New Tech Changing Equipment Coverage

A circuit board makers testing machine suddenly began to smoke. A self-diagnostic check showed that internal components were “not communicating.” The machine was shut down and the internal switch cards and other plug-in components were removed. Investigators found 52 switch cards and the motherboard were melted and charred.

A metal test probe had apparently fallen into the machine and caused the short circuit that damaged the electronics. The sensitive equipment was typically used 22 hours a day and was critical to test the continuity of printed circuit boards.

The loss was not covered under the property policy. Equipment insurance, however, paid $21,710 for the damage and $164,090 for lost business income.

When it comes to equipment breakdowns, nothing is simple any more. Whether its Silicon Valley or a shop on Main Street, we all depend more than ever on new technology. A company may have the same name, location and employees as it did when it first opened for business, but chances are the equipment it uses has changed a great deal. Equipment breakdown insurance is also changing to keep pace with new equipment risks and the need for new types of coverage.

Once known as boiler and machinery insurance and mostly limited to larger manufacturers, schools and municipalities, equipment breakdown coverage is an increasingly important part of any commercial insurance program. Virtually every business today, large and small, has greater insurable values of equipment. And new technology, such as fragile electrical and computerized equipment, is subject to breakdowns that can be more frequent and costly than in the past.

The name “equipment breakdown insurance” better describes the coverage. Many businesses dont even have a boiler, although boiler breakdowns still account for many expensive losses. Commercial insurance buyers do have a range of modern equipment that they rely on for sales, production, communications and other essential functions. The equipment they use includes inventory control systems, diagnostic equipment, telecommunications, security and data systems, personal computers, copiers, printers and fax machines.

Electrical and electronic equipment is now the number-one category of breakdown loss, according to an analysis of Hartford Steam Boiler claims; 10 or more years ago, boilers and cooling equipment were most likely to break down. It follows that power surges and other electrical line disturbances have become the top cause of breakdowns, surpassing boiler problems as the most frequent cause.

Here are some typical losses involving electrical problems that were covered by equipment breakdown insurance:

Shopping Malla voltage surge from a local utility caused the loss of air conditioning during a heat wave. A 680-ton chiller motor shorted out. The loss totaled $125,594 for repairs and rental equipment.

Office Buildinga power surge was transmitted through an office communications network, destroying 200 computers. Total paid loss: $100,000.

Film Processorthe computer, circuit boards and sensors of a commercial color film processor were destroyed when a truck hit a utility pole and electricity pulsed through the lines. Total paid loss: $48,347

Restauranta short circuit knocked out air conditioning to a nightclub and restaurant for more than a week. The total paid loss of $96,189 included repairs, business income losses and extra expense.

Dont underestimate the investment that a business or other organization has in equipment. Breakdowns can be much more costly than many people assume. High-tech means high risk. Computers and electrical equipment are vital to any commercial operation.

Equipment is everywhere–in stores, offices, in every type of location. Then there are exposures from more basic equipment such as electrical distribution systems, air conditioning and refrigeration, elevators and heating systems, making equipment breakdown insurance more important than ever.

How does the coverage fit with a commercial insurance program? Equipment breakdown coverage supplements the commercial property policy to pay for the unique causes of equipment damage like short circuits, mechanical breakdown, electrical arcing and motor burnout. It helps protect against equipment breakdown loss, just as property coverage provides protection for property damaged by fire or windstorm.

Just about any equipment used to conduct business is covered. Equipment breakdown insurance covers the cost of equipment repair or replacement, spoilage, and expenses incurred to protect property or to speed up restoration of operations.

Business interruption coverage is an important option, since income losses can easily reach many times the cost of the equipment damage. It pays for lost profits and continuing expenses, including rent and mortgage payments, payroll and general overhead caused by a covered breakdown.

With more businesses relying on new technology and business practices, equipment breakdown insurance continues to evolve with new products and coverage. The list of covered equipment is greatly expanded to include todays sophisticated electrical and electronic systems and devices. Since business interruption risks are higher, more coverage is available for income losses due to equipment breakdown.

Computers of all types are usually covered by equipment breakdown insurance. Some policies offer extensive coverage for personal computers, voice mail and other computer equipment, and for the restoration of data lost because of a breakdown.

Another important feature that is standard in some policies is contingent business income coverage. This recognizes the interdependence of todays economy by paying an insured client for business interruption losses and extra expense that result from a covered breakdown at the separate location of a major supplier or customer.

As technology advances and equipment becomes more mobile, equipment breakdown insurance has expanded its coverage to protect equipment when it is used away from an insureds building or property. Off-premises coverage is a change from traditional equipment breakdown insurance, which was designed for equipment installed at a specific location. It can pay for damage to electronic equipment used by business travelers, technical and scientific instruments, and other gear.

Some equipment breakdown policies close a potential coverage gap that can occur when power surges that damage equipment are caused by lightning, snow, ice or wind. The problem can arise because power problems are usually excluded by property insurance.

At the same time, equipment breakdown insurance excludes most weather-related perils that might cause a power surge or other line disturbance. That can leave a client without coverage, unless the equipment policy makes an exception for surge damage.

Another change is in the way commercial clients are purchasing equipment breakdown coverage. Once offered primarily as a standalone policy, equipment insurance has been made available to most any business by embedding the coverage into a commercial property-casualty package policy. By adding equipment coverage automatically, the risk is spread among many policyholders to broaden the coverage, keep prices affordable and eliminate extra paperwork.

Equipment breakdown insurance has changed drastically over the years. It has adapted in response to technology and the marketplace.

In the years ahead, businesses will face new equipment exposures that we cant yet envision, requiring new types of insurance coverage, products and services. The challenge is to educate commercial insurance clients about the financial risks that are associated with advances in technology. Only then can they make appropriate decisions to protect their mission-critical equipment.

Kevin Monahan, CPCU, is vice president, The Hartford Steam Boiler Inspection and Insurance Company, responsible for The Hartford Steam Boiler Inspection and Insurance Companys Central U.S. equipment breakdown insurance operations and strategic risk partner relationships with property-casualty carriers.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 1, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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