Equipment Breakdown Insurance: Too Important to Ignore!


ADJUSTING TODAY the result of failure to satisfy its obligations.

One summer there was a switchgear failure at a water pumping station, which cut the water pumping capacity in half. The insured determined within a 48-hour period following the failure that permanent replacement would take weeks—possibly even months. To therefore continue to operate at full capacity, it rented portable generators and bought diesel fuel to supply them. These measures were taken to prevent crop loss and liabilities to tenants. The amount spent was $264,642 for generators, fuel, and related labor and freight charges.

The insured had a property policy that included loss of business income and extra expense coverage. Under the expediting expense clause, the policy covered “the reasonable extra cost of temporary repair and/or replacement and/ or expediting the repair and/ or replacement of damaged property insured hereunder.” Loss or damage to growing crops was specifically excluded. When this claim was submitted to the insurer, it paid $628,262 for the cost to permanently replace the switchgear, but the insurer declined to cover the expenses related to the rental of the generators and purchase of the fuel. The insurer’s reason was because the expenses were incurred to save the growing crops.

The district court concluded that the contract’s expediting expense clause allowed for a temporary replacement for damaged property and that the fuel and generator rental costs were covered. The court concluded that the policy contemplated that covered property such as the switchgear had value for the function it performed in addition to its value as a piece of property. The policy provision on expediting expenses, therefore, applied to both the cost of temporarily replacing the switchgear’s function and the cost of permanently replacing it.

Also, because the rented generators and purchased fuel replaced the switchgear’s function of powering the water pump, the court held that the expediting expense clause covered the costs incurred in obtaining them. The court also decided that the policy’s growing crops exclusion did not apply because it barred coverage for physical loss or damage to crops — not for costs incurred to replace covered property in order to save or protect the crops. The court of appeals affirmed the district court’s decision.

In the majority of cases involving expediting expenses, the big question is whether expediting expenses incurred are truly for temporary repair or for permanent repair. Representative of such cases is Detroit Edison Company v. Protection Mutual Insurance Co., 134 F.3d 790 (U.S. Ct. App. 6th Cir. 1998).

It was held there that the insured electric utility’s cost of installing temporary replacements for damaged transformers and cables was not covered by an expediting expense provision of its property policy, which included boiler and machinery coverage. This policy covered the extra costs of temporary repair of damage to property and the extra costs of expediting permanent repair or replacement of such damaged property.

The question under consideration was whether the policy obligated the insurer to pay, as extra costs of temporary repair, the cost of installing temporary replacements for damaged transformers and cables. The district court answered the question “no,” concluding that to replace the damaged property temporarily was not to repair it temporarily. The court of appeal affirmed the district court’s decision.

What is interesting to note in this case was the testimony of the insurer’s chief underwriter who...