Equipment rental? Be aware of the insurance implications

If you have trucks and/or trailers sitting in the parking lot and would like them to generate some income to help pay the bills by leasing them to a third party company or independent owner-operator, it would be wise to get in touch first with your insurance agent. To clarify, I am not talking here about truck/fleet owners using lease-purchase agreements with drivers, rather equipment lease agreements with independent third parties or individuals who take responsibility for the safe operation of the equipment.

Take one of my clients for example. They have one truck, and when they started the business, they had one trailer. When this initial trailer suffered a mechanical problem, there was an unexpectedly long downtime waiting for the necessary repair parts. To minimize the loss of revenue, the customer elected to purchase a second trailer and remove the original trailer from the policy. A few months later this trailer finally got the repair it needed — the owner contacted me and wanted to put the repaired original trailer back on the shelf.

They informed me that they were leasing the trailer to a third party and wanted the trailer to be insured while in the third party’s possession.

Unfortunately, I was required to inform them that if they leased any equipment to a third party, the leased equipment would not be covered while it was in the “care, custody and control” of that third party. Also, all the insurance companies I have access to (10-plus) would not offer the coverage they were looking for. It is difficult to find insurance that provides coverage for our equipment while it is leased.

[Related: Confronting a cost crisis: ‘What do I do now to stay in business?’]

The best guidance I have ever received about insurance came from an underwriter. It is especially relevant if we want to insure equipment that we rent to a third party. He said: “Usually you can find insurance on anything if price is no object. So I’m not saying you can’t, I just don’t know where it would be.”

The bottom line is that if/when we find an insurance company that will offer us a quote on equipment we want to lease, it’s almost certain that the quote will be prohibitive for most truck owners and especially for independent owner-operators or small fleets .

Why? Equipment leased to a third party has a much higher claim rate. Both leased trucks and trailers have an increased potential to be damaged, stolen, abandoned or vandalized compared to equipment we drive ourselves or equipment we hire drivers to operate for us.

As a result of this reality, the insurance carriers I represent (representing the majority of insurance companies that insure owner-operators and small trucking companies in the United States) do not provide any coverage for equipment leased in this manner. Or, depending on the insurance company, they will only provide limited coverage. Specifically, coverage may only be available when the equipment we rent is currently not on lease and is in our “care, custody and control.”

The bottom line is that if you don’t have the correct insurance coverage while renting equipment from a third party and you file a claim for loss, that claim could be denied. The best way to illustrate this is by using a few hypothetical but realistic scenarios.

Lease for both scenarios: John Doe of John Doe Trucking has signed a 1-year lease with you for a 2022 dry trailer. Under the lease agreement, John Doe provides you with a certificate of insurance that provides proof of physical damage coverage up to $50,000 for a “non-owned trailer” that is in its “care, custody and control.”

Scenario one: With three months left in that one-year term, John Doe, without notice to you and without your knowledge, returns the trailer after hours. When you return to work the next business day, you will find the trailer. To your dismay, you see that the trailer is placed at the top. This means that the top of the trailer hit a bridge and sustained extensive damage. You contact John Doe and he denies returning the trailer damaged. You then contact the John Doe Certificate of Insurance insurance company and file a claim. The insurance adjuster for John Doe’s insurance policy notifies you that John Doe dropped coverage on the unowned trailer eight months ago. Since there is no coverage for an unowned trailer, your claim is denied.

[Related: Safeguard for trucking business’ certificate of insurance to avoid becoming an ID theft victim]

Second scenario: Six months after the lease expired, John Doe failed to make his lease payment. You try to contact John Doe, but his number is not in use, the notices you sent him via registered mail are bounced, and the emails to him are bounced back to you. You check the FMCSA and find that his company, John Doe Trucking, is “unauthorized.” You then contact the local police department and report the trailer as stolen and contact the insurance company about the John Doe certificate of insurance to file a claim. The insurance adjuster for the John Doe insurance policy is notifying you that the John Doe insurance was canceled two months ago. Because John Doe does not have a current insurance policy, your claim is denied.

After you have exhausted your attempts with John Doe’s insurance company to recover your losses in the scenarios above, you file a claim with your own insurance company. In the course of gathering information from your insurance adjuster and investigating the claim, the adjuster discovered that the equipment subject to the claim was/was leased to John Doe Trucking and was under the “care, custody and control” of that company at the time of the incident giving rise to the loss claim. Your commercial auto insurance policy (as most do) excludes coverage for any of your equipment that is rented out to a third party. Because the trailer is/was leased and under the “care, custody and control” of John Doe, the claim can be dismissed.

The moral of the story? If you already lease equipment and have not disclosed this to your insurance agent, I encourage you to contact them today. And be very careful who you do business with when leasing equipment.

If you have a specific insurance-related question for the author of this installment of Overdrive Extra, longtime independent owner-operator and insurance agent W. Joel Baker, leave a comment with any question below the story or contact Baker directly through his website.

Find more information related to the ins and outs of insurance, among countless other topics, at Overdrive/Co-produced by ATBS Business Partners for new and established owner-operators, a comprehensive guide to running a small transport business. Click here to download the newly updated 2022 edition of the Business Partner Guide for free.

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