Making sure your drivers have quality trucks to drive can be an expensive task. For many trucking companies, new equipment is being obtained via bank loan or it’s being leased from one of the many leasing companies available. In either scenario, there is a potential gap in physical damage coverage between what the lien holder or leasing company values the equipment, versus what the standard insurance policy will cover. This lease/loan gap in coverage can easily be addressed as long as business owners are reviewing contracts and notifying their insurance professionals of any loan or lease arrangements their company may have.
To understand the coverage gap that exists, we first need to cover the standard valuation method used in most physical damage insurance policies. This valuation method states the most an insurance carrier will pay in the event of a loss is the lesser/least of the ‘actual cash value’ of the damaged or stolen property, the cost of repairing or replacing the damaged or stolen property with other property of like kind or quality, the stated value for the damaged or stolen vehicle as indicated on an equipment schedule maintained with the insurance carrier, or the limit of insurance indicated on the physical damage policy. “Lesser” or “least of” are keywords used by physical damage insurers in their valuation methods. So let’s put together an example using the criteria below:
Trucking Company ABC has a physical damage insurance policy with Insurer XYZ
The policy has a per vehicle max limit of insurance of $150,000
The company has a leased truck (new) covered under the policy and documented on the schedule of insurance with the insurance carrier for $130,000 (what ABC deemed as appropriate)
Nine months after ABC leases the new truck, it’s totaled in an accident. Insurer XYZ uses the standard valuation language in determining how much ABC should be reimbursed for the loss. Since the truck is totaled, Insurer XYZ will most likely reimburse ABC based on the actual cash value of the equipment……this means they won’t be getting the $150K max per vehicle limit of insurance and they won’t be getting $130K either (due to ‘lesser’ or ‘least of’ wording). Insurer XYZ will likely obtain a few dealer quotes for the same type of truck and average them. They’ll then likely take the VIN and all the specs of the truck and use NADA (www.nada.com) to obtain a valuation on the truck. Using the average of the dealer quotes and valuation from NADA the insurer will then come up with a new average. Adding in sales tax/title costs will then result in the reimbursement/fair market value they deem appropriate.
So what does the scenario above have to do with lease/loan gap coverage? Let’s assume the lease contract valued the equipment at $140K new with $1,000 of monthly depreciation. This means that the contractual obligation to the leasing company at the time of loss was still $131,000. If the actual cash value of the vehicle as deemed by Insurer XYZ turned out to be $110,000, then there would be a $21,000 gap in coverage which ABC trucking company would be responsible for. To address this gap in coverage and contractual obligation to the leasing company or bank, a lease/loan gap endorsement should’ve been added to the physical damage policy. Such an endorsement is designed for scenarios in which the valuation provided by an insurance carrier for a loss may differ from the equipment value stipulated in the lease/loan contract.
The lease/loan gap endorsement may be configured in a few different ways depending on your company's needs and depending on what the insurance carrier can accommodate. For instance, some insurance companies may opt to add a lease gap endorsement to your policy that simply requires you to list the vehicle value according to the lease/loan obligation. In this scenario, the cost of the endorsement is the additional premium that would be paid due to the higher vehicle value(s) on the schedule maintained with the insurer. Another lease gap scenario may be the addition of the endorsement for an additional charge. The vehicle would still be listed on the schedule maintained with the insurance carrier for the actual cash value according to the insured; however, the endorsement would stipulate an additional amount of reimbursement available for vehicles under a lease/loan contract.
The financial benefit of a lease/loan gap endorsement, when such a loss occurs, outweighs the cost of the endorsement itself. Your insurance professional can help determine whether or not this exposure exists and what form of lease/loan gap endorsement will best meet your needs.