Replacement Cost vs. Actual Cost for Equipment

Construction equipment is expensive! As a former general contractor, I chose to purchase some equipment, but I also rented some. I would purchase my skid-steer loaders and attachments because of how often they were used and the benefits of having them around the shop. Other equipment, such as lifts or all-terrain forklifts, were rented as projects called for them. 

When a contractor is pondering the decision to purchase, there are several things to consider:

• Is it the right equipment and technology?
• Should the equipment be new or used? 
• Are the reviews favorable? 
• How will the equipment be transported to and from job sites?
• Will it make the company money?
• Will it help projects run smother?
• What are the tax advantages?
• How long will it take to recoup the investment? 

If you decide to purchase equipment, it is important to have the proper insurance coverage. You don't want to wait until you have a claim to find out what coverage you have—or don't have.

Insurance coverage for contractor's equipment can be based on replacement cost or actual cash value. Replacement cost coverage typically pays the cost to repair or replace the item up to the value listed, whereas actual cash value coverage pays only the depreciated value. An item's market value, which is based on age and usage, can give you a ballpark idea of its actual cash value.

Make a list of equipment and high-value tools (scheduled equipment), including the year, make, model, and serial number. Discuss with your agent how to cover each of these items. Consider what you would do in the event of a loss. Would you replace the item? Would you be looking to obtain something of similar quality?

From this determination, consider the value in dollars. For items you plan to replace, utilize a value of what it would cost new (e.g., it would cost $150,000 to replace my 2-year-old backhoe). For items that are older or well worn, consider actual cash value. For actual cash value, utilize a value of what it would cost to purchase the item in its current condition.

Contractors need to understand if their insurance policy provides coverage for general tools (unscheduled equipment). This is blanket coverage for less expensive power and hand tools, such as saws, drills, toolboxes, tool pouches, levels, and safety equipment. These tools are not listed separately, but it is important to clarify the value. Be sure to include the value of tools in construction trailers, trucks, and gang boxes to ensure you have adequate coverage.

Tools and equipment are vital for the livelihood of a contractor, so it is important to make sure your items are properly covered. Clear communication with an insurance agent can help ensure your items are covered so there aren't any surprises in the event of a claim. Don't wait until an item is stolen or destroyed in an accident to find out what coverage you have.