Karen Caulfield, senior underwriting manager, equipment breakdown underwriting, Liberty Mutual Insurance, with more than 30 years of equipment breakdown underwriting experience, discusses the equipment covered under this type of insurance, how this coverage came to be and how it plays a role in businesses as small as a bakery to as large as a fortune 100 manufacturer.
R&I: What is equipment breakdown coverage?
Caulfield: Equipment breakdown (EB) covers losses stemming from damage to key equipment caused by failure of mechanical, electrical or other components due to power surges, electrical arcing, steam explosion and other events. Such losses are typically excluded by standard commercial property forms.
EB pays for repairing or replacing damaged equipment as well as the resulting business income losses.
The coverage was originally developed to protect the steam boilers that powered large factories at the turn of the 20th century. Today, however, the business-critical equipment of any size company can be covered by this insurance, such as diagnostic equipment in hospitals, air conditioning and refrigerators in restaurants, and business and communications equipment in offices.
R&I: What is covered under equipment breakdown?
Caulfield: EB policies cover the cost to repair or replace key pieces of equipment. They can also pay for other expenses related to the loss, such as lost income, extra expenses needed to continue operations while the machinery is fixed, or the lost value of spoiled or contaminated products. A policy can even cover expenses incurred when normal operations are interrupted by the failure of off-site, non-owned equipment (contingent business interruption).
R&I: Why is this coverage important today?
Caulfield: EB coverage should be a key part of any company’s insurance program, because both the frequency and severity of these claims are rising.
There are three reasons for this. First, technological advances in electronics have increased the complexity of equipment. Today, most equipment contains a range of sophisticated controls and sensors, internet connectivity and advanced electronic sub-components never imagined just five years ago.
Second, this new technology often requires specialized technicians to diagnose and fix the damaged equipment, increasing both downtime and repair costs.
Third, the nation’s aging electrical grid can cause fluctuating electrical supplies and outages, which can produce electrical surges that can seriously damage equipment.
R&I: What is the difference between equipment breakdown and property coverages?
Caulfield: EB is a type of property insurance that covers specific equipment damaged by mechanical and electrical failure and other events, which are typically excluded from property policies given the specialized underwriting and risk engineering resources needed to insure against these. EB was designed to fill the gaps in property policies.
R&I: Who can benefit from such coverage?
Caulfield: Any size company in any industry should consider EB as part of its risk management program.
From an office building to a main street bakery to a fortune 100 manufacturer, every company has sophisticated equipment that is key to generating output, and hence revenue. When that equipment grinds to a halt, revenue stops and the cost of continuing operations rises, further impacting the bottom line.
EB coverage protects a company’s bottom line by providing the resources to quickly repair or replace key machinery or for temporary production facilities.
R&I: What are current market conditions?
Caulfield: The EB market is healthy. Pricing, terms & conditions and capacity are stable. Interest in the product is shifting down market from large and mid-sized companies to smaller accounts.
R&I: What should brokers, agents and buyers look for in an equipment breakdown provider?
Caulfield: Brokers, agents and buyers should understand a potential provider’s complete equipment breakdown offering.
It all starts with underwriting. Does the insurer have the experience to help define the exposure and develop plans for managing, mitigating and effectively pricing that risk?
Risk engineering is also critical. Does the carrier have the qualified, National Board-certified engineers who can help identify hazards and production bottlenecks, improve an account’s maintenance programs, infrastructure and business continuity plans, prevent unplanned downtimes, and allow a business to quickly recover from equipment failures?
One quick and effective measure of a potential carrier’s EB expertise is that insurer’s ability to offer its EB offering to other carriers so that those insurers can meet the full insurance needs of their customers.