Equipment Breakdown Insurance

The coverage pays for physical damage caused by an accident to covered equipment. An accident is a sudden and accidental breakdown that shows itself as physical damage needing repair or replacement. It includes:

• mechanical breakdown, including rupture or bursting caused by centrifugal force;
• electrical damage from artificially generated current, including arcing and power surges;
• explosion of steam boilers, steam piping, engines and turbines;
• damage to boilers and water heaters from a condition inside them, such as running dry.

Covered equipment is broad. It includes equipment that operates under pressure or vacuum, such as boilers, pressure vessels, air compressors and refrigeration systems; electrical and mechanical equipment that generates, transmits or uses energy, such as transformers, switchgear, motors, pumps, generators, chillers, rooftop units and elevator machinery; and communication and computer equipment, including phone systems, security systems and building management controls.

The coverage pays more than the repair itself. Standard and optional coverage parts include:

• Expediting expenses. Overtime, express freight and temporary repairs to get equipment running faster.
• Business income and extra expense. Lost income and extra costs while the equipment is down, subject to a waiting period.
• Spoilage. Food, medication and other perishable goods lost when refrigeration fails.
• Utility interruption. Lost income when a breakdown at the utility's equipment cuts power, water or gas to the property, usually after a waiting period.
• Data restoration. The cost of restoring data lost when a server or controller fails.
• Hazardous substances and refrigerants. Cleanup of contamination caused by the breakdown, and the extra cost of replacing refrigerants.
• Code and efficiency upgrades. The cost of meeting current code, and in many forms a modest allowance to replace failed equipment with more efficient equipment.

The exclusions divide the work between this coverage and the property policy:

• Wear, deterioration and gradual conditions. Wear and tear, rust, corrosion, erosion and other gradually developing conditions are not themselves an accident. If they cause a sudden breakdown, the breakdown is covered; the worn parts that simply need replacing are not.
• Perils the property policy covers. Fire, lightning, windstorm, hail and explosion other than of covered equipment belong to the property policy that insures the building, even when equipment is damaged.
• Flood and earthquake. Excluded here as on the property form.
• Testing. Damage during a pressure test or other testing of the equipment.
• Structures and non-covered property. Foundations, the building structure, insulating and refractory material, buried piping in many forms, vehicles and mobile or construction equipment.
• Lack of maintenance. Not an exclusion as such, but carriers can suspend coverage on a piece of equipment their inspector finds in dangerous condition, effective immediately on written notice.

Where the breakdown and a property peril both play a part, such as a compressor failure that starts a fire, the two policies may each argue the other should pay. When the property and breakdown coverage sit with different carriers, a joint loss agreement settles who pays first.

Equipment breakdown is priced as a rate on the building and contents values, adjusted for occupancy and for the equipment the building contains. An office building with ordinary heating and cooling is priced lower than a hotel with central plant boilers and chillers, and a building with large boilers, cooling towers or process equipment is priced by schedule. It is usually a small share of the property premium.

The limit is commonly set equal to the property limit, since a single accident can destroy equipment throughout a building, but several of the coverage parts carry their own sublimits: spoilage, data restoration, hazardous substances, expediting expenses and ammonia contamination are often capped well below the main limit. Those sublimits deserve a look on any property where food, medication or data would be lost in an outage.

Deductibles are usually a flat dollar amount per accident for property damage, with a waiting period for business income measured in hours or days. A separate deductible for large equipment is common. The utility interruption waiting period matters as much as the limit, because many outages are over before a long waiting period ends.

The business income limit on the breakdown coverage should match the income limit on the property policy rather than a smaller figure. Replacement switchgear, transformers, chillers and elevator controls can take weeks or months to arrive, and the building is closed or partly closed for all of it. Ask what the form pays toward expediting, since air freight and overtime are often the cheapest way to shorten that wait.

Breakdown carriers underwrite the equipment and the way it is looked after:

• A list of major equipment: boilers, chillers, cooling towers, generators, switchgear, elevators and any process equipment, with age and capacity.
• Service contracts and maintenance records for heating, cooling, elevators and electrical systems.
• Infrared scans of electrical panels, surge protection and the age of the electrical service.
• Backup power, spare parts and how quickly critical equipment could be replaced.
• For boilers and pressure vessels, the jurisdictional inspection certificates required by state law.

Breakdown carriers employ licensed inspectors, and in many states they carry out the jurisdictional boiler and pressure vessel inspections the law requires (in Missouri, as special inspectors commissioned under section 650.245). That inspection work is part of what the premium buys, and an inspector's recommendations are worth acting on, because the carrier can suspend coverage on equipment left in dangerous condition.

Report the breakdown immediately, shut down damaged equipment to prevent further damage, and keep the failed parts. The carrier may send an engineer to establish the cause, and a part thrown away before inspection can turn a clear claim into a disputed one. Temporary measures, such as a rented chiller or generator, are usually covered as extra expense or expediting expense, but agree them with the adjuster as early as possible.

A boiler failure in winter shows how the two policies split one event. The boiler repair and the lost income while the heat was off are a breakdown claim. Pipes that freeze and burst afterward are water damage under the property form, which pays for freezing only if heat was maintained or the system was drained as the policy requires. Keeping records of what was done to hold heat in the building protects both claims.

The carrier decides with the owner whether to repair or replace. Replacement is at like kind and quality, with the code and efficiency upgrade allowance where the form includes it. On older equipment, parts availability often drives the decision, since equipment that cannot be repaired quickly extends the business income claim. Spoilage claims need an inventory of what was lost and its cost; business income claims need the same records as any income claim.

Heat turns a breakdown into an emergency. In Arizona, where a July chiller failure leaves a building unusable, loss of cooling becomes a habitability and business interruption problem wherever cooling is not optional. In Nevada, where breakdown costs surprise owners, lenders on senior housing increasingly ask about backup power and cooling redundancy as a condition of the loan.

Any building with central heating, cooling, elevators or significant electrical gear needs this coverage. Some classes depend on it more than others.

Senior living communities that cannot lose heat, cooling or power face resident relocation costs and spoiled medication and food when equipment fails, and backup generators are both an underwriting question and a covered item. Hotels running central boilers, chillers and kitchens close rooms when the plant fails, and kitchen refrigeration adds spoilage.

Wash tunnels, conveyors, pumps and controllers are the business itself: a controller destroyed by a surge closes the site as surely as a fire, and the equipment is often worth more than the building. Apartment buildings with central plant and elevators lose rent when heat or hot water fails across the building. Associations maintaining shared boilers and lifts are responsible for equipment that serves every unit.

• Not bought at all. The property policy excludes breakdown, and the owner assumed otherwise.
• No income cover on the breakdown. The repair is paid but not the rooms, rent or sales lost while the equipment was down. The income cover on the property policy will not respond to a breakdown.
• Low sublimits. Spoilage or data restoration capped far below what would be lost.
• Two carriers and no agreement. Property and breakdown with different carriers, and no joint loss agreement to settle mixed claims.
• Uninspected boilers. Expired jurisdictional certificates, which can put both the coverage and the operating permit at risk.