Equipment Breakdown Insurance was previously called Boiler & Machinery insurance, when the policy focused on protecting boilers, pressure vessels and industrial machinery. With the modernization of insurance terms, Equipment Breakdown actually is a better name for a policy that is essential for small businesses and big businesses. In its very basic sense a breakdown policy covers the sudden and accidental breakdown of different types of machinery that are either electrically or mechanically powered – so just about everything in your office, warehouse, or factory. Items such as electrical panels, air conditioning systems, refrigeration systems, boilers and pressure vessels, production systems, computer systems, telephone systems, diagnostic equipment and more.
Your business policy will cover these types of property when they are damaged by fire or similar peril but will exclude coverage for things like electrical arcing, explosion, and breakdown which are the common causes of failure for mechanical and electrical equipment. Another way to look at it is that your business policy or property policy will cover the external events that happen to equipment and machinery; and the equipment breakdown insurance policy will cover the internal events that happen to equipment and machinery.
Wear and Tear
An important point to consider when thinking of “internal events” is that wear and tear are not covered on a breakdown policy. In fact the insuring agreement in the breakdown policy defines the covered peril as an “accident” so as to separate those events which are sudden and accidental from those that take place over time – like poor maintenance, wear and tear. The exclusionary language of wear and tear includes: depletion, deterioration, rust, corrosion, erosion, settling, defect, contamination, misalignment, mis-calibration, and any gradually developing condition.
Because of the wear and tear exclusion, you can imagine how difficult some equipment breakdown losses can be to settle! Often, experts are needed to support the insured’s case of a loss being covered and not excluded under wear and tear. All the same, proper maintenance and good recored keeping of regularly scheduled maintenance will help prevent claims and problems in settling legitimate claims.
Loss of Income
An important element of an Equipment Breakdown Insurance policy is the loss of income provision. When a key piece of equipment goes down due to a mechanical failure you may need to shut down some or all of your business operations until the equipment is repaired or replaced. During that shutdown you firm will suffer a loss of income while still incurring operating expenses. Your standard property policy that does include business income (a/k/a/ business interruption insurance) will not cover you for this claim because it was triggered by a breakdown which is not a covered peril. So, including sufficient loss of income coverage on the breakdown policy is important. The level or amount of business income coverage you purchase on the breakdown policy will depend on how serious an exposure you have. As an example, a professional office does not have as an extreme of a loss duration as say a manufacturing facility. Some breakdown policies automatically include a limit of loss of income which is a percentage of the physical damage (primary) limit of coverage. Careful examination of the limits against your exposures should be conducted to avoid problems should a loss occur.
Often we’re asked “what if the equipment is covered under a manufacturer’s warranty – do I still need breakdown insurance?”
Good question, and the answer is usually yes. Most warranties only have a short life span and may not include protection for breakdowns covered by an equipment policy, in addition they will not cover “consequential loss” such as loss of income; which as we described could be as expensive of a loss as the direct damage to equipment. While there will be some overlap, it’s better to have comprehensive coverage under your own policy, rather than relying on a manufacture’s warranty.
Have other questions about mechanical breakdown coverage? Let us know – email or call us for a conversation today!