Chapter 10 - Equipment Breakdown Insurance

Mechanical Equipment Breakdown Equipment includeso Compressors/pumpso Engines/turbines Losses includeo Breaking of rotating elementso Destruction of gearso Failure of moving parts Causeso Maintenance (lubrication)o Overuse and stresso Metal fatigueAir Conditioning and Refrigeration Equipment Include electrical and mechanical componentso Fanso Compressorso Switchboards Similar breakdowns to electrical and mechanical systemso Often excluded under BPP Ammonia refrigeration includes contamination hazardOther Office Equipment and Systems Equipment breakdown insurance traditionally did not cover office equipment Modern technology has created sophisticated equipment that has elements of mechanical andelectrical equipmento Computer systemso Telephone systemso Copiers/fax As a result, they have similar types of loss exposuresHistory of Equipment Breakdown Coverage Used to be specific insurance on each and every piece of equipment Expansion to groups of equipments, e.g., “pressure vessels” or “mechanical equipment”o Thus the name “boiler & machinery” Eventually equipment breakdown coverage as it exists today which defines covered equipmentgenerally Coverage limits have switched from values of machinery to values based on building and contents Numerous coverageso Property damageo Business income, extra expense, and expediting expenseso Spoilage damageo Utility interruption fills gap of business income/extra expenseo Ordinance or law coverageo Brands and labels

Equipment Breakdown Coverage Ten insuring agreements are available and coverage is provided if a limit is indicate for eachcoverage on Declarations1. Property damage2. Expediting expenses3. Business income and extra expense (or extra expense only)4. Spoilage damage5. Utility interruption6. Newly acquired premises7. Ordinance or law coverage8. Errors and Omissions9. Brands and labels10. Contingent business income (dependent properties)Covered Cause of Loss “Breakdown” to “covered equipment”o Once triggered, coverage from all insuring agreements applieso Protects equipment plus consequences including:• Business personal property of insured (or in care, custody or control of insured)• Business income loss "Breakdown"o Means the following direct physical loss that causes damage to "Covered Equipment“ andnecessitates its repair or replacement:1) Failure of pressure or vacuum equipment;2) Mechanical failure including rupture or bursting caused by centrifugal force; or3) Electrical failure including arcing;“Covered Equipment”1) Equipment built to operate under internal pressure or vacuum other than weight of contents;2) Electrical or mechanical equipment that is used in the generation, transmission or utilization ofenergy;3) Communication equipment and "Computer Equipment"; and4) Equipment in Paragraphs (1), (2) and (3) that is owned by a public or private utility and used solelyto supply utility services to your premises.…the "Covered Equipment" must be located at a premises described in the Declarations and beowned, leased or operated under your control (Except for (4))Equipment Breakdown Coverages: Property Damage and Expediting Expenses Again, coverage is broader than damage to “covered equipment” Includes all property of the insured that is damaged as a result of breakdown of covered equipmento Buildingo Business personal propertyo Personal property of others BPP would exclude coverage for most property losses anyway Expediting expenses are for costs incurred to temporarily repair or speed up permanent repairs fordamaged propertyo Not as broad as extra expense coverage

Equipment Breakdown Coverages: Spoilage Damage Covers damage to:o Raw materials,o Goods in process of manufacture, ando Finished goods Must result from breakdown of covered equipment that causes lack or excess:o Heato Lighto Steamo Refrigeration Includes loss due to contamination from ammonia (used in refrigeration) Also pays for expenses that help reduce spoilage lossEquipment Breakdown Coverages: Time Element Coverages Business income coverage pays for:o Actual loss of business incomeo During period of restoration (continues 5 days after equipment is replaced)o Due to suspension of operations (full or partial)o Caused by breakdown of covered equipmento Extra expense coverage too Utility interruptiono Extends business income and extra expense to include breakdown of equipment ofutility companieso Includes spoilage protection Contingent business incomeo Adds business income loss (or extra expense) from equipment breakdown at dependentproperties (supplier or end user)o Must specify location of non-owned propertyEquipment Breakdown Coverages: Other Coverages Newly acquired premiseso Extends all equipment breakdown coverages (property and BI) to newly acquiredpropertieso Unlike other coverage forms, number of days must be specified Ordinance or law coverageo Pays for increased cost of construction to repair damaged buildings according toordinance or lawo Also pays for demolition of undamaged portion of a building Brands and labelso Similar to brands and labels endorsement in property insuranceo Insurer pays expenses to remove labels or stamp “salvage” Errors and omissionso If insured makes an error or omission listing property or premises

Equipment Breakdown: Exclusions Some exclusions are listed in definitions ofo Breakdown (a bit technical)o Covered equipment (e.g., vehicles, items that need to be replaced periodically) Exclusions similar to BPP exclude losses caused byo Ordinance or law (if no coverage under equipment breakdown)o Earth movement or watero Nuclear hazard and war/military actiono Wear and tearo Mold and neglect Exclusions because of other available coverageo Combustion explosion (generally covered under BPP)o Breakdown caused by other perils (lightning, windstorm, etc.)Limits of Insurance Most often, one limit applies for all coverages per breakdowno Suggestion is to set limit equal to value of property at premises For each insuring agreement, separate limits may also be showno May list “Included” which makes that coverage part of the policy limit, not in addition tothe limit Coverage is limited to $25,000 for:o Spoilage caused by ammonia contaminationo Consequential loss for undamaged propertyo Replacement, reprogramming, and/or research for restoring computer datao Cleanup of hazardous substanceso Damage to property from water $15,000 limit for mold caused by breakdownDeductibles Unless indicated as “Combined” is on declarations page, deductibles apply to each insuringagreement separately Four types of deductibleso Dollar deductibleso Time deductibles are used for business income and extra expenseo Multiple of daily value is alternate to fixed elimination periods• Daily value (or average daily value, ADV) is the lost income per day of shutdowno Percentage of loss (subject to some minimum)• Often used for spoilage

Equipment Breakdown Conditions Most are comparable to other coverageso Abandonment, appraisal, duties in the event of loss (notice, proof of loss, etc.), otherinsurance provisions Valuation is replacement costo Though outdated equipment may have endorsement for ACV (if anything)o Finished stock is at selling price (less discounts and shipping costs)o Coverage for upgrades (up to 25% more) is available for improved equipmento New equipment may be more efficient (energy or otherwise) and safer Suspensiono If covered equipment is in danger, coverage can be suspended Each year, insured must report:o Value of insured propertyo Estimated annual income (similar to Business Income Worksheet in BIC)o Reported property values help determine premiums next period Typically, only limited application of coinsurance for business income coverageo If annual reports are timely, no coinsurance penaltyo If reports are late, insured may share in business income loss if actual business income ismore than previously reportedJoint or Disputed Loss Agreement When property and equipment breakdown insurance is provided by different insurers, disputes mayoccuro What type of explosion?o Separation between explosion and resulting fire? Disputes may delay payment to policyholder When policy language includes the Joint/Disputed Loss Agreemento Each insurer pays the amount that is covered under contract plus ½ the disputedamount (immediately)o Insurers then settle differences through arbitrationChapter 10 Summary Identify the types of exclusions in commercial property coverage and how equipment breakdownfills the gaps List the types of equipment that are candidates for equipment breakdown insurance Discuss the various coverages under equipment breakdown