Equipment finance insurance is not a separate product. It is the insurance you already carry on a truck, machine or vehicle, set up so that it satisfies the finance contract as well as your business. When plant or vehicles are bought through equipment finance, the financier has a stake in the asset until the last payment, and the policy has to reflect that. This guide covers what financiers commonly ask for, how a total loss is paid out, and where the numbers on the loan and the numbers on the policy fall out of step.
Why the Financier Cares About Your Policy
The asset is the financier’s security. If a financed excavator is stolen or a prime mover is written off, the loan does not disappear with it. The financier’s position depends on the structure:
- Chattel mortgage. Your business owns the asset from the start and the financier holds a security interest over it.
- Finance lease or operating lease. The financier owns the asset and your business uses it for the term.
- Hire purchase. The financier owns the asset until the final payment is made.
Whichever structure you use, the contract will usually include insurance obligations. Read that clause, or send it to your broker, before settlement.
What Financiers Commonly Ask For
- Comprehensive cover for the full term. Own damage, fire and theft on the asset, not third party only, from settlement until the loan is paid out.
- The financier noted as an interested party. Recorded on the policy under its correct legal name.
- A certificate of currency at or before settlement. Showing the asset, the sum insured, the policy period and the interested party.
- Notice of cancellation. Some contracts ask that the financier be told if the policy is cancelled or not renewed.
- A minimum sum insured. Sometimes the purchase price, sometimes the amount financed.
- Liability cover for vehicles and mobile plant, since an uninsured liability claim can threaten the business that is making the repayments.
Requirements differ between financiers and contracts, so check what your own contract says.
Noting the Interested Party Correctly
Noting an interest means the insurer records that the financier has a financial stake in the asset. In a total loss, the insurer typically pays the financier up to the amount owing, and any balance goes to you. Noting the interest does not make the financier a party to the policy, and it does not change who is responsible for disclosure, the excess or the premium.
The financier’s name should match the finance contract, not a trading name on a letterhead, and each asset should carry the right financier, which gets harder when a fleet is spread across several lenders. When a loan is paid out, ask for the interest to be removed so a future claim is not held up waiting for a discharge letter.
Sum Insured vs Payout Figure
The sum insured and the loan balance measure two different things. The sum insured, or the market value where that is the basis of cover, is what the insurer may pay if the asset is lost. The payout figure is what you owe the financier to close the loan today, including any break costs or fees the contract allows. The two numbers move separately.
Early in a loan, the balance can sit close to the purchase price while the asset’s market value has already fallen. Late in a loan with a large balloon, the amount owing can still be significant against an older asset.
The Gap Between Market Value and Loan Balance
If the policy pays market value and the market value is lower than the payout figure, the insurer pays the financier what the policy provides and the business pays the difference, often while it also needs a replacement asset to keep working.
Ways to narrow the gap:
- Agreed value. Where available, insure for a value agreed at the start of the policy period rather than market value at the time of loss. Our guide to market value vs agreed value explains the trade-off.
- Review the value each renewal. An agreed value that made sense on day one can drift away from both the market and the loan.
- Factor in the balloon. A large residual payment keeps the balance high for longer. Consider it when you set the sum insured.
- Ask about gap-style benefits. Some motor and finance products include or offer a benefit aimed at the difference between the settlement and the amount owing. Terms and limits vary, so read them before you rely on one.
- Include bodies and attachments. A truck body, crane, tipper hoist or attachment bought on the same loan should be in the sum insured, or the settlement will fall short of what was financed.
An agreed value still needs to be supportable. Insurers commonly check it against the asset’s age, condition and market, and may decline a figure well above replacement cost.
Certificates of Currency at Settlement
The financier or dealer commonly asks for a certificate of currency before releasing funds, and the certificate needs to show the asset and the interest correctly.
- Send your broker the tax invoice or dealer quote with the make, model, serial number or VIN, and the price.
- Confirm the financier’s exact legal name and the finance structure.
- Confirm the delivery date, so cover starts when the asset becomes your responsibility.
- Ask for the certificate to show the financier as an interested party.
- Check the certificate before it goes out: serial number, value, dates and names.
A machine delivered on a Friday and financed on a Tuesday can be uninsured over the weekend unless cover was arranged from delivery.
Changes During the Loan Term
- Refinancing. The new financier needs to be noted and the old one removed.
- Selling a financed asset. The loan is usually paid out at sale. Remove the asset and the interest from the policy once the sale completes, not before.
- Changing how the asset is used. A truck moved from your own work to carrying for others, or a machine moved into dry hire, needs a policy update. A mismatch can affect claims.
- Letting the policy lapse. Depending on the contract, a lapse can be a default under the loan, and some contracts allow the financier to insure the asset and recover the cost from you.
Premium Funding Is a Different Thing
Equipment finance pays for the asset. Insurance premium funding spreads the cost of the policy itself over instalments. Keep them straight: a missed premium funding instalment can lead to the policy being cancelled, which can in turn breach the insurance clause in the equipment finance contract.
Equipment Finance Insurance Checklist
- Read the insurance clause in the finance contract before settlement.
- Arrange cover from delivery, not from the finance date.
- Note each financier by its legal name, asset by asset.
- Compare the sum insured with the payout figure at least once a year.
- Include bodies, attachments and accessories bought on the loan.
Common Questions
Can I use my own policy, or does the financier choose the insurer?
Check the contract. Financiers commonly accept your own cover if it meets the contract’s requirements, and some also offer insurance at the point of sale. Where you have the choice, compare what each option actually provides, not only the price.
What happens if the asset is written off and the settlement is less than I owe?
The insurer typically pays the financier first, up to the settlement amount under the policy. Any remaining loan balance is usually still yours to pay, which is why the gap discussed above deserves attention before a loss, not after it.
Do I need to tell my insurer when I pay off the loan?
Yes. Ask for the interested party to be removed and keep the financier’s discharge letter with your asset records.
Talk It Through
Request a quote or call 1300 983 940 before your next purchase settles, and we will line up the policy with the finance contract so the certificate is ready when the financier asks. If you are still arranging the loan, our equipment finance page is the place to start.
General advice only. This article does not take your objectives, financial situation or needs into account. Consider the relevant PDS and Target Market Determination before deciding on a policy.