A while back we had a client who experienced something that we in the industry call a “Constructive Total Loss.” For him, it was a very painful experience, one that I think we can all learn from.
What is a “Constructive Total Loss?” A CTL is a loss where the item insured is not totally destroyed, but is so severely damaged that the insurance company considers it uneconomical to repair. A CTL in and of itself is not particularly painful, but if you happen to have undervalued your equipment, purchased a stated amount physical damage policy (which the majority of policies are) and been involved in an accident that damages your equipment at 50% or more of the amount stated on the policy, you may feel you got burned.
Here’s what happened to our client:
Tom purchased a “lead” and a “pup” flatbed trailer to be pulled as doubles. The “lead” was purchased for $40,000 and the “pup” for $45,000. Tom figured he could repair almost anything that could happen to these trailers if they were involved in an accident, so he decided to insure them on a stated amount policy for $15,000 each. His assumption was that this would reduce his physical damage premium and that in the event of a claim, if the insurance company paid him $15,000 for each of them, he would be able to use that money to repair any damage that might occur.
On a snowy, icy day Tom lost control and rolled his rig. The result was $12,000 in damage to the “lead” trailer (80% of the value he insured for) and $9,500 to the “pup” (63% of the value insured for.) Tom thought everything was going to be ok, until the Claims Adjuster called him and told him that he was going to “total-out” the two trailers and would be sending Tom a check for $30,000 and, per the policy conditions, the insurance company would be taking possession of the totaled vehicles. Tom quickly realized that while he had $30,000 in his pocket, he had nothing to repair and an additional $55,000 in outstanding loans for the equipment!
There are two important lessons that Tom learned. The first is that there is no savings in underinsuring your equipment. To have insured these trailers up to their full value would have likely cost less than and additional $1,500 a year (much less than the ultimate hit of $55,000.) Additionally, Gap Coverage (which I discussed in last month’s posting) is a coverage that can be vital to protecting yourself financially from unforeseen catastrophic losses.
What would happen in the event of a loss that did a significant amount of damage to your equipment? Would you be content with your settlement in the event of a CTL or is it time to make some revisions? Give us a call today and we can discuss with you the best methods to insure yourself so you don’t get burned by a Constructive Total Loss.
Until next month,
Jeffery A. Moss