Vehicle Operations Insurance: Are You Really Covered?

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.

Insuring apparatus for its actual cash value is not a bad choice. Your department probably has an established plan for financing or buying new equipment to replace old equipment (if you do not, develop one). If an engine or a rescue truck has to be "retired early" because it was totaled in a wreck, that does not mean your department did not get to use it for the years that you had it - you just "sold" it a little sooner than planned. You can still take the insurance money from the actual-cash-value settlement and use it as a down payment on a new rig.

There are, however, potential problems with actual-cash-value insurance. One problem is that if you do "total" a vehicle, you must negotiate with the insurance company to determine the actual cash value. An adjuster may say, for instance, that the useful life of your engine is 15 years, not 20, and if you cannot refute it, you will get a smaller check.

Another problem is that not every insurance company uses the classic or traditional definition for actual cash value. Some companies may define actual cash value as "fair market value," instead of replacement cost less depreciation. They may say they could depreciate the cost of repairs, even on a small claim, so that your department ends up paying part of the repair bill. Or they may insist on making the repairs as cheaply as possible, instead of doing it the way you want it done.

If your department has a solid financial plan for replacing old equipment, the insurance policy includes a good definition of actual cash value, and the carrier uses adjusters who are fair and reasonable, then actual cash value may be the way to go. But what other options are there? The next column will look at replacement-cost-value insurance.

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.