Would Your Equipment Rental Operations Be Found Liable? - Insurance
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
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Would Your Equipment Rental Operations Be Found Liable?

Construction Equipment Distribution, February 2006.

Article Date: 02-01-2006
Copyright (C) 2006 Associated Equipment Distributors. All Rights Reserved.


In the event of serious injury and damages, would your business be protected?

A worker operating a rented skid-steer loader with a backhoe attachment steps on a control pedal while exiting the machine. He is pinned between the roof of the cab and the backhoe boom and dies as a result of head injuries. During the accident investigation, it's noted that most of the warning and instructional decals originally on the equipment had been removed or painted over, including the warning label on the boom. A lawsuit is filed against the dealership alleging failure to properly warn and instruct the user. Total damages awarded to compensate the estate of the deceased: $1,200,000.

An employee of a subcontractor is hit by a rented tractor operated by an inexperienced employee of another subcontractor. The employee suffers serious injuries as a result of the accident. A lawsuit is filed against the subcontractor and the dealership who rented the tractor. The suit against the dealer alleges equipment failure (the brakes failed) and failure to instruct the user on proper use of the equipment. The subcontractor who rented the tractor does not have liability insurance. In a review of the rental contract, it is found that the contract does not state that the renter is responsible for liability losses. It also does not state that the renter holds the dealership harmless from such losses and does not require confirmation of who would be operating the tractor. The dealership cannot provide verification that they had instructed or offered to instruct the renter on proper use of the tractor. The dealership also cannot provide verification of when the brakes had last been serviced. Total medical cost and compensatory damages awarded to the injured worker: $650,000.

Cases like these are not uncommon. If you assume situations like these will be fully covered by your insurance - think again. In a liability suit, insurance deductibles, loss of business due to an unfavorable business reputation, time- and capital-consuming litigation, increased insurance premiums and loss of corporate assets beyond insurance policy limits can directly impact the bottom line. Keep in mind that courts can and do assess punitive damages in cases of extreme negligence. In many states, punitive damages are not covered by insurance.

What can you do? As the old saying goes, "Prevention is the best medicine." Minimize your legal liability exposure from rental and leasing operations by following these risk management strategies.

  • Pre-qualify your customers - Has your rental customer been trained on safe use of the equipment? Will a third party, such as an employee or subcontractor, be allowed to operate the equipment? Is the customer properly insured in the event of an accident? If you don't know the answers to these questions - you should.               Keep your customers and your business safe by selecting only those customers who can safely use the rental equipment, and who will use it as intended. This is your first defense in preventing liability suits. Ask your customers who will be operating the equipment, what it will be used for and whether the intended operator has been trained to use it. If the equipment requires standard certification, such as OSHA forklift training, specify this in your rental agreement. Have your customer sign to verify the training took place.
  • Attach safety labels, warnings and equipment instructions/manuals - Provide original equipment safety labels, warnings and operating instructions, including operating manuals, to the rental customer and operator.
    These should include rules for safe use, equipment ratings and capacities, maintenance instructions and inspection schedules for the equipment. Many manufacturers include operating instructions in a specially designed box on the machine itself. Always check to see that these instructions are present and make it a point to mention them to your customers. Ensuring your customers have access to these safety instructions meets your legal "duty to warn" requirement concerning equipment and operating hazards.
    The absence of proper safety labels can jeopardize the safety of the operator and be a basis for legal liability, as evidenced by the skid-steer loader example above. All safety labels and decals should be placed as originally designed by the manufacturer. Never remove, damage or paint over safety decals. If the warnings have become illegible over time, replace them.
  • Inspect equipment before each rental - Develop an equipment inspection and maintenance program for rental equipment. Many manufacturers will provide forms or checklists to accomplish this.
    Before any rental goes out, inspect it for proper equipment condition and fluid levels; inclusion of manuals, decals and labels; and proper working condition of safety equipment and devices. Be sure any necessary repairs or maintenance are completed before renting or leasing the equipment. Never rent equipment "as is" if there are known safety or operational problems. Document all maintenance and repairs to your equipment.
    Following a rental inspection routine and keeping detailed record of rental equipment maintenance is crucial to mounting an adequate defense in the event of litigation. It will also protect your interests in the event your equipment becomes damaged during rental.
    While many dealerships rent older equipment, a better practice is to rent new equipment with the latest technology and safeguards. Although your up-front costs will be greater, you will see offsets in a reduced frequency of equipment breakdown and customer complaints, lower maintenance and repair costs, and reduced accidents and injuries.
  • Use a standard rental agreement that protects your interests - Develop a rental or lease agreement that details the contract between the dealership and the rental customer. Use the agreement for every equipment rental or lease transaction, even non-revenue rentals or loans.
    A properly written and correctly used agreement will help protect your dealership in the event of an accident or injury during the rental period. Although there are no guarantees, many courts will uphold terms and conditions of your agreement if it is correctly written and consistently executed.                                                               
    The specifics of an agreement will vary by equipment and dealership. Your agreement should be designed to meet the needs of your individual business circumstances. You should also have an attorney review the standard forms or contracts you use.
As with any formal agreement or contract, it is important that the customer sign the document and that it is filed and maintained as a vital business record. The owner or an officer of the dealership should also sign every agreement.
Never use an equipment rental agreement to rent cars or trucks. Car and truck rentals should have a rental agreement that is specifically designed for vehicles licensed for road use. These types of agreements are vastly different when it comes to protecting your business against liability lawsuits.


Transporting Equipment
Do you rent trailers with your equipment rentals? Hauling or towing heavy machinery produces its own unique set of hazards, which significantly increase the liability associated with a rental or lease.


It's your dealership's responsibility to make sure a rented trailer is appropriate for the equipment used and that it performs as intended. If an accident occurs because the wrong trailer is used or because your trailer is not properly maintained, you could be held responsible. These types of over-the-road accidents can result in millions of dollars in losses.

To prevent liability exposures associated with your trailer rentals, consider the following risk management measures:

  • Evaluate your customer's ability to transport the equipment, just as you would for using the equipment. Does the driver need to have a Commercial Drivers License (CDL)? Does the towing vehicle have sufficient capacity to haul the equipment safely?
  • Make sure all labels on your trailer are in-place and legible, including wide load signs and other markings and devices required by state and federal Department of Transportation rules.
  • Inspect the trailer prior to each rental and maintain it as you would any piece of equipment in your fleet. Check the condition of safety chains and hitch connections to prevent the towing vehicle and trailer from becoming disconnected in transit. If the trailer has electric brakes, make sure they work properly. If the trailer has hydraulic brakes, make sure the fluid is flushed per the maintenance schedule and the reservoir is properly filled before renting. Ensure the tow vehicle has an appropriate hitch connection and a working brake controller. Document all inspections and maintenance.
  • Determine who is responsible for securing cargo and document that in your rental agreement along with all other terms and conditions for trailer use and equipment transportation.
    You may find it easier and safer to transport equipment yourself, rather than having a customer do so under uncontrolled or questionable conditions.
Establish A Rental Policy
To protect your business, establish and enforce a rental and leasing policy. In large dealerships, multiple people may be involved in the renting or leasing process. This could result in inconsistent use of the policy. In dealerships that rent infrequently, there may be indifference to procedure because rentals are rare.


Regardless of the reason, inconsistent and undocumented practices can undermine the risk management process. In the case of a lawsuit, inconsistent rental procedures could be used to prove liability. It is important to apply your rental procedures the same way, every time. If possible, assign one person to handle rental and leasing transactions. This will help to keep your procedures consistent.

Protect Your Business
Use these risk management strategies to help increase your sales through equipment rental and leasing, without increasing your risk of legal liability. Following these guidelines will help reduce accidents, control insurance costs and improve your bottom line.


 


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