rather than at the work site. In this case cover is provided against the risk of fire and natural perils at the storage site with a low premium.

In order to keep administration costs to minimum,partial cover cancellation for a limited period isonly allowed where the machines are idle for at least90 days of the year, in periods of at least 30 days.Individual periods of idleness must be reported tothe insurer before they commence.

If, by contrast, the insurance should be extended bythree months in excess of one year, the additionalpremium is calculated proportional to the basepremium.

5.4 Provisional cover and quotation

Provisional cover and rates may be offered beforethe risk has been inspected. However, the insuredmust agree to accept any later modifications whichthe inspection deems necessary.

Such provisional cover may be granted for amaximum of 30 days; thereafter it may be cancelledby either the insured or the insurer. The premiumshould be paid before the date of cancellation.

The inventory list and the qualitative factors shouldbe examined by the inspector once a year and anynecessary adjustments made to the policy. Inaddition, an investigation of each claim must becarried out, which in turn provides the insurer withthe opportunity to acquire additional informationon the insured and the quality of the insuredinventory. If the insurer evaluates this informationcarefully and introduces the appropriate measures,he will generally be able to prevent the entire policyportfolio from becoming a loss-maker.

Careful evaluation of this information and theintroduction of appropriate preventative measureshelp increase the profitability of the whole port-folio. Experienced insurance engineers are in aposition to uncover enormous opportunities for costsaving.

The following list enumerates the main pointswhich should be checked during an inspection visit:

Condition of the machinery and equipmentAre vehicles roadworthy? Are their tyres in goodcondition? Are they fitted with rear-view mirrors?Do the brakes, steering and lights work properly?Are there any oil leaks? How many hours per dayare the machines in use? Are they used at night? Is there any evidence of the machines having beenused for purposes other than those they wereintended for?

Reliability of drivers and operatorsAre they well trained for the type of vehicle they areoperating? Do they have specific training as me-chanics, fitter or suchlike? Are normal work and restperiods adhered to? Are shift records including arecord of accidents kept?

Standard of maintenanceAre there regional service and repair facilities? Areimportant spare parts stocked? Are service intervalsadhered to? Is a service record kept? Are the work-shop managers qualified?

Regular inspections by the insurer keep him in-formed and provide him with a general overview ofthe plant and equipment insured. This gives him acertain opportunity to intervene in the plant man-agement and exert a certain moral pressure byindicating ways in which maintenance and trainingmight be improved. At the same time the inspec-tions help in loss prevention.

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The basic premise of claims settlement is thateverything which might be repaired should be, andnot replaced. The costs of repair may not, however,exceed the machine’s actual market value.

Attention here should be given to two importantaspects:• every claim should be investigated and the repair

discussed;• the claims payment should be based on verifiable

reports of work undertaken and materials used.

6.1 Claims investigation as a reliable source

of information

The claim must be investigated immediatelyfollowing its occurrence. Only then is it possible toidentify the actual reasons for the accident.Investigation carried out by a claims investigatorwith a good knowledge of the use and repair ofcontractors’ equipment enables the correct level ofcompensation to be determined and increases theinsurer’s loss experience.

The investigation must provide evidence that theclaims arose from an insured accident (collision,flooding, fire etc). It may be necessary to questionwitnesses and to piece together a jigsaw puzzle ofinformation if the situation first appears unclear.Cases where internal mechanical breakdown (eg brakes or steering system) resulted in externaldamage such as collision, crashes, falls or fires, deserve special attention.

6.2 Loss settlement in accordance with

general principles

The loss report provides the basis for the indemni-fication. Ideally the inspector will additionallyprovide a confidential report on the way in whichthe settlement should be dealt with.

The internal claims service must be able to answerthe following questions: 1. Was the policy still in force and the premium

paid at the time of the loss?2. Was the damaged plant on the inventory list and

is its new replacement value contained in thesum insured?

3. Is the loss covered?4. Was the loss reported correctly? (Important for

prompt inspection and assessment of the claim)

If all questions are answered positively the claim canbe settled without difficulty (see Figure 4).

6 Claims settlement

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In accordance with general principles the followingare indemnified:• repair costs needed to restore the equipment to

the same level of operability as prior to the claim.The upper limit is, however, the actual value if the damage can be repaired.

• In the case of a total loss, the actual value imme-diately prior to the loss.

The actual market value should be equivalent tothat of a used machine of the same age andcondition, and this is determined according topractical considerations and not an average rate ofdepreciation. The insurer should not forget todeduct the excess.

Damage should be repaired whenever possible. New replacements – even of individual parts – isnot permissible where perfect repair is cheaper.“Cosmetic” damage which has no effect on theplant’s operation is no basis for demanding thereplacement of damaged parts.

The insurer will only undertake provisional repairswhen the machine is needed urgently. Cover may,however, be withdrawn until the machine hasundergone a final and thorough repair if theprovisional repair work might constitute anadditional risk. Moreover, the costs for provisionalrepairs will only be indemnified to the extent thatthey constitute a part of the final inevitable repair.Improvements or alterations, as well as normalmaintenance of the plant undertaken as a welcomeadditional “perk” of any repair work, are notindemnified.

6.3 Underinsurance – problems for insurers

and insured

Sometimes during the loss settlement it becomesevident that the sums insured no longer correspondto the new replacement value; in other words theequipment is underinsured.

In such cases, the amount recoverable by theinsured is reduced by the proportion by which thesum insured was too low. The excess is deductedafter adjustment of the loss amount for under-insurance.

Underinsurance, which can be not only costly forthe client, but also result in too little premium forthe insurer, can be avoided by annual checks.

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Figure 4Claims handlingprocedures

yes

no

Contractor

Loss event

Claims advice

Claims register

Claims registerClaims advice

Claims settlement

Is loss covered?

Indemnification

Refusal

Cash claimspayment

Acknowledgementof receipt

Internal checks:• Is policy valid?• Is premium paid?• Is damaged item

insured?• Is loss event

covered?• Was claim sub-

mitted within time limit?

Loss survey• Cause of loss?• Extent of loss?• Loss-preventionor mitigationmeasures?

Statistics:• causes • items • branch

Statistics:• causes • items • branch

Loss adjustmentsupport or adviceaccording toreinsurance treaty

Insurer Reinsurer

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7.2 Tower crane collapses

During the construction of a highway bridge, atower crane was mounted on tracks on a 4.4%gradient. The track ends were secured by buffers. To compensate for the incline the crane waspropped up with steel plates.

Until the time of the accident the crane had beensecured to the tracks with clamps. In order toundertake some concreting work the crane had tobe moved downhill by about half a metre. Thisrequired that the securing clamps be removed. A securing device to hold back the crane on thesloping tracks was not considered necessary.Although the motors were only switched on verybriefly to move the crane downwards it becameunbrakable, slid further down the tracks until itreached the buffers, forcing these aside, and aftercollapsing and crashing onto the bridge, wascompletely destroyed.

The crane had to be written off as a total loss. Itsnew replacement value was USD 360,000, its actualmarket value at the time of the crash was still USD 210,000.

This loss would have been easily avoided by attach-ing a steel cable to the undercarriage of the crane to prevent uncontrolled movement.

7 Loss examples

7.1 Faulty erection

Example 1: On a construction site, a technician was supervisingthe assembly of a revolving tower crane. The out-rigger and the counterweight were already in positionand provisionally secured when a strut in the mainsupporting column unexpectedly cracked and theentire upper structure collapsed due to the suddenimbalance. Investigations into the cause of the ac-cident revealed that the sequence of operations wasnot in line with the manufacturer’s prescribed as-sembly procedure. This loss fell within the scope ofthe CPE policy cover. The indemnity for the almostnew crane amounted to USD 100,000, whereas thetotal value of the fully assembled crane was USD 120,000.

Example 2: In another incident a crane was to be erected by twospecialists working on behalf of the crane manufac-turer. The outrigger counterweight was to be raisedto a height of approximately 25 metres and fixed toan iron angle plate with screws. Altogether the coun-terweight’s load, made up of a number of concreteblocks, amounted to some 8.5 tons. Part of thecounterweight was already in position when theupper half of the steel construction suddenly buck-led and a section fell to the ground pulling thecounterweight and the two technicians with it. Oneof them was killed and the other seriously injured.The loss investigation revealed the accident to bedue to faulty material in the iron angle plate. Thematerial damage amounted to USD 125,000 com-pared to a total value of the crane of USD 170,000.

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7.3 Bulldozer taken by joy-rider

A bulldozer was kept in a fenced area near aconstruction site located some distance outside atown.

A joy-rider gained access to the machine, started theengine and drove it away over hilly terrain. Clearlyinexperienced in driving such a machine, theoperator suddenly lost control and drove thebulldozer over the edge of the road into a gully. Themachine was completely destroyed. The CPE policycovers theft and the owner subsequently receivedUSD 120,000 (following deduction of the excess,and based on the actual value of the machine).

7.4 Broken axle leads to collision

The following claims incident is typical of claimsinvolving accidents caused by internal mechanicalbreakdown. A loader, which was perfectly operableuntil the time of the accident, collided with the wall of a building for no apparent reason and wasseverely damaged.

According to the driver the machine had suddenlybecome unstearable, the reason being a broken rearaxle bearing – as was later revealed by the accidentinvestigation. The CPE policy does not coverinternal mechanical failure – in this case a bearingin the rear axle and the differential – but anindemnity of USD 12,000 was paid for the collisiondamage.

7.5 Track dozer crushed

A track dozer was being used in rough terrain toprepare the ground for a motorway access road.Several large boulders loosened during earlierclearance work using explosives above the site wherethe dozer was being used, fell from a height of some30 metres in the dozer’s direction. The driver wasable to prevent more serious consequences byputting the vehicle into reverse and jumping fromthe cabin.

The dozer was insured with an annual policycovering the contractor’s entire plant in a specificcountry. Almost all parts of the vehicle, a mere twomonths old, were damaged. The USD 380,000indemnity was therefore not far from the machine’scurrent market value of USD 480,000.

7.6 Gravel-cleaning machine derailed

A special gravel-cleaning machine was being pulledto the worksite by a diesel locomotive on a narrowgauge track. The cleaning machine weighed about60 tons and was some 25 m in length. Its maximumallowed speed specified by the designer was 60 km/h. The total new replacement value of thisspecial train was USD 3,500,000.

During use, moving at a speed of about 37 km perhour, the machine’s rear undercarriage suddenlyderailed. Unfortunately the train operator did notnotice anything wrong at first. After a further 25metres with the rear carriage derailed, the machineoverturned and fell down an embankment. Luckilythe locomotive stayed on the tracks.

Three large mobile cranes had to be brought in tosalvage the machine – accounting for 30% of theUSD 400,000 loss amount. This did not includethe cost of the uninsured tracks. The cause of theaccident was found to be a faulty chassis construc-tion, there having been insufficient suspension to compensate for the effect of vibration at certainspeeds.

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8 Future trends

Some insurers, owing to lack of experience, forexample, set the premium rates based on excessivelylow sums insured corresponding only to the actualmarket value.

Occasionally it has been observed that the value ofthe plant on a large construction site is simply addedto the total site value. With the premium rate validfor the entire construction period, only a fraction ofthe premium required was subsequently paid. Plantinsurance has also made losses everywhere whereinsurance companies were unable to send their ownexperienced engineers, where the plant and equip-ment were insured against (internal) mechanicalbreakdown, and not only losses resulting fromexternal perils. In this case the insurer not onlyfinanced a share of the inflated repair costs but alsoa good share of the normal maintenance costs.

All of these considerations and experiences lead tothe conclusion that CPE insurance can be profitable,but only for those insurance companies withsufficient know-how and who continually monitorthe policy portfolio. This requires engineers with abroad experience in this area.

The building industry has grown considerably over the last decades. This has led to a tremendousincrease in the amount of contractors’ plant andmachinery in use. There are nowadays newer andmore efficient machinery, able to meet greatertechnical requirements and operate under difficultsite conditions. The market for CPE insurance hasincreased correspondingly.

With this expanding market the indiscriminateinsurance underwriter may feel tempted to quicklyacquire a sizeable insurance portfolio. Caution isadvised, however. CPE insurance is a minefield forthe inexperienced and only profitable for insurershaving an above-average range of experience and agreat deal of know-how. Many insurance companieshave withdrawn from CPE underwriting followingpainful experiences. Heavy losses were incurred withcover conditions and premium rates ill-suited to thespecial features involved in the use of contractors’plant and machinery.

If the insurer is nonetheless determined to seriouslytackle this special market, with the help of exper-ienced engineers and the recommendations made, he will be successful.

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© 1998Swiss Reinsurance CompanyZurich

Title: Contractors’ Plant and Equipmentinsurance in international markets

Author: Hans Willi Fischer(Revision of the 1986 publicationof the same title by the sameauthor)

Editing and production:Group PM Engineering and Swiss Re Publishing

Translation by:Swiss Re Language Services

Graphic design: Markus Galizinski, Zurich

Photo credits: F. Carrascosa + M. Frei, ZurichCaterpillar, Geneva Liebherr, BiberachWalo Bertschinger, ZurichSwiss Re Zurich Swiss Re Brazil Swiss Re France

Additional copies of this brochure,as well as an overview of SwissRe’s other publications (Swiss RePublishing – our expertise for yourbenefit) can be ordered from:Swiss Reinsurance CompanyMythenquai 50/60P. O. BoxCH-8022 Zurich

E-mail publications@swissre.comInternet www.swissre.com

(11/98, 2000e)