Equipment Breakdown Insurance
Many businesses utilize equipment that is subject to mechanical or electrical breakdown. Examples are air conditioners, escalators, boilers, production equipment, and computer-controlled machine tools. A breakdown can damage both the equipment itself and other property. The result may be an expensive repair bill and lost income. Businesses can protect themselves against such events by purchasing equipment breakdown insurance.
Breakdown Excluded By Standard Property Policies
Most standard property policies exclude three perils that can cause damage to business-owned machinery and equipment:
- Artificially generated electrical, magnetic or electromagnetic energy that damages or disrupts electrical or electronic devices. Most property policies do cover ensuing loss caused by fire.
- Mechanical breakdown, including 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.
Breakdown Loss Example
The following example demonstrates how an equipment breakdown can trigger a loss. Tracy owns Tip Top Textiles, a company that custom-dyes fabric for small apparel manufacturers. One day a Tip Top employee is using a dyeing machine to dye fabric for a customer when the motor inside the machine breaks apart. The damaged motor causes the machine to shut down, rendering the fabric unusable. The dying machine is inoperable and will remain that way until the motor is repaired.
When Tracy files a claim for the damaged motor and fabric under her commercial property policy, she learns that the damage is excluded by the machinery breakdown exclusion in her policy. The loss would have been covered had she purchased equipment breakdown insurance.
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 still exist nowadays but most machines are powered by electricity. Thus, boiler and machinery insurance has largely been replaced by equipment breakdown (EB) insurance, which affords broader coverage.
EB insurance covers damage to covered property by a covered cause of loss (peril). Covered property typically includes any property you own as well as property owned by someone else and under your control if you are legally responsible for it. For example, suppose that Tip Top Textiles uses a dying machine that it leases from Machines Inc. The contract states that Top is responsible for any damage the machine sustains during the term of the lease. If Tip Top purchases EB insurance, the machine should qualify as covered property.
Meaning of Breakdown
Equipment breakdown insurance covers property damage caused by breakdown to covered equipment. In the ISO form, breakdown means the following the types of direct physical loss. To qualify as a breakdown, the loss must cause damage to covered equipment that necessitates the equipment's repair or replacement.
- Failure of Pressure or Vacuum Equipment. For example, a valve breaks on a tank holding compressed air. Alternatively, a pressure release valve in a steam cooker breaks apart.
- Mechanical Failure Including Rupture or Bursting Caused by Centrifugal Force. An example is the motor that broke apart inside Tip Top's dyeing machine.
- Electrical Failure Including Arcing. For example, a power surge damages a computer-operated cutting machine owned by a machine shop. The machine is now inoperable.
Note that a machine that simply shuts down without incurring any physical damage has not suffered a breakdown as that term is defined in EB insurance. Likewise, no breakdown has occurred if a machine does not require repair.
What Is Covered Equipment?
For property damage to be covered under EB insurance, it must be caused by a breakdown to covered equipment. In the ISO EB form, this term includes the four categories of equipment described below. Be sure you read the definition of covered equipment carefully as it contains many exclusions.
- Pressure Vessels and Vacuum Equipment. Includes any equipment built to operate under internal pressure or vacuum. Examples are boilers, hot water heaters, vacuum pumps, autoclaves, steam cookers, and pressurized storage tanks.
- Electrical or Mechanical Equipment. Includes a wide variety of electrical or mechanical equipment. Examples are transformers, circuit breakers, furnaces, air conditioners, generators, compressors, refrigerators, ovens, production machinery, and elevators.
- Communication Equipment and Computer Equipment. Examples of communication equipment are telephone systems, fire alarm systems, and security systems. Computer equipment includes computers and peripheral devices like external hard drives and printers.
- Utility-owned Equipment. Includes equipment in any of the above categories that is located at the described premises and owned by a utility. The equipment must be used solely to supply utility services to your 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:
- A motor inside an ice cream freezer burns out, causing the freezer to shut down. All of the ice cream melts.
- A pressure release valve on a boiler fails due to corrosion and the boiler explodes. The explosion severely damages a restaurant building 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.
EB insurers offer a variety of coverage extensions. Examples are described below. Some may be included automatically at specified limits while others are available for an additional premium.
Ammonia contamination coverage applies to spoilage of food or other covered property that is contaminated with ammonia (often used as a refrigerant) due to a breakdown of covered equipment (typically a refrigerator or freezer).
Expediting expense insurance covers extra costs you incur to make temporary repairs or to speed up the process of repairing or replacing damaged property.
When added to EB insurance, business income and extra expense coverages apply if the loss of income or extra expense results from damage to covered property caused by a breakdown of covered equipment.
Spoilage insurance covers spoilage damage to raw materials, products being manufactured or finished products. To be covered, the spoilage must result from the lack (or excess) of power, light, heat, steam or refrigeration due to a breakdown of covered equipment located on your premises.
Utility Interruption coverage 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. For instance, a breakdown occurs at a utility-owned switching station located at a site owned by the utility. The breakdown causes a power outage at Tip Top Textiles, resulting in damage to fabric. If Tip Top has purchased utility interruption coverage under an EB policy, the loss should be covered.
Ordinance or Law coverage applies to losses caused by the enforcement of building codes if a building has suffered damage due to a breakdown of covered equipment.
Errors and Omissions coverage protects you against accidental mistakes you make in describing your property or its location. For example, you inadvertently omit a location or provide the wrong address.
Brands and Labels coverage protects the reputation of your brand. It applies when products you make or sell contain your brand or label, and the products are damaged due to a breakdown of covered equipment. It pays the cost of removing your brand or label from the damaged products or labeling them as salvage. In the absence of this coverage, your insurer may pay you for a loss and then sell the damaged products with your brand attached.
Water Damage insurance covers water damage that results from a covered breakdown. For instance, a water pump breaks down and causes water to accumulate in your warehouse, damaging your stock.