Equipment Breakdown Insurance
Equipment breakdown coverage is a type of commercial property insurance. It covers damage to business property and loss of income that result from the breakdown of machinery or equipment. Many businesses utilize equipment such as computers, telephone systems, air conditioners, refrigerators, boilers, lathes or production equipment. This equipment may suffer a mechanical or electrical breakdown, which in turn damages other property. The following scenario demonstrates how a breakdown loss may occur.
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. Suddenly, the motor inside the machine breaks apart. The damaged motor causes the machine to shut down. The fabric is now unusable. The dying machine is inoperable and will remain that way until the motor is repaired.
Tracy files a claim for the damaged motor and fabric under her commercial property policy. She soon receives some bad news. Her claim is not covered! According to the adjuster, her policy excludes damage caused by machinery breakdown. The loss would have been covered had Tracy purchased equipment breakdown insurance.
Commercial Property Exclusions
Equipment breakdown insurance is designed to cover three categories of perils that are excluded under a typical property policy. These include:
- Electricity Artificially generated electrical, magnetic or electromagnetic energy that damages or disrupts electrical or electronic devices. However, most property policies do cover ensuing loss caused by fire.
- Mechanical Breakdown Mechanical breakdown, including rupture or bursting caused by centrifugal force. Coverage is usually afforded for ensuing loss caused by elevator collision.
- Boiler Explosion 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. However, property policies typically cover ensuing loss caused by explosion of gases or fuel.
Equipment Breakdown Versus Boiler and Machinery
Equipment breakdown insurance originated in the 1800s when steam boilers were the main source of power for industrial machines. The coverage was initially called boiler and machinery insurance as it was designed to cover damage caused by exploding steam boilers. Machinery has changed radically since the nineteenth century. Boilers still exist, but most machines are now powered by electricity. Thus, boiler and machinery insurance has been replaced with a broader coverage called equipment breakdown insurance.
Equipment Breakdown Coverage
Equipment breakdown (EB) coverage can be added to a commercial property or package policy via a separate form or endorsement. Some insurers utilize a standard EB form published by ISO. Others have developed their own proprietary EB form. Such forms are often similar to, but broader than, the ISO form.
EB insurance covers damage to covered property by a covered cause of loss (peril). Covered property typically includes any property you own. It also includes other people's property that is under your control and for which you are legally responsible.
For instance, suppose that Tip Top Textiles leases a dyeing machine from Machines Inc. Tip Top is responsible under the contract for any damage that occurs to the machine during the term of the lease. The machine is under Tip Top's control, and Tip Top is legally responsible for damage to it. If Tip Top purchased EB insurance, the machine should qualify as covered property under Tip Top's EB insurance.
What Is a Breakdown?
Under equipment breakdown insurance there is only one covered peril: breakdown to covered equipment. The word breakdown is usually a defined term. Under the ISO form, it means any of the types of direct physical loss listed below, if the loss causes damage to covered equipment. The damage must necessitate the equipment's repair or replacement.
- Failure of pressure or vacuum equipment Examples: a valve breaks on a tank holding compressed air. 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 the dyeing machine owned by Tip Top Textiles.
- Electrical failure including arcing Example: a machine shop owns a computer-operated cutting machine. A power surge damages the computer, making the machine inoperable.
Note that a machine that simply shuts down without incurring any physical damage has not suffered a breakdown within the context of EB insurance. Likewise, no breakdown has occurred if a machine has suffered minor damage that does not require repair.
What Is Covered Equipment?
As mentioned previously, equipment breakdown insurance covers damage to covered property caused by a breakdown to covered equipment. For property damage to be covered, it must be caused by a breakdown to covered equipment. The standard ISO EB form includes four categories of covered equipment.
- Pressure Vessels and Vacuum Equipment 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 A broad category that includes a wide variety of electrical or mechanical equipment. Examples are transformers, circuit breakers, electrical panels, furnaces, air conditioners, generators, compressors, refrigerators, freezers, 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 if it is owned by a utility and used solely to supply utility services to your premises. The property must be located at premises described in your policy. 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 control mechanism inside a boiler fails and the boiler explodes. The explosion severely damages a building and its contents.
- A bolt inside a grinding machine breaks, damaging the interior of the machine.
- A short circuit damages a utility-owned transformer located at a factory. The short causes a power surge that damages a computer used to operate production equipment.
A number of coverage options are available under EB insurance. Some of these may be included automatically at specified limits. Others are available for an additional premium.
- Ammonia Contamination Covers spoilage of food or other covered property that is contaminated with ammonia (often used as a refrigerant) due to a breakdown of covered equipment (such as a refrigerator or freezer).
- Expediting Expense Covers extra costs you incur to make temporary repairs or to speed up the process of repairing or replacing damaged property.
- Business Income and/or Extra Expense These are essentially the same coverages that are available under your commercial property policy. However, they apply only if the loss of income or extra expense results from damage to covered property caused by a breakdown of covered equipment.
- Spoilage 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 Extends business income, extra expense and spoilage coverages (if these have been 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 your restaurant, and the contents of your refrigerator spoil. If you have purchased utility interruption coverage under your EB insurance, the loss should be covered.
- Newly Acquired Premises Covers premises you acquire or lease after the policy begins.
- Ordinance or Law This 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 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 Products you make or sell may contain your brand or label. If the products are damaged due to a covered loss, your insurer may pay you for the loss and then sell the damaged products. This coverage enables you to protect the reputation of your brand. It covers the cost of removing your brand or label from the damaged products or labeling them as salvage.
- Water Damage Covers water damage that results from a covered breakdown. For instance, a water pump breaks down and causes water to accumulate in your warehouse. The water damages your stock.
- Mold Coverage Covers damage caused by mold that results from a covered breakdown. Also covers the cost of cleanup and testing.