Owner Operator Best Practices Series: Lease Purchase Programs | Physical Damage – Costly Mistakes
October 4, 2017
Author: Ben Droessler
This 3 part series is for trucking companies offering, or considering offering equipment leasing programs for owner operators. As trucks become more expensive and owner operators have difficulty buying a truck on their own, lease purchase programs are a great way to attract owner operators.
Part 1: The Basics
Part 2: Physical Damage – Costly Mistakes
Part 3: Breaking Up is Hard To Do
Physical Damage – Costly Mistakes
Total losses: When a damaged truck is a total loss, the balance of a loan or lease may exceed what the truck is worth. Most insurance policies only pay what the truck is worth. Leaving the contractor “upside down” and the leasing company likely at a loss. The fix is simple; ensure the physical damage insurance contains a “lease gap” endorsement that will pay the balance of the lease in a total loss. Be careful, not all lease gap endorsements are the same. Some only cover loans and not leases. Others have complicated net present value calculations. Consult your agent to make sure the policy matches your specific lease payout terms.
Federal Excise Tax: New trucks come with a hefty 12% Federal Excise Tax to the purchaser. If you are leasing new trucks you likely built 12% into the lease payments. But what happens when a damaged truck is a total loss very early in the lease term? Most insurance policies do not reimburse Federal Excise Tax. This fix might be more complicated. First, make sure your physical damage policy includes a quality “lease gap” endorsement. Second, ensure the lease gap limits are high enough to cover the truck value including Federal Excise Tax. Finally, consult with your agent to confirm Federal Excise Tax would be included within the “lease gap” endorsement
Take action! A portion of Cottingham & Butler’s Owner Operator Scorecard evaluates lease purchase programs. It’s free, confidential and results are instantly emailed to you. Complete Independent Contractor Risk Scorecard.
Contact Ben Droessler with Cottingham & Butler’s Contractor Services Team.
Ben Droessler CIC
Vice President, Independent Contractor Risk