Risks and Benefits of Sharing Construction Equipment

by Bradford C. Weber, Esq. and AJ Upton, Risk Management Consultant for Oswald Companies

The built industry's sharing economy

A robust sharing economy saves time and money, improves the environment and preserves other resources. Uber and Airbnb let you borrow a car or a house. Why buy a car or a condo when Uber and Airbnb share these expensive items?

That logic applies to construction too.   Commonly, tools and other equipment lie idle, a classic form of waste. Further waste occurs when purchasing and maintaining an array of rarely used items.

More and more companies that don't need tools and equipment on a regular basis are foregoing investing in such tools and equipment. Sharing tools, equipment, skills and resources reduces waste and inefficiency in the built industry.

Collaborative Delivery Models

Design-Build, CM-at-Risk and Integrated Project Delivery (IPD) represent a level of collaboration similar to that found in the sharing economy. Under these novel delivery models general contractors, trades and suppliers share specialized production knowledge with owners and designers while designers share specialized design knowledge with contractors and owners. Sharing knowledge traditionally left untapped and unshared at the bottom of silos, the industry increases the efficiency with which it delivers all services. This is a big step towards a sharing economy by an industry characterized by silos for far too long. Sharing tools and equipment in these collaborative environments makes a lot of sense.

Risks of Sharing

Equipment you share runs the risk of being stolen, burned, wrecked or otherwise damaged. Contractors' direct losses due to damaged equipment exceed $1 billion annually. The loss of a single piece of equipment can wreck a project's timeline and impair productivity. Also, employees using equipment that they are unfamiliar with could present other risks. Injury and damage to projects because of lack of training or expertise should be considered.

Common Causes of Loss

Losses include things like theft or vandalism of equipment on the jobsite, damage to equipment in transit to or from a jobsite, loss of equipment due to fire or tornado while in storage, equipment overturn, incorrect maintenance or upkeep. Employees can cause losses to equipment due to inattention, lack oversight, poor training, or abuse of drugs and alcohol. The vast majority of the damage to equipment occurs as a result of insurable events.

Controlling Loses

Accordingly, the first and best step for protecting equipment is proper insurance. In addition, training personnel, inspecting equipment and properly securing equipment reduces the risk of these events occurring. Educating employees regarding the controllable aspects of equipment loss minimizes risks of loss and insurance protects against uncontrolled risks. By making sure the company that owns the equipment adequately trains the borrowing company's employees on how to use the equipment will greatly reduce the risk of loss. Documentation of this training should be obtained as well.

Covered Equipment

Covered equipment, from an insurance perspective, should include items owned, leased, rented, borrowed, or loaned. Equipment on site, in storage or in transit must also qualify.  A wide range of equipment flows on and off a construction site and it all must be insured. Once all equipment is accounted for, depending on the insurance carrier, equipment that is 3, 5, 7, or 10 years old may be replaced at full replacement cost. Anything older will be replaced at actual cash value. Paying close attention to these limits and how the policy will respond in the event of a loss is key.  

Borrowed Equipment Coverage Gaps

Contractors Equipment Coverage is designed to fill the gaps between Commercial Property and Business Auto policies. A piece of equipment that stays at the insureds designated location and does not leave, can be included in the Business Personal Property section of a Property policy. Business Auto policies typically exclude "mobile equipment." Contractor's Equipment Coverage will cover equipment while it is in transit to and from a jobsite and while at the jobsite.

General Liability for Borrowed Equipment

Also, the owner of the equipment may lack coverage under his own contractor's equipment policy due to rental / loan exclusions.

An Inland Marine Policy is where Contractor's Equipment Coverage is found. A borrower of equipment, by endorsing the policy, can cover any damage to the equipment borrowed. The limit should be set to cover the highest valued item one might borrow. If there is an instance when a higher valued piece of equipment is needed, the insurance limit can be increased during the time the equipment is in their possession. As for the company lending equipment, some carriers will exclude damage to equipment lent to others. This can typically be endorsed on to the lenders policy. Also, for the lender, make sure coverage on your behalf is in place and verify that the borrower has coverage. If there is coverage in place, verify that the limit is will adequately replace the piece of equipment being borrowed.

Operator Liability: You can also assume liability for the actions of others. In some instances, an equipment operator will come with a piece of equipment. This is typically called the "loaned servant" or "borrowed servant" doctrine, and varies among states.  For example, a rented crane may include an operator, if the equipment is being used by you and if you are directing the activity, you may become legally responsible for that operator's actions.  

To share or not to share?

As contractors share more equipment, this question becomes more critical. The list below considerations regarding exposure and coverage gaps:

Length of time equipment is needed?

Terms of the agreement?

Who bears the risk of damage?

Does equipment come with an operator?

Who, if anyone, reimburses the cost of rental coverage?

How the equipment is valued and what is are the limits?

In a dispute does "replacement cost" or "actual cash value" control?

Who must be listed as an additional insured?

Is waiver of subrogation required?

Is evidence of auto coverage required?

What about workers' compensation?

So, what should you do?

The best course of action is to consult counsel and your insurance agency for guidance in these matters.