“The hydraulic line burst at the worst possible time. We were in the middle of production on a large order and had three others stacked behind it. The broken line was fixable, but it had a cascading effect which is where the equipment breakdown coverage really kicked in. The sudden release of pressure damaged the internals of the pump and it seized. That particular pump is a high-pressure unit and only available from the manufacturer in France. It was out of warranty, cost us $20,000 to procure, and took two weeks to arrive using their fastest option. But the cost of the pump was nothing in comparison to the sales we lost in the meantime, the headache from delayed and cancelled orders, and the damage to our reputation with clients…all due to the failure of a $300 line.”
This is a great example of how many businesses depend upon equipment, machinery, and computer systems to produce their product or deliver their service. Business owners should take time to consider all the critical systems their company relies upon and prepare for the unexpected. That can be as simple as having replacement parts on hand, backing up files offsite, or purchasing equipment breakdown coverage.
The Equipment Breakdown Coverage Gap
Although damage to equipment and computer systems is included under property insurance policies, a gap exists when that equipment breaks down on its own. When that happens, no outside forces such as fire or weather cause the damage, therefore property coverage does not help. Equipment breakdown coverage responds when the equipment itself fails due to mechanical or electrical issues.
Equipment Breakdown Coverage
Despite its name, this coverage not only applies to mechanical equipment, but also computer systems. In fact, this coverage is not a new protection, but originated in the 1850s with the insurance of steam boilers. As industry progressed, the coverage expanded until today it covers many business-critical assets.
What is Covered
Equipment breakdown coverage protects a broad variety of machinery, computer systems, tools, and equipment. Most policies define covered equipment to be:
- Equipment that operates under pressure or vacuum
- Equipment that generates, transmits, or uses energy
- Communications equipment
But to bring this to a practical level, below are typical examples of what is protected by equipment breakdown coverage.
Cooling systems and refrigeration
Production machinery and onsite equipment
Equipment controlled by or integrated with computers
Telephone and communication systems
Coverage is triggered when the equipment is physically damaged and needs to be repaired or replaced. Triggers for equipment breakdown coverage are different than typical property insurance policies as they do not include fire, wind, hail, etc. Instead, the triggers broadly define what it means for the equipment to break down and include:
- Failure of pressure or vacuum equipment
- Mechanical failure
- Electrical failure (also think power surge or brownout)
Coverages available are more extensive than you might think and can stretch far beyond the damaged equipment itself. However, each coverage must be selected by the business owner. Just because the coverage is available does not mean it is automatically provided. Consult your policy or ask your insurance agent.
- Damage to the covered equipment: Repairing or replacing the equipment itself.
- Resulting damage to other owned property: Continuing with our earlier example, not only would the failed hydraulic line and pump be covered, but if the burst line spewed hydraulic fluid, covered stored inventory and ruined it, the cost to replace that inventory would be covered as well.
- Extra costs to make temporary repairs and expedite permanent repairs: In the same example, expediting the shipment of the replacement hydraulic pump from France would be a covered expense.
- Lost business income and other extra expenses: Since the damaged pump caused production to cease for a while, income was lost. Equipment breakdown coverage would pay for the net income lost due to the downtime. In addition, it would pay for extra expenses incurred such as cleanup and relocation to a temporary space.
- Spoilage: Equipment breakdown of refrigeration equipment often means a loss of cold stock or inventory, many times costing more than the repair of the equipment. Spoilage coverage protects against this risk.
- Utility Interruption: Electrical, gas, or other utility interruptions often mean lost production, lost revenue, or spoilage, all without any physical damage to equipment. Utility interruption protects business income as well as inventory/stock from spoilage due to an interruption in utilities.
Under equipment breakdown coverage, computer equipment is included. The most common claims for computer equipment under this coverage are electrical issues such as power surges, power outages, or brownouts. However, it is worth mentioning certain computer-related risks are NOT included, such as cyber breach, virus, ransomware, or similar cyber threats. Such coverage is properly found in cyber liability insurance.
How to Purchase
Although standard property insurance policies do not include equipment breakdown coverage automatically, it can often be added to them for a reasonable cost. If not, a separate equipment breakdown policy is readily available. Coverages vary, so be sure to consult your insurance agent.
Questions regarding equipment breakdown coverage? Contact your Bankers Insurance agent. Not a client of ours? Let us earn your business! Each client is assigned a personal agent in our office, given their email address, and provided a phone number that rings right on their desk.