Dateline: early 1960s. Location: telephone company office on Manhattan Island. Time: noon hour. Without any advance warning, a 40-foot-long boiler tears loose from its bolt in the cement, blasts through a reinforced concrete wall and travels 400 feet though the office, plowing through six banks of file cabinets. It is believed that a valve manufactured in Fort Wayne, Indiana, had malfunctioned, turning the low-pressure boiler into a very "high pressure" boiler that exploded. Welcome to the world of boiler and machinery damage insurance!
This article will be based on Insurance Services Office, Inc.'s (ISO), boiler forms. There will be occasional comparisons to one of Hartford Steam Boiler Insurance Company's boiler and machinery contracts.
I have several reasons for deviating from the normal format of not referring to a specific insurer. Hartford Steam Boiler writes a significant amount of boiler and machinery insurance. Any insurance agent has direct access to and can use the Hartford Steam Boiler (HSB) forms. Also, because HSB writes only boiler insurance, an agent does not need to be concerned about having to make a huge volume commitment of other kinds of insurance just to be able to use HSB's boiler and machinery insurance.
There are several types of boilers. They are referred to with such terms as fire tube, water tube or cast iron sectional. Boiler inspectors and boiler underwriters need to know the differences among the various styles of boilers. Many people, when they speak of boiler insurance, forget that the full name of the insurance product is boiler and machinery (B&M) insurance. A lot more than boilers are covered. Electric motors, air conditioners, refrigeration equipment and computers comprise a partial list of the many types of objects that can be insured under a B&M contract.
In a fire tube boiler, tubes go through a "pot" of water. Fire goes through the tubes in the water to turn the water into either hot water or steam. One of the safety controls on this style of boiler ensures that the fire will be turned off if the water level inside the boiler gets too low. In the above example, the low water cutoff control malfunctioned. Several of the fire tubes got too hot because there was no longer any water around them. So, aside from all the other damage from that accident, it caused several of the fire tubes to warp, so they had to be replaced. A boiler and machinery policy would pay for the cost of replacing those warped fire tubes. Regular property insurance would not pay for the cost of replacement in this kind of a loss.
A typical boiler and machinery damage insurance contract provides coverage for damage to the insured object(s), other property of the insured and property belonging to anyone other than the insured. However, more and more property insurance is being written on newer, broader property insurance forms. The property forms are now in a position to pay for losses that used to be covered only by a boiler and machinery damage contract.
Insuring property of the insured and others as part of the boiler and machinery contract still makes sense. Sometimes there are loss settlement problems when both a property insurer and a boiler insurer cover the same part(s) of a loss. Later, in another article, I will discuss how to reduce loss adjustment problems between insurers of different lines of business.
Usually boiler and machinery policies have a rather long list of items that are considered as covered objects. You will find the list of items insured by that particular policy in the Definitions section of the contract. It is here that you can determine if there is coverage for refrigeration equipment, air compressors, air conditioners, production machinery and other items. Comparing the "objects" definition in two different contracts is not a bad way to determine if two boiler policies are similar or different in their coverage.
All boiler and machinery policies have a clause defining the types of objects that are being covered in the contract; however, there are differences in types of boiler policies. ISO provides two forms for small businesses. The Small Business Boiler and Machinery Coverage Form (SBBMCF) provides coverage basically on boilers, related equipment and air-conditioning systems that have a capacity of 60,000 Btu per hour or more. Business interruption and extra expense is covered for a limit of 25% of the object limit. An object is typically the boiler that is listed on the declarations page.
ISO's Small Business Boiler and Machinery Broad Coverage Form also covers the object(s) described on the declarations page and provides business income and extra expense coverage. Its definition of covered objects is broader than the other small business boiler contracts. Air compressors are among the objects included in the coverage provided by the small business broad form contract.
Boiler coverage
In the following imaginary situation, Machine Shop, LLC, had just upgraded much of its equipment with a new air conditioner and all new electrical service, including a very large control panel and a new air compressor. All of the equipment was up and running and everything seemed to be proceeding well. No one noticed that the air compressor had slowed down a little. Nor, did anyone see that the air pressure on the air compressor gauge was rising--well beyond the pressure for which the machine had been set. Finally, the pressure in the air compressor storage tank became so high that it blew up, severely damaging the air compressor's pump.
Machine Shop's owner expected that his boiler and machinery policy would pay for the damaged equipment and business income loss associated with it. He had carried that kind of coverage on his boiler and machinery policy for many years. Recently, however, he had changed insurance agents. The new agent assured him that the new boiler and machinery policy contained all of the coverages provided by the old B&M contract--plus some additional coverage.
Machine Shop submitted this loss to the boiler and machinery insurer. Within a couple of days, the boiler insurer informed Machine Shop that its boiler and machinery policy did not provide any coverage for loss to the air storage tanks or the compressor. When the owner asked his agent to explain this, the agent responded that the boiler forms must have changed and coverage for damaged machinery could no longer be insured. The insurance agent went on to state that Machine Shop was insured with a small business boiler policy that provided all of the boiler and machinery coverage that was available.
Machine Shop's owner called his former agent who told him that coverage for machinery breakdown is available two ways. Regular boiler and machinery policies with an endorsement and small business broad form contracts cover losses due to machinery breakdown. Hartford Steam Boiler has at least two policies that cover the loss of machinery breakdown.
Subrogation
To use another fictitious example, let's assume a business called Small Restaurant, Inc., installed some very expensive refrigeration equipment in order to meet the requirements for obtaining a license to operate. While Small Restaurant was closed, the landlord came into the premises. The landlord knew nothing about refrigeration equipment. This did not stop him from "fiddling" with the valving and controls.
Early the next morning, the result of the landlord's activities became evident. Every new cooler, refrigerator and freezer had malfunctioned and quit running. There was significant damage to all of the equipment. This claim was submitted to Small Restaurant's boiler and machinery damage insurer.
After the repairs were made, the boiler and machinery damage insurer subrogated against the landlord. The landlord just laughed and told the insurer that it couldn't subrogate. The tenant's lease prohibited any insurer of Small Restaurant from subrogating against the landlord. Both Small Restaurant and the boiler and machinery damage insurer checked the lease and confirmed that it did contain a waiver of subrogation clause. Because the subrogation rights had been waived, the boiler and machinery insurer stated that under the terms of their contract, there was no coverage for the loss.
ISO's Small Business Boiler Policy, Small Business Boiler Broad Form, and its regular contract all have identical subrogation clauses. There is no coverage if the boiler and machinery damage insurer's subrogation rights are waived.
Two of Hartford Steam Boiler's boiler and machinery damage policies do not have a waiver of subrogation clause. With these policies, there is coverage even if the tenant or landlord has waived the subrogation rights of the insurance company.
Prospects
Many agents do not have any idea of the kinds of businesses that might be prospects for boiler and machinery damage insurance. A quick look at any main street in any town will reveal many. Restaurants, service stations, car washes, drugstores, offices, food stores and flower shops are examples.
Summary
Here are some of the points raised in this article:
* Boiler and machinery insurance can be used to insure a wide range of objects besides boilers.
* Boiler policies have a list of the objects that are insured by each policy.
* Some policies insure more objects than others do.
* Be careful of the subrogation clause. While one insurer does not deny coverage if there is a waiver of subrogation, other contracts do deny coverage if a waiver of subrogation does apply.
* Comparing the list of insured objects between two or more policies can give an indication of whether or not one policy is better than another. *
©COPYRIGHT: The Rough Notes Magazine, 2000