Introduction to Equipment Breakdown Coverage
In the realm of commercial insurance, standard property policies (Causes of Loss forms) are designed to protect against external perils like fire, windstorm, or theft. However, they traditionally contain significant exclusions regarding internal failures. Specifically, standard property forms exclude damage caused by mechanical breakdown, electrical arcing, or the explosion of steam boilers and pipes. To fill this critical gap, businesses utilize Equipment Breakdown Coverage, historically known as Boiler and Machinery insurance.
This coverage is essential because modern businesses rely heavily on sophisticated technology and mechanical systems. A simple motor burnout or a boiler explosion can lead to massive property losses and even more significant business interruptions. This article provides the fundamental knowledge required for the complete Commercial exam guide.
Commercial Property vs. Equipment Breakdown
| Feature | Commercial Property Policy | Equipment Breakdown Policy |
|---|---|---|
| Mechanical Breakdown | Excluded | Covered |
| Electrical Arcing | Excluded | Covered |
| Steam Boiler Explosion | Excluded | Covered |
| External Perils (Fire/Wind) | Covered | Excluded (usually) |
| Inspection Services | Rarely Included | Core Component |
Key Definitions: Breakdown and Covered Equipment
For an Equipment Breakdown policy to trigger, there must be a defined Breakdown to Covered Equipment. For exam purposes, it is vital to understand how these terms are strictly defined within the policy form.
Breakdown means direct physical loss that causes damage to covered equipment, requiring its repair or replacement. This includes:
- Failure of pressure or vacuum equipment.
- Mechanical failure, including rupture or bursting caused by centrifugal force.
- Electrical failure, including arcing.
Covered Equipment (formerly called 'Objects') includes equipment built to operate under internal pressure or vacuum, electrical or mechanical equipment used in the generation or utilization of energy, and communication/computer equipment. It is important to note that the policy does not cover equipment during research and development or testing.
Typical Equipment Protected
The 10 Coverage Categories
The standard Equipment Breakdown Protection Coverage Form provides several distinct coverages. While some are automatic, others may be subject to specific limits on the declarations page. Understanding these categories is essential for success on practice Commercial questions.
- Property Damage: Covers direct damage to 'covered property' (the insured's property and property of others in their care).
- Expediting Expenses: Pays for the extra costs to make temporary repairs or to speed up permanent repairs (e.g., overtime labor or express shipping).
- Business Income and Extra Expense: Similar to standard business interruption, this covers lost profits and extra costs incurred to keep the business running after a covered breakdown.
- Spoilage Damage: Covers the loss of perishable goods (like food or medicine) due to lack of power, light, heat, or refrigeration caused by a breakdown.
- Utility Interruption: Extends business income and extra expense coverage to breakdowns of equipment owned by a utility provider (electric, water, gas) that services the insured's premises.
- Newly Acquired Premises: Provides automatic coverage for a limited time for equipment at newly purchased or leased locations.
- Ordinance or Law: Covers increased costs to repair or rebuild due to local building codes or laws.
- Errors and Omissions: Protects the insured if they accidentally fail to describe a location or make an error in the description of the equipment.
- Brands and Labels: Pays for the cost of labeling or branding salvaged property.
- Hazardous Substance Remediation: Covers the cost to clean up or dispose of hazardous substances resulting from a breakdown.
The Suspension Provision
One of the most unique features of the Equipment Breakdown policy is the Suspension Provision. If an insurer's inspector finds a piece of equipment to be in a dangerous condition, they have the right to immediately suspend coverage for that specific object by delivering a written notice to the insured. Coverage remains suspended until the equipment is repaired or the hazard is removed. This is an absolute right of the insurer and does not require the insured's prior consent.
Exclusions and Conditions
Like all insurance contracts, Equipment Breakdown policies have specific exclusions. Understanding these helps clarify what the policy is not intended to cover:
- Wear and Tear: Gradual deterioration, depletion, or corrosion is not considered a 'breakdown.'
- Testing: Damage occurring while the equipment is undergoing a hydrostatic, pneumatic, or gas pressure test is excluded.
- Windstorm or Hail: These are typically covered under the standard Commercial Property policy and are excluded here to avoid duplicate coverage.
- Fire and Explosion: Generally, if a fire or an external explosion occurs, the standard property policy responds. This form specifically covers internal explosions of steam boilers and pipes.
A critical condition to remember for the exam is the Joint Loss Agreement. This provision is used when both a Commercial Property policy and an Equipment Breakdown policy apply to a loss. It ensures that both insurers pay their share promptly to the insured, and the insurers resolve any disputes over the exact proportion of liability between themselves later.