Boiler and Machinery Insurance

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1 Boiler and Machinery Insurance What is boiler and machinery insurance? You don t need a boiler to have the exposure! The term "boiler and machinery" insurance is really a misnomer. Modern policies cover much more than just boilers and production machinery. In fact, many policies are written for insureds who do not own or operate boilers or pressure vessels, but yet have sizable mechanical and electrical exposures. In its broadest context, boiler and machinery insurance has to do with insuring equipment that generates, uses or transmits power and is more accurately described as equipment breakdown coverage. Who needs it? If your business or organization owns, operates or depends upon some type of equipment to generate revenue, you likely need equipment breakdown insurance. Ask yourself the following questions: Do you use electricity? Do you heat, cool or refrigerate your premises? Do you have communication networks? (computers, telephones) Do you manufacture or process goods? Do you use equipment to sell, deliver services or help you keep track of sales? Do you use a lot of hot water? If you answered yes to any of these questions, you likely need equipment breakdown insurance. A Closer Look: What s in the Boiler? A wide range of electronic equipment or equipment that has some type of electronic component is covered by boiler and machinery insurance. Transformers, electrical switch gears, motors, voltage regulators and generators. As well, equipment which is more electrical than mechanical in nature, like computers, fax machines, copiers and telephone systems and networks. Boiler and machinery insurance can also include refrigeration equipment, air conditioning equipment, various types of piping, turbines, engines, pumps, compressors, blowers, gearing, shafting, electric motors, generators, transformers and assorted other types of mechanical and electrical equipment. Why do I need it? The Costs. The cumulative costs of equipment breakdown can be staggering. It s not just the physical damage caused by the explosion or breakdown that's of concern. While repairs are being made, valuable time and profits are lost. Business Interruption coverage, an extension of boiler and machinery insurance, protects against this. Often Extra Expense coverage is required to keep the business in Page 1 of 5

2 operation regardless of cost. Consequential Damage and Refrigeration Interruption insurance protect against spoilage as the result of breakdown. Many times these business interruption, extra expense and spoilage losses can be much more extensive than the damage to the equipment itself. These breakdowns occur often enough for there to be a legitimate risk to your organization's financial health and business profits. The unique Hazards. Equipment is subject to unique hazards including power surges, short circuits, low-voltage conditions, centrifugal force, motor burnout, and mechanical breakdown. And, since machinery and equipment are generally integrated into an interdependent system, when one breakdown occurs, it can have a snowball effect that leads to another problem. In fact, failure to one part can cause your entire system to crash. The cost to repair it can be expensive, as can the cost of an interruption to your business. Equipment breakdown insurance covers equipment accidents from these risks of loss. Electronic Networks on the rise. Electrical exposure has grown dramatically in recent years as businesses have become more automated and integrated through electronic networks. Even small firms have become dependent on computer networks and other forms of electronic equipment for inventory management or storage of customer account and product information, and they also rely on scanners, fax machines, card readers, etc. This equipment is exposed to power surges, short circuits, and to general electrical disruption that can cause extensive losses. Can I get the same protection from my commercial property insurance policy? Property insurance for your business covers many standard perils, such as fire, accident, and water damage, but it does not pay for equipment failure and any resulting losses. Even "all risk" property coverage wasn't designed to pay for equipment accidents from the unique causes of equipment failure such as short circuits, centrifugal force or mechanical breakdown. Standard commercial property and most multi-peril or package policies contain exclusions for electrical disturbance, mechanical breakdown, and explosion of steam boilers and piping. Equipment breakdown coverage is specially designed to pay for damage caused by these risks. How is it different from Warranties or Service Contracts? Warranties and service contracts are important but they don't cover many of the common causes of equipment breakdowns. Maintenance contracts cover routine services such as cleaning or adjustment. But they don't pay for damage due to operator error, the cause of significant equipment breakdowns. Equipment breakdown insurance does. Warranties and maintenance contracts don't pay for business interruption or income loss resulting from breakdown. Nor do they pay for spoilage, damage to surrounding property or extra expenses to restore operations. Equipment breakdown insurance can cover all these risks. I'm a Tenant, Do I Need It? You don't have to own a building to face an equipment breakdown risk. If you are a tenant you may still have equipment such as phone systems, fax machines, computers, air conditioners and an electrical system. These types of equipment do fail and even a modest loss can be painful to a business. Your lease may also make you responsible for other equipment that services your premises. Your operations and income are dependent upon the equipment of others. If the electrical, Page 2 of 5

3 heating or cooling system of your landlord broke down, the interruption of those services can impact you. The right equipment breakdown coverage can protect you in this capacity as well. What does Boiler and Machinery insurance pay for? Boiler and machinery insurance pays for financial loss incurred when equipment breaks down suddenly and accidentally. Specifically, it covers direct damage to covered property when caused by a covered cause of loss. Covered property is any property that is owned by the named insured or is in the named insured's care, custody, or control and for which the named insured is legally liable. A covered cause of loss is a sudden and accidental breakdown of the insured's boiler and machinery equipment or any part of the equipment described in the policy. The standard boiler and machinery policy contains three extensions of coverage: 1. Expediting Expense coverage this covers the reasonable extra cost incurred to expedite progress after a loss in order to get you back in business quickly. a manufacturer has a piece of heavy equipment breakdown. The equipment cannot be repaired; it must be replaced by a modern equivalent. The costs associated with its replacement, including quick delivery charges, are covered under the policy. 2. Automatic Coverage this covers accidents to objects at newly acquired locations for up to ninety (90) days after the named insured acquires the property; and Defense Cost and Supplemental Payments this applies when the insurer is defending the insured against claims or suits alleging liability for damage to property of others. Defense Cost and Supplementary Payments are payable in addition to the policy limit. Expediting Expenses are included in, and not in addition to, policy limits. In addition to the three extensions, the policy has three interior sub-limits of $5,000 each for: 1. the cost of cleanup, repair or replacement, or disposal of hazardous substances; 2. damage resulting from contamination of covered property by ammonia; and 3. damage by water to covered refrigerating or air conditioning vessels and piping. These limits are part of and not in addition to the limit specified in the policy. What are the types of Coverage? Comprehensive Coverage This coverage is written only under the standard policy form. Coverage is provided for all insurable boiler and machinery equipment, including or excluding production machines. Coverage can also be written to cover particular types of boiler and machinery equipment. Your Tele-marketing phone system is destroyed during a power surge. The cost of replacing your phone system is insured it s also possible to recover the loss of business income during the replacement time. A short circuit in your building causes complete loss of computer information. The cost of recovering the information is significant. The costs associated with the repair of the computer system as well as the collection and restoration of data is covered under the policy. Page 3 of 5

4 Basic Coverage This coverage can be written under the small business form to cover boilers and vessels equipment, including or excluding air conditioners/compressor units. A hot water boiler explodes and causes significant damage to your business premises and surrounding building. The damage to the boiler and the business premises as well as surrounding buildings are insured. Broad Coverage Form This coverage is also written under the small business policy. Many insureds refer to this form as the comprehensive form for small business since it covers a broader range of equipment. Coverage is provided for any boiler, any fired or unfired pressure vessel, any refrigeration or air conditioning equipment, and any mechanical or electrical equipment. The compressor on your restaurant refrigerator breaks down. As a result, you must have the unit repaired, you must also replace all of the spoiled produce and close the premises for two days to get things back in order. All three of these losses (repair to the refrigerator unit, food spoilage and business interruption, are insurable under the policy). Limit of Insurance Under the small business form the limit of insurance is based on the estimated value of the insured's property. Are there additional coverages available under boiler and machinery insurance? Business Interruption Coverage This endorsement can be written to provide coverage on either a "valued" or an "actual loss sustained" basis. When the actual loss sustained option is used, the coverage pays only for the insured's actual loss of income. If coverage is written using the valued option, the insured is able to collect a predetermined amount of coverage for each day the business is interrupted because of an accident to an insured object. The coverage is subject to a per accident limit and a deductible that can be expressed as either a specified time period or a dollar amount. When the valued form is used the daily amount of insurance is paid regardless of the actual amount of loss. Extra Expense This endorsement pays for the extra expense of maintaining operations after an accident to an insured item until normal operations can be restored. This endorsement excludes coverage for loss of income. To have coverage for loss of income and extra expense, the endorsement called combined business interruption and extra expense must be added to the policy. Consequential Damage This endorsement covers loss due to spoilage of specified property from lack of power, light, heat, steam or refrigeration, which results from an accident to an insured item. What is the standard deductible? The standard deductible is $500. Coverage can be written with more than one deductible. The insured can choose one deductible for a group of covered items and a different deductible for all other items. If a loss occurs involving more than one covered item, the higher deductible would apply. Page 4 of 5

5 Inspection Services Another benefit of boiler and machinery insurance is the inspection service that insurers provide to the insured. Boiler and machinery insurance coverage is designed to reduce, through periodic inspections, the chance of malfunction among boilers and other equipment, including pressurized, electrical, and electronic machinery. Not only does this periodic inspection service satisfy most jurisdictional inspection requirements, it can also benefit the insured by providing sound loss control recommendations that can help ensure efficient operation and longer equipment life. The first step in the risk identification process is to determine what objects are most likely to give rise to a loss. One of the most apparent, for example, is any object containing steam. In addition to steam boilers, any object under pressure or vacuum will be considered. Refrigeration and air conditioning compressors are also insured under a boiler/machinery policy. Electrical objects such as transformers, reactors, circuit breakers, and other items that could be critical will also be identified and examined. Contact us for a no-obligation Consultation To learn more about the Boiler and Machinery Insurance coverage that will work for your particular business needs, please contact our offices on a no-obligation basis, for a free, personal consultation. We have a dedicated team of professional employees waiting to serve you. Page 5 of 5