Table of Contents 

PF&M AT A GLANCE

Equipment breakdown protection

It used to be called simply boiler and machinery coverage, but times have changed! When it comes to equipment, nothing is simple any more. The Insurance Services Office’s (ISO) latest revision of this coverage eliminated this familiar term and replaced it with equipment breakdown protection coverage, which more clearly reflects the type of coverage needed in the 21st century.

A few years ago a power outage or electrical disturbance was little more than an inconvenience. The same event today can damage or destroy sensitive equipment and cost even more in business income and extra expense losses. Boilers, air conditioning and refrigeration equipment still account for the most expensive losses, but electronic and electrical equipment losses are now by far the leading cause of most equipment claims. Equipment breakdown insurance changed to keep up with new types of equipment and the coverages needed to protect it. The old coverage, which applied mostly to larger manufacturers and government entities, changed and became an important standard part of most commercial insurance programs.

Equipment breakdown insurance now covers virtually any type of business equipment and can be designed to coordinate with any commercial property insurance program. It pays the costs to repair or replace property and can also include coverage for spoilage, expenses to protect property or expenses necessary to restore normal operations.

The coverage includes breakdown of covered equipment owned by the insured as the only covered cause of loss. It also covers similar property of others in the insured’s possession if the insured is legally responsible for loss or damage to it. This coverage is needed because of limitations or exclusions on breakdown coverage in most commercial property coverage forms. The insurer must also defend the insured against any claim alleging liability for damage to property of others.

Equipment breakdown can be written as a stand-alone, monoline policy or as a coverage part in a commercial package policy.

The new form is more streamlined than its predecessor and contains wording that makes it consistent with the language in commercial property coverage forms. Other wording is included that previously appeared in separate or optional endorsements. In addition, new forms, provisions and endorsements have been developed. For example, the basic coverage form has provisions to include 10 of the most frequently used coverages, and three of those were not even available in the previous program!

The policy consists of both common policy and equipment breakdown declarations pages, along with the common policy conditions that apply to all commercial lines coverage forms, and the coverage form itself. Many of the exclusions in the coverage form are familiar, since policy language now aligns closely with the language in property coverage forms. Nearly all explosion losses are excluded because they are normally covered under property forms. Many of the loss conditions and general conditions are also familiar and similar to those in property forms.

The form includes several important and exhaustive definitions. Breakdown is damage caused by failure of pressure, vacuum, mechanical and electrical equipment. It does not include damage from centrifugal force, malfunctions, certain defects, leaking valves and connectors, tube or brush damage, foundation or structural damage, protective device functions or gas turbine cracking caused by combustion.

The definition of covered property includes pressure, vacuum, mechanical, electrical, production and diagnostic equipment. This includes computer and communications equipment, as well as equipment that generates, transmits or uses energy. The 12 categories of defined ineligible equipment or property not covered are mostly better covered by other forms of insurance, such as other property, automobile, aircraft, watercraft and inland or ocean marine insurance forms.

A specific type of excluded property is any equipment that must be replaced on a scheduled basis as part of periodic maintenance. Most equipment breakdown losses can be prevented with proper maintenance, and this coverage form automatically includes inspection services to ensure that equipment condition is inspected periodically. The inspections provision in the form also meets any inspection conditions legally required by a governmental entity or municipal agency.

The Joint or Disputed Loss Agreement condition is unique because it keeps the insured from being treated unfairly in a loss adjustment when two or more insurance companies providing coverage cannot agree about coverage or coverage amounts. Under this provision, the insured is compensated for a covered loss on a timely basis and the insurers then determine their respective shares of the total loss payment.

Business income is a very important coverage option to consider. The broad range of covered equipment means a higher level of risk for business income and extra expense losses in addition to property damage losses. Business income exposures that once were considered no more than low or moderate for most businesses have increased dramatically as customers depend more and more on their equipment. Nearly half of all equipment breakdown claims now include an element of loss of business income or incurred extra expenses.

Another important consideration is contingent business income coverage. This coverage acknowledges that a business depends in part on other businesses and pays business income or extra expense losses resulting from a covered equipment breakdown incident at the location of a key supplier or customer.

A number of coverage, exclusion and valuation endorsements are available to customize coverage to meet the specific needs of a given insured.

Please note that this is only a brief overview of the coverages available in this program. The PF&M Analysis from The Rough Notes Company, Inc., contains broader and more thorough discussions of these and other related subjects. Agency OnLine subscribers can refer to PF&M Sections 231.4-2, Equipment Breakdown Protection Coverage Analysis, for a detailed evaluation, discussion and additional information on this and related subjects. *

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