If you have trucks and/or trailers sitting in the parking lot and you’d like them to generate some revenue to help pay the bills by leasing them to a third-party company or an independent owner-operator, you’d be wise to contact your insurance agent first. To clarify, I’m not talking here about truck/fleet owners utilizing lease-purchase agreements with drivers, rather equipment lease agreements with independent third-party companies or individuals who assume the responsibility for the safe operation of the equipment.
Take for example one of my customers. They have one truck, and when they started the business, they had one trailer. When that initial trailer suffered a mechanical issue, there was an unexpectedly long period of downtime waiting for necessary repair parts. To minimize the loss of revenue, the customer elected to purchase a second trailer and remove the initial trailer from the policy. Several months later, that trailer had finally received the repair it needed -- the owner contacted me and wanted to place the repaired initial trailer back onto the policy.
They informed me they were leasing the trailer to a third party, and they wanted the trailer to be insured while in the third party’s possession.
I had the unfortunate obligation to inform them that if they leased out any equipment to a third party, the leased equipment would not be covered while in the “care, custody and control” of that third party. Additionally, all the insurance companies I have access to (10-plus) would not offer the coverage they sought. Insurance that provides coverage for our equipment while it is leased out is hard to come by.
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The best guidance I've ever received for insurance came from an underwriter. It is especially relevant if we want to insure equipment we lease to a third party. He said: "Usually, you can find insurance for anything if price is not an object. So I am not saying you can’t, just I wouldn’t know where it would be."
Bottom line is if/when we locate an insurance company who will offer us a quote for equipment we want to lease out, it’s almost a given that the quote will be cost-prohibitive for most truck owners and especially for independent owner-operators or small fleets.
Why? Equipment leased to a third party has a much higher claims rate. Both trucks and trailers that are leased out have an increased potential to be damaged, stolen, abandoned or vandalized when compared to the equipment we operate ourselves or equipment we hire drivers to operate for us.
As a result of this reality, the insurance carriers I represent (accounting for the majority of insurance companies who insure owner-operators and small trucking companies in the United States) do not provide any coverage for equipment leased out in this manner. Or, depending on the insurance company, they will only provide limited coverage. Specifically, coverage may be available only when the equipment we lease out is currently not under a lease and is in our "care, custody and control."
What it all boils down to is if you don’t have the correct insurance coverage while leasing equipment to a third party and you file a claim for a loss, that claim can be denied. The best way to illustrate this is by using a couple of hypothetical yet realistic scenarios.
Lease agreement for both scenarios: John Doe of John Doe Trucking has signed a lease agreement for a term of 1 year with you for a 2022 dry van trailer. As per the lease agreement, John Doe provides you with a certificate of insurance which provides proof of physical damage coverage up to $50,000 for a “non-owned trailer” which is in his “care, custody and control.”
Scenario One: With three months to go on that one-year term, John Doe, without notifying you and without your knowledge, returns the trailer during non-business hours. When you return to work on the next business day you find the trailer. To your dismay, you see the trailer has been topped. That is to say, the top of the trailer hit a bridge and has suffered extensive damage. You contact John Doe and he denies that he returned the trailer damaged. You then contact the insurance company on John Doe’s certificate of insurance and file a claim. The insurance adjuster for John Doe’s insurance policy notifies you that John Doe had removed the non-owned trailer coverage eight months ago. Because there is no coverage for non-owned trailer, your claim is denied.
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Scenario Two: Six months into the lease term, John Doe failed to make his lease payment. You attempt to contact John Doe but his number is not in service, the notices you sent him via registered mail are returned, and emails to him bounce back to you. You check the FMCSA and discover his company John Doe Trucking is “not authorized.” You then contact your local police department and report the trailer as stolen, and contact the insurance company on John Doe’s certificate of insurance to file a claim. The insurance adjuster for John Doe’s insurance policy notifies you that John Doe’s insurance was canceled two months ago. Since John Doe has no current insurance policy, your claim is denied.
After exhausting your attempts with John Doe’s insurance company to recover your losses in the scenarios above, you then file a claim with your own insurance company. During your insurance company’s adjuster’s information gathering and investigation of the claim, the adjuster discovers that the equipment the claim is for is/was leased to John Doe Trucking and was in that company’s “care, custody and control” at the time of the incident that led to the claim for the loss. Your commercial auto insurance policy (as most all do) excludes coverage for any of your equipment that is leased to a third party. Because the trailer is/was under a lease and in John Doe’s “care, custody and control,” the claim can be denied.
Moral of the story? If you are already leasing out equipment and have not disclosed that to your insurance agent, I would encourage you to contact them today. And be very careful about who you do business with when leasing out equipment.
If you have a particular insurance-related question for the author of this Overdrive Extra installment, longtime independent owner-operator and insurance agent W. Joel Baker, drop a comment with any question under the story or get in touch with Baker directly via his website.
Find more information related to the ins and outs of insurance, among a myriad other topics, in the Overdrive/ATBS-coproduced "Partners in Business" manual for new and established owner-operators, a comprehensive guide to running a small trucking business. Click here to download the newly updated 2022 edition of the Partners in Business manual free of charge.
