Insurance: Are You Really Covered? Part 3

This is the final installment of a series on buying insurance for fire apparatus and other emergency vehicles. The previous installments covered topics that included "totaling" a vehicle, depreciation, indemnification, and replacement cost value and actual cash value coverage. This column focuses on another type of coverage.

Several insurance companies that cater to fire-rescue organizations have tried to find better ways to insure apparatus. These companies have revised policy wording for replacement cost value insurance to eliminate some of the problems encountered with replacement cost value insurance. This new type of coverage is called "agreed value," "agreed amount," "stated value" or something else.

With agreed value coverage, the policy will list each vehicle and show a "value" or "limit" that applies to it. Your insurance agent should meet with you at least once a year and ask whether you want to increase or decrease the amount of insurance on any vehicle.

Before you can intelligently answer the question, "Does your department want to increase or decrease the coverage on a vehicle?" you need to understand how agreed value coverage works. Last month's column defined replacement cost value as the lesser of:

1. The cost to repair the damaged vehicle; or
2. The cost to replace the damaged vehicle with another vehicle of like kind and quality; or
3. The amount actually spent to repair or replace the damaged vehicle.

Agreed value coverage is much the same, except parts 2 and 3 are changed to say:

1. The cost to replace the damaged vehicle with a new vehicle of like kind and quality; or
2. The agreed value (the amount) shown on the policy declarations.

These changes seem simple, but they have a profound effect on how a claim is settled. For example, let's say your department bought a new Class A pumper in 1985 for $300,000 and its 1999 replacement cost is $400,000. If you wreck this vehicle and have replacement cost value insurance, the insurance company could spend $300,000 or $350,000 repairing it just to save itself from spending $400,000 on a new apparatus. The repairs could take months! (This kind of scenario acted as a catalyst for this series.)

With agreed value coverage, you have the option of selecting a more reasonable value. If you listed this vehicle on your policy for $200,000, then as soon as the insurance company determines repairs will cost more than $200,000, the negotiations are finished. The insurance company owes you $200,000. Why? Because it must pay you the LESSER of parts 1, 2 or 3. We already know that parts 1 and 2 are both more than $200,000, so the company owes you under part 3!

With agreed value coverage, your department and the insurance adjuster can probably figure out within days of the crash whether repairs would cost more than the agreed value on the policy. If yes, the adjuster can agree to pay the claim right away for the full agreed value. Then you can start shopping for a new or used apparatus - or you can just take the money and not do anything with it. There are no strings requiring you to actually replace the damaged pumper. Part of the deal, of course, is that the insurance company takes title to the wreck and can sell it to recoup part of its payment.

When deciding what agreed value to assign to each vehicle, you have to think about what your department would do if the vehicle were to be severely damaged in a wreck.

Let's say your department has three engines. Engine 1 is a 1973 model that cost $200,000 new, Engine 2 is a 1985 model that cost $300,000 new and Engine 3 is a 1998 model that you just bought for $400,000. You already know that to replace any of the three engines would cost upwards of $400,000 because that is how much the 1998 model cost. (If you don't know today's cost for a new version of one of your vehicles, you need to find that out right away.) Obviously, you will want an agreed value on the 1998 model of at least $400,000 - that's what it's worth. But what about the 1973 and 1985 engines?

If your department wants to pay for the coverage, it can insure the other two engines for an agreed value of $400,000 each. If either one is wrecked, the insurance company would spend up to $400,000 repairing it or give you $400,000 for a new engine. But since the 1985 model has a market value of only $75,000 and the 1973 pumper is only worth $30,000, why would you want the insurance company to spend hundreds of thousands of dollars fixing up either one? Why not ensure them for $75,000 and $30,000, respectively? Or why not insure them for $100,000 or $150,000 each? Why pay extra premiums for a $400,000 agreed value? I can think of a couple of reasons.

Suppose you have a rollover with the 1973 model that you insured for $400,000. The insurance company believes the pumper can be repaired in six months for $250,000. But you really don't want the apparatus back, do you? Your department wants the cash! So you tell the insurance company you will take a $200,000 cash settlement. The insurance company saves $50,000 plus whatever it can sell the wreck for. Sounds good, doesn't it?

The insurance company, however, may try to negotiate you down. Neither of you really want the vehicle repaired. The trick is to come up with a settlement that you can both agree on. The only way you can play this game is to insure the truck for an amount that's much closer to its replacement cost new than to its market value used.

Another reason is that every once in a while a piece of apparatus actually is destroyed beyond repair. In those cases, you may want the insurance to pay for the full cost of a new truck. If the incident involves an older truck, the settlement could be quite a windfall for your department.

With this being the final installment of the series, I thought it would be appropriate to make some recommendations:

1. Meet with your department's insurance company every year.
2. Many options are available if the insurance representative has prior knowledge of your operation - he or she may be able to suggest a few of the best options to present to your fire department.
3. If you don't understand something about your insurance or about something the insurance representative has said, ASK QUESTIONS!
4. Read the fine print, then ask questions until you have a full understanding.
5. The questions you don't ask now are the arguments you probably won't win later.
6. If your department insures its vehicles for actual cash value and is buying new apparatus, state the intended useful life in the legal notice so that there are no insurance disputes later relating to depreciation.
7. Purchase apparatus insurance from a reputable insurance company specializing in fire apparatus coverage.
8. Don't let municipal officials lump your fire apparatus with the garbage trucks and the dump trucks in a municipal insurance policy. If you do have an accident, your apparatus will be considered just another truck. Moreover, the insurance carrier may not be sensitive to the fire department's needs, such as emergency vehicle driver training.
9. Determine how the insurance company plans to repair your vehicles (if needed) before you pay premiums.
10. Make sure your insurance company has a reputation of making timely payments for repairs.
11. Given the choices - actual cash value, replacement cost value, or agreed value - agreed value would seem to be the best way to go for most fire departments.

I would like to thank the insurance representatives for their expertise in contributing to this series.

Michael Wilbur, a Firehouse® contributing editor, is an FDNY lieutenant in Ladder Company 27 in the Bronx and a firefighter in the Howells, NY, Fire Department. He is an adjunct instructor at the New York State Academy of Fire Science and the Orange County Fire Training Center. Wilbur has developed and presented emergency vehicle operator courses throughout the country and has consulted on a variety of fire apparatus issues.