The excess and surplus lines market continues to offer new coverages, including insurance that protects against the breakdown of equipment. Increasingly, companies are using arrangements with specialty insurers to incorporate equipment breakdown coverage into their product offerings. This follows a trend among standard insurers who have made equipment breakdown a standard part of their commercial package policies.
Until recently, equipment breakdown was not available in the surplus lines market as it was in the standard markets. Surplus lines companies and wholesalers were placed at a competitive disadvantage as retail agents began to expect equipment breakdown to be included in their packages in an effective and efficient way. The retailer's customer often had few options from the surplus lines market for affordable equipment breakdown coverage, which pays for repairs, business interruption, and other related losses. By offering equipment breakdown and other specialty coverages, many surplus lines companies are now starting to broaden their product offerings in response to this need.
Filling a Coverage Gap
Once purchased primarily by industrial risks, equipment breakdown coverage has become essential for all commercial clients. Every business or organization today relies on electrical and other equipment that is more complex and costly to repair. The lack of equipment breakdown insurance in surplus lines left a coverage gap — a serious exposure since it is estimated that half of the commercial property-casualty insurance market is served by non-traditional providers to cover risk.
Surplus lines companies are responding with equipment breakdown coverage that is reinsured and serviced by specialty carriers who make a business of insuring equipment. That is important, since equipment breakdown is different from coverage for fire, windstorm, or other property exposures, requiring technical knowledge and extensive service capabilities. The unique causes of breakdowns have long been excluded by package policies, and it takes specialists to understand equipment.
The specialty insurer provides a surplus lines company with coverage and services that range from filings and underwriting to jurisdictional inspections of equipment, claim handling, and marketing support. It is also vital for the specialty insurer to understand the unique role of, and work effectively with, wholesalers. In essence, the specialty insurer becomes the "equipment breakdown department" for the surplus lines company, which can expand its coverage without adding staff and resources. The company's wholesalers can save retailers time and money with "one-stop" shopping that includes equipment insurance.
A Market Transformation
Many surplus lines companies are using a portfolio approach that has long been successful in the standard insurance markets. This model, which allows wholesalers to add equipment breakdown to their policies, transformed the standard markets in the 1990s and offers many advantages. It makes it easy for insurers, brokers, agents, and insureds to include equipment breakdown in an effective and efficient way since there is no separate policy or paperwork. At the same time, spreading the risk makes the coverage more affordable.
In the standard markets, virtually all the national carriers and the vast majority of regional carriers offer equipment breakdown insurance on a portfolio basis. It has become standard practice for equipment breakdown coverage to be automatically included, and market surveys show that most agents prefer to package specialty coverages, reducing the time and extra cost of quoting mono-line coverage.
Surplus lines companies are adapting the portfolio concept to enhance their coverage and compete with standard market insurers. Some specialty carriers who provide equipment breakdown coverage are adjusting these arrangements to accommodate the different needs of surplus lines companies. This makes equipment breakdown coverage seamless and flexible within the context of the surplus lines marketplace.
Keep the Wholesaler in Mind
A key consideration is the role of wholesalers with contract binding authority in the surplus lines market. The equipment coverage is still priced on a portfolio basis, providing the same rate efficiency available in the standard markets. However, the coverage must take the wholesaler into account. After all, the decision to add equipment breakdown will be made by each wholesaler, and they should be able to opt out of the program. Individual insureds should have the same choice.
The most successful portfolio programs are partnerships among the surplus lines company, the specialty insurer, wholesalers, and insureds. They all recognize the need for equipment breakdown coverage in a "high-tech, high-risk" world in which businesses rely heavily on mechanical and electrical equipment.
Whether you are purchasing insurance, arranging a program, or representing an insurer who wants to add equipment breakdown through a specialty insurer, there are some things to consider when evaluating coverage:
How inclusive is the equipment breakdown program? Are virtually all types of equipment covered for the many unique causes of mechanical and electrical breakdown? Is business interruption coverage included? Often, the income loss is much higher than the cost of repairs.
Who will handle the claims? The specialty insurer must have the knowledge and experience with equipment to effectively adjust equipment breakdown losses. Claim staff should have access to networks of repair firms and spare parts. Don't hesitate to inquire about the claim reputation of the specialty company.
What about jurisdictional boiler inspections? They are a key benefit. Be certain that the specialty insurer has enough inspectors located near clients so inspections can be completed when legally required. Otherwise, clients can easily find themselves in violation of state boiler regulations.
Are loss prevention and maintenance management services offered? Maintenance information should be readily available to all insureds. A specialty equipment insurer should be able to inspect locations with significant equipment exposures and respond to questions about ways to improve operations and maintenance.
The need for equipment breakdown insurance is clear — the focus now is on how to provide broad coverage that is easy to integrate and attractively priced. If surplus lines follow the experience of the standard markets, embedding equipment coverage in package policies will become the industry standard. The result is improved coverage and less hassle for both insured businesses and surplus lines companies as specialty insurers take over the equipment coverage that they know best.
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