Where did the term “boiler and machinery insurance” originate?
The Hartford Steam Boiler Inspection & Insurance Company (HSB) was founded in 1866. Back then steam powered the industrial revolution, and catastrophic boiler explosions occurred about once every four days in the U.S. Boiler and machinery equipment was not what it is today.
“People were getting killed, plants were getting destroyed, business income was being lost,” says Denis O’Shea, assistant vice president of HSB. “The people that founded HSB were business people that decided to create an organization where the objective was to design a better boiler and then a system whereby the object would be periodically inspected to ensure that the equipment was being properly maintained and serviced.” The company’s engineering judgments were then backed up with a commercial insurance policy.
But you say you have no boilers?
In fact, O’Shea says that these days, the term “boiler and machinery” is really a misnomer in that modern policies cover much more than just boilers and production machinery.
“The truth is that just about any business needs equipment breakdown coverage,” O’Shea said. “If all you had was an electrical system, an air-conditioning system and some electronic equipment to produce or track inventory, you would need equipment breakdown insurance. It’s also true you don’t need to be a building owner to need it.”
Throughout the first half of the 20th Century, the coverage evolved to include a broader range of equipment. By the 1980s, products began to evolve even more rapidly with the development of technology such as computers and other devices that use electronic components.
“The coverages were broadened to cover not just what was in the basement but what was in the boardroom,” O’Shea said.
But I already have property and casualty insurance to cover me!
Your property and casualty policy only covers damage to your equipment from “external” causes, such as a fire, a flood or a tree falling on your roof. That policy does not cover damage from “internal” causes such as mechanical failure, electrical short circuit or “arcing” (faulty wiring or motor burnout).
What you should buy therefore, in addition to your property and casualty policy, is “equipment breakdown” insurance.
Once mostly limited to large manufacturers, equipment breakdown insurance (sometimes sold under the old-fashioned name of “boiler and machinery insurance”) is an increasingly important part of any sound small-business insurance package.
New technology, such as fragile electronic and computerized equipment, is subject to breakdowns that can be more frequent and costly than traditional mechanical equipment.
New business practices, such as Internet marketing and “just in time” inventory, make all businesses more dependent than ever on computer systems.
Critical business information often exists only on the Internet, or in online databases, that cannot be access during periods of equipment breakdown.
Employees are now traveling with many types of equipment that were once permanently attached to a fixed location, so breakdowns often occur in places other than the ones insured under traditional property/casualty policies.
“You should think of equipment breakdown coverage as being like accident, health and disability insurance for your equipment,” says Mark MacGougan, assistant vice president of HSB. Yet, amazingly, commercial property insurance policies often exclude losses related to equipment breakdowns, unless you specifically ask for the coverage.
But isn’t my equipment already covered by the manufacturers’ warranties?
MacGougan admits there is some overlap between warranties and equipment breakdown coverage but points out that “warranties usually exclude things like operator error, which are normally covered by an equipment breakdown policy. So, for example, if one of your employees negligently overloads an electric circuit by plugging too many things in to the wall, you should be covered.” MacGougan cautions, though, that even an equipment breakdown policy will not cover you against acts of intentional sabotage by your employees.
So what exactly does this insurance cover?
Virtually every business, institution and public entity depends on equipment to keep operations going and income flowing. Today, equipment breakdown is a more common and greater risk. Most equipment now contains sensitive and fragile technology that can be easily damaged. More equipment is mission critical so breakdowns bring operations – and income – to a halt. Increased system complexity and interdependency mean a breakdown elsewhere can impact you, yet standard property insurance excludes the risks unique to equipment.
The Simple Seven
Equipment breakdown (formerly called “boiler and machinery”) insurance covers many types of equipment. Click on The Simple Seven for a quick overview of the primary types of equipment and risks covered by equipment breakdown insurance.
This form of insurance provides important mechanical breakdown coverage generally not available under any other insurance policy. A boiler and machinery policy can protect an insured against the effects of catastrophic property loss, such as steam boiler explosion or an expensive breakdown of machinery and equipment.
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 protects against this. Often, extra expense coverage is required to keep the business in operation regardless of cost. Consequential Damage and Refrigeration Interruption insurance protects against spoilage as the result of a breakdown. Many times these business interruptions, extra expense and spoilage losses can be much more extensive than the damage to the equipment itself.
Equally important is the valuable inspection service that boiler and machinery insurance may provide. Not only does this service satisfy most jurisdictional inspection requirements, but it also benefits the insured by providing sound loss control recommendations that can help assure efficient operation and longer equipment life.
The equipment breakdown policy of today covers certain core groups of equipment. One group is comprised of electrical systems, which can represent a major component of a building’s total value.
“The average value of an electrical system within a facility could range between eight to 15 percent of the building’s total value,” O’Shea of HSB says. “Electrical systems are prone to breakdown caused by something known as electrical arcing, which is essentially a big short-circuit.” A significant portion—as much as 25-50 percent—of the entire electrical infrastructure of a building can be damaged in an electrical arcing event.
A wide range of electronic equipment or equipment that has some type of electronic component is also covered:
· Electrical switch gears
· Voltage regulators and generators
· Mechanical equipment, including production machinery, compressors, gears, fans, blowers and pumps
Also included are all types of business equipment which are more electrical than mechanical in nature:
· Fax machines
· Copiers and telephone systems; fit into this group.
Do you have an example?
“Up here in Northern California and the Silicon Valley, some of these high-tech facilities require really pure power at prescribed frequencies and with very few voltage swings,” Tony Trivella, western regional vice president of HSB, says. “If you get anything other than that, that has a potential of damaging fragile production equipment that can go into the millions of dollars to replace.”
“In the West a lot of what we cover is related to the agricultural industry, food processing, cold storage, that sort of thing,” Trivella says. “One of the issues that we have really seen a lot of this year has been food spoilage or food contamination as a result of equipment failure.”
Trivella described a recent spoilage situation in California’s Central Valley, where a utility transformer failed, arced and caused a power surge at an insured’s facility. “As a result, 16 motors shorted out, and those motors were supplying refrigeration to three cold storage rooms at the location,” he explained. “This facility was storing cantaloupes, and approximately 43,000 boxes of cantaloupes were spoiled as a result of a lack of refrigeration.”
What have been the challenges with marketing this insurance?
Many insurance agents, brokers and buyers may not understand equipment breakdown coverage, so businesses often opt for self insurance.
“In the old days, it used to be hard to sell those businesses that don’t own their own buildings an equipment breakdown policy,” Trivella says. “Today, there’s plenty of equipment exposure that a business has regardless of whether or not they own their building. The whole trend towards equipment being an important component, an essential component in the operation of a small business, has really raised the awareness of commercial insureds toward equipment breakdown coverage.”
How much does an equipment breakdown policy cost?
While there are many variables that will affect a premium quote, such as the type of business you are in, the type of equipment you are using and where your business is located, the cheapest way to buy equipment breakdown coverage is “if you build it into your property/casualty policy rather than a stand-alone policy,” advises MacGougan, who adds that you should look at the bullet-point summary of what is included in your property/casualty policy, and look for the “boiler/machinery” heading.
According to MacGougan, equipment breakdown coverage is growing dramatically, and most insurers are building it into their commercial property packages. If you have an older policy, however, you may have to review it with your independent insurance agent to make sure it covers the high-tech equipment upon which your business now relies. If it doesn’t, maybe it’s time for an upgrade.
Other Enhanced Insurance articles related to Business Insurance:
Business and Commercial Insurance (Includes Video)
Enhanced Insurance is not written by attorneys. If you’re looking for legal advice, you need to contact a lawyer. Further, insurance practices and forms change constantly and are varied from state to state. For definitive answers in your area, contact a local agent.
While the majority of people want an agent involved in their purchase of insurance, many people want to see if they can save money by buying direct from the insurance company. Others want to try a direct quote to make sure the premium they’re now paying through their local agent is fair. If you want a quote for your coverage, click on the competitive quote button on the right side of this page.