Equipment Breakdown Insurance: Too Important to Ignore!


...breakdown of steam, water tube, and fire tube boilers and accessory machinery. Undoubtedly, the change in terms was made because of the numerous other kinds of equipment that became eligible for insurance against accidental breakdown. Currently, this equipment can be categorized as: (1) equipment built to operate under internal pressure, such as boilers and pressure vessels, (2) electrical or mechanical equipment used in the generation, transmission or utilization of energy, (3) communication and computer equipment and (4) the equipment in (1), (2) and (3) used by utilities to supply its (sic) services.

Equipment breakdown coverage commonly is written under a separate policy. It is not unusual, however, for insurers writing highly protected risks (HPR) policies to also include equipment breakdown coverage. Insurers of package policies, such as business owners forms, also accommodate insureds with some coverage, and some coverages can be automatically included or added by endorsement to property forms. It also may be possible to purchase equipment breakdown coverage in lieu of purchasing equipment maintenance insurance, the latter of which is intended to pay for losses to equipment that are not covered by any warranty, guarantee or service contract.

With the exception for steam, water tube and fire tube boilers used for heating and generating power in public places, and equipment requiring inspections, such as elevators, coverage for other equipment is purely voluntary. Whether this latter equipment presents a significant enough exposure to warrant insurance will depend on the nature of the equipment and its cost. It may turn out to be cost-effective where it is purchased along with mandatory coverage for boilers and other equipment.

Most states have laws regulating the inspection of boilers used for heating and generating power in public places. These laws generally require annual inspections. When one considers the cost of a governmental inspection, it often turns out that the cost is less than what an insurer charges for its inspection and insurance. Although the purpose of an inspection is to reduce the chances of loss, explosions and breakdown still occur. If such a loss was to occur and the owner had only a governmental inspection, the owner might be without insurance for resulting bodily injury or property damage, or both. It often turns out better, however, to purchase an equipment breakdown policy on the boiler so as to obtain not only an annual inspection by the insurer’s engineer, but also insurance to protect against a loss.

Equipment Breakdown Entails Many Different Objects

“Object” is a term that has its genesis with boiler and machinery policies. It referred to the general category of equipment covered and defined in more precise terms of what “object” included. In the case of National Union Fire Insurance Company of Pittsburgh, PA. v. The Travelers Indemnity Company, 210 F. Supp.2d 479 (S.D.N.Y. 2002) , for example, electrical fixtures and components in an insured’s plant were held to be objects for purposes of a boiler and machinery endorsement to a property policy.

Briefly, the insurer issued a property policy to the named insured, a paper carton manufacturer. The coverage forms consisted of a building and personal property form and a special causes of loss form, both remarkably similar to the ones offered by ISO. Accompanying these forms was a boiler and machinery endorsement covering: (1) direct physical loss or damage to property of the insured and to others in the care, custody or control of the insured, (2) loss and expense resulting from necessary interruption of business resulting from an “accident” to an “object,” (3) extra expense, and (4) spoilage.

1. ISO Form EP 00 20 09 07, Copyright, ISO Properties, Inc. 2006.