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What is Equipment Breakdown Insurance?
Equipment Breakdown Insurance covers the repair or replacement of malfunctioned or damaged equipment and many of the costs associated with the breakdown of equipment, including spoiled inventory and losses to business income. A standard commercial property insurance policy will not cover the breakdown of equipment. Equipment Breakdown Insurance can be added to the commercial property insurance policy as an endorsement or purchased as a standalone policy.
Why do you need Equipment Breakdown Insurance?
Many businesses rely heavily on equipment to carry out their most important business functions. A breakdown of key equipment such as manufacturing equipment, air conditioning systems, or computer servers could cause significant financial devastation for any company, but especially small businesses.
Any piece of equipment essential to your business can break down, but the advent of technology has created new threats. Technology provides enormous value to modern businesses, but it also brings a heightened exposure to risk and potential interruption of operations. Technologically advanced equipment may include components that are highly sensitive to disturbances in the environment and can easily sustain damage. The interconnected nature of modern technological systems means a breakdown of one type of equipment may affect the operations of others—and repairing or replacing complex equipment may also be difficult and time-consuming.
Given the way many modern businesses operate, equipment breakdowns also present new challenges. For example, even one day in the office without email or the ability to run a mobile app or e-commerce website can result in significant losses of time and revenue for a company. “Just-in-time” manufacturing processes that create efficiency would also be at risk, in addition to end-to-end supply chain management that is dependent on a variety of electronic communications. These are only a few examples in which businesses rely on the speed and agility of technologically advanced equipment to drive value.
Equipment Breakdown Insurance plays an important role in protecting a business financially because there are a variety of scenarios in which a breakdown in equipment could cause significant losses.
The refrigeration systems for an upscale restaurant breaks down over a weekend and shuts the restaurant down for several days. Not only must the restaurant pay for the repair of the refrigerators, but it also suffers $30,000 in lost income from not operating the business during the shutdown period and another $10,000 in losses from the spoiled food.
A manufacturer that produces ballpoint pens faces an equipment breakdown that leads the company to halt production for several weeks. As a result, the manufacturer loses its contract with a large retail company.
An event venue that is hosting a music festival over a weekend in the summer suffers a malfunction of its air conditioning system. Since the event must be canceled because of the heat, the venue loses the income from renting the auditoriums and must reimburse festival organizers for the refunded tickets.
What types of equipment does Equipment Breakdown Insurance cover?
There are five major types of equipment that Equipment Breakdown Insurance covers.
- Mechanical including motors, engines, and manufacturing equipment
Example: The assembly line of an automotive factory breaks down and production is halted immediately for hours.
- Computers/Communications such as computer, phone, and security systems
Example: A power outage shuts down the computer systems and phone systems of a medical clinic.
- Electrical including cables and electrical panels
Example: A short circuit in a transformer, panel, or cable destroys a significant part of the system for a warehouse.
- Air conditioning and refrigeration systems
Example: A hotel’s air conditioning system breaks down during a national trade show that is taking place in the convention hall.
- Boilers and pressure equipment including heating units, hot water units, cookers, sterilizers, and cleaning equipment
Example: A boiler at a retail jewelry store breaks down in the winter and the store loses heat for the day.
What types of “accidents” are covered by Equipment Breakdown Insurance?
Equipment Breakdown Insurance covers “accidents” that are generated internally from within the equipment, e.g. an explosion in a steam boiler or a mechanical breakdown of production equipment. If the equipment breakdown is caused by an external force, such as a fire or hurricane that damages the building, the resulting losses would be relevant to the commercial property insurance policy instead. Equipment Breakdown Insurance will not cover external events that damage equipment and most often will specifically denote the perils that are not covered, such as fire, hail, windstorm, hurricane, earthquake, and flooding.
What are the key exclusions to Equipment Breakdown Insurance?
“Wear and tear” is the most important exclusion to Equipment Breakdown Insurance. If the equipment breaks down or malfunctions because of wear and tear, rust and decay, or faulty maintenance, then it would not be covered under the policy.
What financial losses does Equipment Breakdown Insurance cover?
Equipment Breakdown Insurance will cover many of the financial costs associated with the breakdown of equipment, including repairs, inventory losses, and business income losses. Here are the major categories of coverage for an Equipment Breakdown Insurance policy:
Property Damage – Covers the cost to repair or replace equipment damaged on or off premises.
Example: The air conditioning system of a major office complex breaks down and the property manager hires a dozen technicians to fix the system.
Business Income – Covers the loss of income due to the breakdown of equipment until it’s repaired or replaced.
Example: A power surge shuts down the power on the block where a medical clinic is located. The medical clinic closes for the day and loses an estimated $10,000 of business income.
Extra Expense – Covers additional expenses to keep the business running after an equipment breakdown.
Example: The production equipment at a regional shoe manufacturer breaks down and workers are bussed to another factory in the state while the equipment is under repair. Extra Expense will cover the transportation costs of bussing the workers.
Service Interruption – Covers business income and extra expenses after a contracted supplier’s equipment breaks down and causes an interruption of your operations.
Example: An e-commerce company hosts its website on an Internet Service Provider which goes down due to technical problems for one day. Since this is an interruption of service due to an equipment breakdown from a contracted service provider, Equipment Breakdown Insurance will cover the estimated business income lost from the day the server was down.
Other categories of coverage include:
Perishable Goods – Covers the loss of items that can spoil.
Example: The refrigeration system breaks down at a pharmaceutical company’s R&D facilities where patient blood samples are stored. Researchers must discard the samples and collect new samples from patients.
Ordinance or Law – Cost of complying with up-to-date building codes and laws when a property is repaired or rebuilt.
Example: A boiler explosion damages a building to the extent that it needs to be partially rebuilt. Since the building was last renovated, the city has issued new codes about fire sprinklers that must be updated with the new construction.
Expediting Expense – Covers the extra cost of fast-tracking repairs.
Example: A law firm has suffered a breakdown of its computer server and hires IT technicians to work overtime to repair the server.
Data Restoration – Covers the cost of restoring or retrieving lost or damaged data.
Example: A computer system breakdown at a medical clinic results in the data corruption of all of the patient files. The clinic pays a certified technician to restore all of the files.
Brands and Labels – Provides coverage for the cost of protecting your reputation or brand.
Example: A clothing manufacturers’ products have been damaged by an equipment breakdown. Brands and Labels coverage will pay the cost of removing the brand from the products before they are sold as salvage.
Demolition – Covers the cost of demolishing a building.
Example: An explosion of a boiler damages the building to the extent that it needs to be demolished and rebuilt.
Since most businesses rely on equipment to operate, a sudden breakdown in key equipment could result in a cascade of financial losses. From the business income lost due to shutting down operations temporarily to the cost of hiring technicians to repair malfunctioning systems, businesses need to be prepared to deal with the financial ramifications of equipment breakdown. Equipment Breakdown Insurance covers the damage or malfunction of many types of equipment, though key exclusions include breakdowns caused by wear and tear or external forces such as natural disasters. Given that many modern companies rely on technologically advanced equipment, which can easily sustain damages, Equipment Breakdown Insurance is an important policy to purchase.