Many businesses utilize air conditioners, boilers, production machinery, and other equipment that's subject to mechanical or electrical breakdown. When such equipment breaks down, it may sustain physical damage that's costly to repair. If the damaged equipment is unusable, the business may suffer a loss of income. A breakdown incident may also cause damage to property other than the equipment itself. Fortunately, businesses can protect themselves from losses caused by equipment breakdowns by purchasing equipment breakdown insurance.
Why You May Need It
Businesses that rely on mechanical or electrical equipment are vulnerable to losses caused by the three types of perils described below. These perils are excluded by a typical property policy.
- Artificially generated electrical, magnetic, or electromagnetic energy: Damages or disrupts electrical or electronic devices. Most property policies do cover ensuing loss caused by fire.
- Mechanical breakdown: This includes rupture or bursting caused by centrifugal force. Most policies cover ensuing loss caused by elevator collision.
- Explosion of steam boilers, steam pipes, steam engines or steam turbines: Also excluded is damage to steam boilers, steam pipes, etc. caused by an event (such as a steam explosion) inside that equipment. Property policies typically cover ensuing loss caused by an explosion of gases or fuel.
Equipment Breakdown Coverage
Equipment breakdown (EB) insurance was initially called boiler and machinery insurance because it originated at a time when steam boilers were the main source of power for industrial machines. Boilers are still used for heating water but nowadays, most industrial machines are powered by electricity. For this reason, boiler and machinery insurance has been replaced by a broader coverage called equipment breakdown (EB) insurance.
In many states, boilers used for heating or power generation must be inspected annually. Insurers that offer EB insurance will often perform the required inspection at a reasonable cost.
EB coverage can be written alone or added to a commercial property policy via a separate form or endorsement. Some insurers utilize standard insurance services office (ISO) EB forms while others use their own proprietary product.
The ISO EB form covers damage to covered property by a covered cause of loss. Covered property typically includes any property you own as well as property owned by someone else that's under your control if you are legally responsible for it. For example, suppose your machine shop leases a cutting machine from an equipment leasing firm. Your firm is liable under the contract for any damage the machine sustains during the term of the lease. If your business is insured under an EB policy, the machine should qualify as covered property.
Meaning of Breakdown
The standard EB form covers property damage caused by a breakdown to covered equipment. Breakdown is a defined term. It means a direct physical loss that meets one of the descriptions listed below.
- Failure of pressure or vacuum equipment: For example, sediment in a boiler causes the elements to overheat and subsequently fail.
- Mechanical failure: This includes including rupture or bursting caused by centrifugal force. An example is a turbine engine that's damaged when a fan blade breaks off and flies into the engine.
- Electrical failure: This includes arcing. For example, a power surge damages a computer-operated cutting machine owned by a machine shop. The machine is now inoperable.
To qualify as a breakdown, the loss must cause damage to covered equipment such that the equipment requires repair or replacement.
What Is Covered Equipment?
For property damage to be covered under EB insurance, it must be caused by a breakdown to one of four types of equipment:
- Pressure vessels and vacuum equipment: Includes any equipment built to operate under internal pressure or vacuum. Examples are boilers, water heaters, vacuum pumps, autoclaves, steam cookers, and pressurized storage tanks.
- Electrical or mechanical equipment: A broad category that includes things like transformers, circuit breakers, furnaces, air conditioners, generators, compressors, refrigerators, ovens, production machinery, and elevators.
- Communication and computer equipment: Examples are telephone systems, security systems, fire alarm systems, computers, and printers.
- Utility-owned equipment: Means equipment that fits one of the above categories and is owned by a utility. The equipment must be located at the described premises and used solely to supply utility services to the insured's premises. An example is a utility-owned transformer located on your premises and used by the utility to deliver electricity to your business.
Examples of Covered Losses
Here are examples of losses that would likely be covered by an equipment breakdown policy:
- The heating unit in an ice cream freezer fails, causing excessive ice to form on the coils. The freezer shuts down and the ice cream melts.
- A pressure release valve on a boiler becomes corroded and fails. The boiler explodes, causing severe damages to a grocery store and its contents.
- A bolt inside a grinding machine breaks, damaging the interior of the machine.
- Electrical arcing triggered by a storm damages power lines owned by a utility, causing an electrical outage. The outage is followed by a surge, which damages a computer used to operate production equipment.
Many EB insurers offer a variety of coverage extensions. Here are some examples:
- Ammonia contamination: Covers spoilage of food or other covered property contaminated with ammonia (used as a refrigerant) due to a breakdown of covered equipment, such as a refrigerator or freezer.
- Spoilage: Covers the spoilage of raw materials, property being processed, or finished goods caused by a lack (or excess) of power, light, heat, steam, or refrigeration due to a breakdown of covered equipment located on your premises.
- Expediting expense: Covers extra costs you incur to make temporary repairs or to expedite permanent repairs to damaged property.
- Business income and extra expense: These coverages apply if the loss of income or extra expense results from damage to covered property caused by a breakdown of covered equipment.
- Utility interruption: Extends business income, extra expense, and spoilage coverages (if purchased) to cover loss resulting from a breakdown to covered utility-owned equipment located away from your premises.
- Ordinance or law: Covers losses caused by the enforcement of building codes if a building has suffered damage due to a breakdown of covered equipment.