Equipment Breakdown Insurance: Too Important to Ignore!



Apart from the common policy conditions that apply to all standard ISO coverage parts, the equipment breakdown coverage form contains loss conditions and general conditions. Most of these conditions closely follow the comparable conditions on commercial property coverage forms.

Among the loss conditions are those applying to abandonment; appraisal; defense; duties in the event of loss or damage; insurance under two or more coverages; legal action against the insurer; loss payable clause; other insurance; privilege to adjust with the owner; conditions mandating steps to reduce the loss; transfer of the insured’s rights of recovery against others; and valuation.

Some conditions apply solely to business income and extra expense coverages. These are:

Among the general conditions of the equipment breakdown coverage form are: additional insured requirements and coverage; bankruptcy; concealment, misrepresentation or fraud; liberalization; mortgage holder; no benefit to the bailee; policy period and coverage territory; premium and adjustments; suspension; joint or disputed loss agreement; arbitration; and final settlement with insurers.

One of the conditions requiring some comment deals with valuation.

Valuation Condition

The valuation method of the equipment breakdown coverage form is quite similar to what applies with commercial property coverage forms. In the event of loss or damage, the insurer will determine the value of covered property in one of two ways.

The first is to determine the cost to repair, rebuild or replace the damaged property with property of the same kind, capacity, size and quality, on the same or another site, whichever is cheaper.

The second way is to determine the cost actually and necessarily incurred to repair, rebuild or replace the covered property. Whichever applies, the insurer will not pay for any damaged property considered to be obsolete and useless to the named insured.

If the named insured elects or the insurer requires that the repair or replacement of damaged covered property be done in such a way that it improves the (1) environment, (2) increases efficiency or (3) enhances safety— but still maintains the existing function—the insurer will pay up to an additional 25 percent of the property damage amount otherwise recoverable and, of course, subject to the limit of insurance.

If it turns out that the damaged covered property is subject to a warranty, maintenance or service contract, and the warranty or contract becomes void because of the breakdown, the insurer will reimburse the named insured for the used costs of nonrefundable and nontransferable warranties or contracts.

Unless the insurer agrees otherwise in writing, if the named insured does not repair or replace the damaged property within 24 months following the date of the breakdown, the insurer will only pay the smaller of (1) the cost it would have taken to repair or replace it or (2) the actual cash value at the time of the breakdown.

Joint or Disputed Loss Agreement

Although perhaps not as important today as before the revision of the boiler and machinery exclusions (and now the equipment breakdown exclusions), controversy would often arise following a loss as to whether the commercial property or the equipment breakdown insurance, or both, should respond.

Except when the same insurer is providing both coverages (and not reinsuring the equipment breakdown elsewhere), this question can best be resolved by use of a joint or disputed loss agreement on both the commercial property and equipment breakdown insurance.