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In the July 1998 installment of Emergency Vehicle Operations we examined an accident allegedly caused by a person who was driving a piece of fire apparatus while intoxicated. The apparatus involved was a 1970s-vintage aerial ladder. The apparatus was insured for its full replacement value ($500,000), yet an insurance adjuster told the fire department it had little or no chance of getting a new rig. The adjuster further stated that the insurance company would pay up to $499,999.99 to fix the damage to the truck, but would not replace it.
The incident triggered many questions about apparatus insurance. This column will attempt to answer these questions in several installments devoted to this misunderstood, yet most important issue. This will help fire departments make educated choices in purchasing apparatus insurance.
One of the duties of a fire department is to take good care of its property and equipment. Stations, apparatus and other equipment are purchased with money provided by the community for the department through tax dollars or contributions. The care that the fire department is required to give goes beyond just maintenance and safekeeping. Care also includes buying insurance coverage to protect against accidental damage and/or acts of God.
When it comes to insuring fire apparatus and EMS vehicles, insurance companies offer many options. These columns will help you make the proper choices.
The first term you need to understand is actual cash value. This is a term insurance companies have used since the first horse-drawn apparatus hit the street. Historically, actual cash value was the cost of a new item identical to the damaged item (or nearly so), then adjusted downward ("depreciated") to reflect the remaining useful life of the damaged item.
Let's say you spent $800 in 1993 to buy 100 feet of two-inch hose for Engine 3. If the useful life of the two-inch hose on Engine 3 is 10 years, then the actual cash value for that hose would depreciate by 10% every year. Its actual cash value is based on the cost to buy new hose today, not on the amount you actually spent on the original hose, so let's say that by 1998 the price of a new hose has gone up to $1,000. The 1998 actual cash value, then, would be $1,000 minus five years of depreciation (50%), or $500.
The same approach works for fire engines. If you bought a 1,250-gpm pumper for $200,000 in 1990 and expect it to have a 20-year useful life, it will depreciate 5% per year. Its 1998 actual cash value would be the 1998 cost of a new 1,250-gpm pumper with similar construction features and quality (say $275,000) minus eight years of depreciation at 5% per year (40%), which equals $165,000. Note that, in the eyes of the insurance company, it does not matter what you paid for the vehicle when it was new. Actual-cash- value insurance values the truck based on the present-day replacement cost for a truck of similar kind and quality, minus physical depreciation.
If you insure your pumper for the actual cash value, the insurance policy will not state how much actual-cash-value insurance your department has. It will be up to your department and the insurance company to figure out the actual cash value after the accident. The insurance company still has to pay for all of your repairs as long as the repair costs are less than the actual cash value.
Actual cash value comes into play only when the repair costs are high or the actual cash value is low (when the rig is getting close to the end of its useful life). If you and the adjuster agree the repairs would cost more than the actual cash value, the insurance company calls your accident a "total." It then pays you the actual cash value (minus a deductible, if you have one) and takes the damaged truck to sell as salvage. You take the cash to use any way you want.