Like any insurance policy, boiler policies can be endorsed or amended to modify coverage to fit the particular need of a client. This article will be dealing with traditional boiler contracts in which the underwriter attaches the appropriate endorsement(s). Insurance Services Office, Inc.'s, boiler forms will be the basis of this article.
Proper object description
In a fictitious example, Local Village had several large, deep-water wells. Large pumps were used in these wells to supply water to the residences and businesses of the village. To have an adequate, dependable flow of water, these wells had been drilled over 1,000 feet down. Pumps large enough for this type of operation are very expensive and driven by a computer control panel. Boiler and machinery damage insurance had been bought to cover damages to the pumps and related equipment.
Despite all of the safety precautions, cutoff switches and surge protectors that they could buy, lightning struck one of the wells. There did not appear to be any damage to the building that housed the well equipment. After the pump ceased to operate, one of the village water engineers came to look at the well house and the equipment that was in it. At first glance, she did not see a lot of damaged equipment lying all over the floor. It took a closer look to determine the damage. Several of the wires leading to the computer control panel were black. After removing the rear cover to the computer and its control panel, she saw that virtually all of the wires and circuits had been "fried." Most of the wires were blackened and she could see that a number of the circuit boards had melted. Upon looking at the motor for the water pump, she could see that the wires leading to it also were blackened. After removing one of the covers to the motor, she also saw more blackened wires and a few that were melted.
This loss was reported to their boiler and machinery damage insurer. Coverage had been purchased to protect against damage to the well machinery. The damage to the motor was covered. Normally, computer equipment is not covered on a standard ISO boiler and machinery contract. However, in this case, the computer was being used as part of a covered object. As a result, the computer damage was also covered.
In the example just given, attaching an endorsement to cover mechanical objects provided coverage for the insured objects. These are the endorsements used to describe covered property:
* Mechanical objects
* Pressure and refrigeration objects
* Electrical objects
* Turbine objects
* Comprehensive coverage (excluding production machines)
* Comprehensive coverage (including production machines)
Whether a client should use a somewhat restricted definition of coverage or the comprehensive depends upon the client and the nature of the insured operations. The four non-comprehensive endorsements are used for clients who do not wish to insure all of their eligible objects. The customer who understands which objects are not being insured and is able to afford to replace those items out of its operating budget does not need to purchase boiler and machinery insurance on those items.
By contrast, there are businesses that wish to insure everything. Comprehensive is the type of covered object description that they should buy. Any firm that is making things and desires comprehensive description should consider buying comprehensive including production machines.
Consequential loss
This is an actual loss that occurred on the south side of Milwaukee during the 1980s. Located outside and at the rear of a small supermarket building, compressors and related equipment operated the freezers and refrigeration units located inside the store. Vandals threw concrete blocks into the compressors. Even though the ice cream was still very hard, the state department of health condemned $20,000 worth of ice cream. All of it had to be thrown away.
The supermarket submitted a claim to its commercial property insurer. The insurer denied the claim stating that its policy form did not cover consequential loss. Actual damage was done to refrigeration equipment. The vandals did no direct damage to the ice cream. However, the ice cream was "damaged" and had to be thrown away as a result of what the vandals had done.
Boiler and machinery damage coverage with a consequential damage endorsement added to it would have covered the loss of the ice cream.
Joint loss
In a fictitious example, Old Hotel, Ltd., used a low-pressure steam boiler to provide heat for the premises. There was a small fire and explosion. All of the damage was confined to the boiler room. Some of the damage was clearly a boiler loss, while another part of the damage was clearly a loss under the property policy. However, the problem arose from the significant part of the loss that could be considered as covered by either the boiler policy or the property policy. Old Hotel wanted to be back in operation very quickly. However, this was not possible because as long as the two insurers were arguing over what each of them should pay, neither insurer would give the hotel permission to proceed with the repairs.
While I used an imaginary loss to illustrate a point, I do remember similar, real-life examples from a time when I was actively writing boiler insurance. Here is an easy way to prevent this type of a problem. The boiler policy should be endorsed with a joint or disputed loss agreement. A similar endorsement should be attached to the commercial property contract. The essence of these endorsements is that if both the property and boiler insurers agree that they have coverage but disagree regarding how much each should pay, each will pay 1/2 of the disputed part of the loss. There is no premium charge for these endorsements. And, they can certainly eliminate the problem of two insurers arguing over which one will pay for a loss.
Computers
In a fictitious example, Ace Office Supply, Ltd., used computers as a part of its operation. A power surge that was generated internally at their location ruined much of the computer. Ace Office Supply, had a boiler and machinery policy that covered much of its operating equipment. Ace presumed that there was coverage for the computer on its boiler policy. However, the adjuster informed Ace that there wasn't any coverage for losses to the computers.
The Insurance Services Office does not have an endorsement to provide coverage on computers that are not an integral part of a covered object. Several boiler and machinery insurers create their own version of computer coverage by attaching an endorsement to an ISO-based boiler and machinery contract. Even though an insurer might be using ISO forms, the insurance company may have made an independent filing so they can provide coverage on computers.
Expediting expenses
A loss that occurred in Oshkosh, Wisconsin, during the 1970s illustrates the importance of coverage for expediting expenses. A large electric motor burned out. An electrician with the ability to work on this very large motor had to drive for an hour to arrive at the firm where the motor was located. While the electrician was on his way, a large crane was being brought in and set up. Another crew was tearing open the roof so that the crane could lift the electric motor through the roof and set in on a lowboy trailer.
Lowboy trailers typically are used to haul large machinery. The platform of the truck bed is probably less than 12 inches above the ground. Many of these lowboy trailers will have three to six axles on the trailer.
The electrician disconnected the motor from the plant's electrical wiring circuits. Then the motor was lifted by crane out through the roof and put on the lowboy trailer. The lowboy trailer was driven to Chicago, about a four-hour drive away.
In Chicago, the damaged motor was removed from the lowboy. Then a new motor was loaded onto the lowboy, whereupon the trucker and new motor returned to the plant. At the plant, the crane picked up the new motor and lowered it through the hole in the roof. The electrician attached the necessary electrical wires to it. The motor's switch was turned on and the motor ran.
This situation occurred on a weekend. Consider the costs of renting a lowboy trailer with the huge semi-tractor needed to pull it on a weekend. The large crane was also rented for two days on a weekend. Because it was not known when the lowboy would return with the new motor, the electrician stayed overnight so that he would be quickly available to connect the new motor. His pay was double time from the time he left his home until he returned to it.
Renting the crane and lowboy and having an electrician on the scene during a weekend may all be considered as expediting expenses. The idea is to spend money to have the repairs completed in less time than normal. Boiler and machinery policies have coverage for $25,000 of expediting expenses. Higher limits for expediting expenses are available.
Water damage limit
Refrigeration and air-conditioning equipment can be insured on a boiler and machinery contract. When these kinds of machinery malfunction, they can cause water damage. This water damage is covered by the contract. The normal limit for water damage is $25,000. A limit higher than $25,000 can be added by endorsement to the boiler and machinery policy.
Transfer of rights of recovery (subrogation)
Subrogation is a concept that has been around for a very long time. The essence of subrogation is that someone negligently injures the insured or the insured's property. Payment for the loss is made to the insured by the insured's own insurance company. After paying the insured, the insurer will try to recover what it paid the insured by making a claim against the person who negligently caused the insured to have a claim.
Today's insurance contracts now use an expression "Transfer of Rights of Recovery Against Others To Us" instead of subrogation. Here we will give three losses in which subrogation is a factor. These losses are to give some illustration of subrogation situations. After those examples, we will give some ideas regarding how to deal with subrogation.
In the first illustration, the tenant damaged the landlord's boiler. The landlord's boiler insurer paid for the damage to the boiler and sought to recover that amount of money from the tenant.
The second scenario involves the damaging of the tenant's equipment by the landlord. Coverage was provided by the tenant's boiler and machinery damage insurer. After paying for the tenant's damage, this insurer sought to have the landlord pay for the repairs.
In the third situation, the tenant caused the damage. The landlord's insurer paid for the damage to the landlord's object(s) and proceeded to try to recover from the tenant. However, the lease had a mutual waiver of subrogation clause. Due to the waiver of subrogation clause, the boiler and machinery insurer could not subrogate. Because its subrogation rights had been waived, this insurer stated there was no coverage on the boiler and machinery damage contract. Then it proceeded to try to get the money back from its insured.
Boiler and machinery damage insurance contracts state that there is no coverage under the contract if their subrogation rights have been waived. If the subrogation rights have not been waived, then either the tenant or the landlord or both need to buy insurance to protect against possible subrogation claims.
Commercial property policies automatically come with a subrogation clause that can be waived. For property policies, for most losses there is no need for insureds to purchase coverage for subrogation claims.
Both the tenant and the landlord do not need to purchase coverage for potential subrogation claims. There are two things that need to be done. The first thing is to have a mutual waiver of subrogation clause put into the leases. This will prevent the insurers from being able to subrogate. There is no cost for doing this. Usually some effort will be required to convince the attorneys for the landlord and the tenant. The second thing--if insurance policies do not already allow waiver of subrogation--is to have a waiver of subrogation clause attached to the respective insurance contracts.
Summary
* Boiler and machinery damage coverage applies only to the described objects. Be sure that you are covering the proper objects.
* There are several definitions of covered objects. Check to determine that the correct definitions are being used.
* Consequential loss (typically) is a loss to foodstuff when there was no direct damage to the food itself but the food still had to be destroyed.
* Joint loss is an endorsement that can preclude property and boiler insurers from disagreeing over who should pay for certain parts of a loss.
* Some insurers will insure computers on a boiler and machinery damage form.
* The expediting expense limit can be increased.
* Increased limits can be purchased for the water damage exposure of refrigeration and air-conditioning equipment.
* The standard boiler policy has a subrogation clause in it. For some insureds, you may choose to waive the subrogation clause. Be sure to endorse a boiler policy, if necessary, to waive the subrogation clause. *
©COPYRIGHT: The Rough Notes Magazine, 2000