Coverage Spotlight

Equipment Breakdown

In this coverage spotlight, an equipment breakdown underwriter sat down with R&I to discuss the ins and outs of covered losses due to mechanical or electrical breakdown.
By: | November 1, 2017 • 3 min read

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.

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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).

Karen Caulfield, senior underwriting manager, equipment breakdown underwriting, Liberty Mutual Insurance

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.

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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.

Autumn Heisler is a staff writer at Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

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Property

Insurers Take to the Skies

This year’s hurricane season sees the use of drones and other aerial intelligence gathering systems as insurers seek to estimate claims costs.
By: | November 1, 2017 • 6 min read

For Southern communities, current recovery efforts in the wake of Hurricane Harvey will recall the painful devastation of 2005, when Katrina and Wilma struck. But those who look skyward will notice one conspicuous difference this time around: drones.

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Much has changed since Katrina and Wilma, both economically and technologically. The insurance industry evolved as well. Drones and other visual intelligence systems (VIS) are set to play an increasing role in loss assessment, claims handling and underwriting.

Farmers Insurance, which announced in August it launched a fleet of drones to enhance weather-related property damage claim assessment, confirmed it deployed its fleet in the aftermath of Harvey.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now,” said George Mathew, CEO of Kespry, Farmers’ drone and aerial intelligence platform provider partner.

“The current wind and hail damage season that we are entering is when many of the insurance carriers are switching from proof of concept work to full production rollout.”

 According to Mathew, Farmers’ fleet focused on wind damage in and around Corpus Christi, Texas, at the time of this writing. “Additional work is already underway in the greater Houston area and will expand in the coming weeks and months,” he added.

No doubt other carriers have fleets in the air. AIG, for example, occupied the forefront of VIS since winning its drone operation license in 2015. It deployed drones to inspections sites in the U.S. and abroad, including stadiums, hotels, office buildings, private homes, construction sites and energy plants.

Claims Response

At present, insurers are primarily using VIS for CAT loss assessment. After a catastrophe, access is often prohibited or impossible. Drones allow access for assessing damage over potentially vast areas in a more cost-effective and time-sensitive manner than sending human inspectors with clipboards and cameras.

“Drones improve risk analysis by providing a more efficient alternative to capturing aerial photos from a sky-view. They allow insurers to rapidly assess the scope of damages and provide access that may not otherwise be available,” explained Chris Luck, national practice leader of Advocacy at JLT Specialty USA.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now.” — George Mathew, CEO, Kespry

“In our experience, competitive advantage is gained mostly by claims departments and third-party administrators. Having the capability to provide exact measurements and details from photos taken by drones allows insurers to expedite the claim processing time,” he added.

Indeed, as tech becomes more disruptive, insurers will increasingly seek to take advantage of VIS technologies to help them provide faster, more accurate and more efficient insurance solutions.

Duncan Ellis, U.S. property practice leader, Marsh

One way Farmers is differentiating its drone program is by employing its own FAA-licensed drone operators, who are also Farmers-trained claim representatives.

Keith Daly, E.V.P. and chief claims officer for Farmers Insurance, said when launching the program that this sets Farmers apart from most carriers, who typically engage third-party drone pilots to conduct evaluations.

“In the end, it’s all about the experience for the policyholder who has their claim adjudicated in the most expeditious manner possible,” said Mathew.

“The technology should simply work and just melt away into the background. That’s why we don’t just focus on building an industrial-grade drone, but a complete aerial intelligence platform for — in this case — claims management.”

Insurance Applications

Duncan Ellis, U.S. property practice leader at Marsh, believes that, while currently employed primarily to assess catastrophic damage, VIS will increasingly be employed to inspect standard property damage claims.

However, he admitted that at this stage they are better at identifying binary factors such as the area affected by a peril rather than complex assessments, since VIS cannot look inside structures nor assess their structural integrity.

“If a chemical plant suffers an explosion, it might be difficult to say whether the plant is fully or partially out of operation, for example, which would affect a business interruption claim dramatically.

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“But for simpler assessments, such as identifying how many houses or industrial units have been destroyed by a tornado, or how many rental cars in a lot have suffered hail damage from a storm, a VIS drone could do this easily, and the insurer can calculate its estimated losses from there,” he said.

In addition,VIS possess powerful applications for pre-loss risk assessment and underwriting. The high-end drones used by insurers can capture not just visual images, but mapping heat, moisture or 3D topography, among other variables.

This has clear applications in the assessment and completion of claims, but also in potentially mitigating risk before an event happens, and pricing insurance accordingly.

“VIS and drones will play an increasing underwriting support role as they can help underwriters get a better idea of the risk — a picture tells a thousand words and is so much better than a report,” said Ellis.

VIS images allow underwriters to see risks in real time, and to visually spot risk factors that could get overlooked using traditional checks or even mature visual technologies like satellites. For example, VIS could map thermal hotspots that could signal danger or poor maintenance at a chemical plant.

Chris Luck, national practice leader of Advocacy, JLT Specialty USA

“Risk and underwriting are very natural adjacencies, especially when high risk/high value policies are being underwritten,” said Mathew.

“We are in a transformational moment in insurance where claims processing, risk management and underwriting can be reimagined with entirely new sources of data. The drone just happens to be one of most compelling of those sources.”

Ellis added that drones also could be employed to monitor supplies in the marine, agriculture or oil sectors, for example, to ensure shipments, inventories and supply chains are running uninterrupted.

“However, we’re still mainly seeing insurers using VIS drones for loss assessment and estimates, and it’s not even clear how extensively they are using drones for that purpose at this point,” he noted.

“Insurers are experimenting with this technology, but given that some of the laws around drone use are still developing and restrictions are often placed on using drones [after] a CAT event, the extent to which VIS is being used is not made overly public.”

Drone inspections could raise liability risks of their own, particularly if undertaken in busy spaces in which they could cause human injury.

Privacy issues also are a potential stumbling block, so insurers are dipping their toes into the water carefully.

Risk Improvement

There is no doubt, however, that VIS use will increase among insurers.

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“Although our clients do not have tremendous experience utilizing drones, this technology is beneficial in many ways, from providing security monitoring of their perimeter to loss control inspections of areas that would otherwise require more costly inspections using heavy equipment or climbers,” said Luck.

In other words, drones could help insurance buyers spot weaknesses, mitigate risk and ultimately win more favorable coverage from their insurers.

“Some risks will see pricing and coverage improvements because the information and data provided by drones will put underwriters at ease and reduce uncertainty,” said Ellis.

The flip-side, he noted, is that there will be fewer places to hide for companies with poor risk management that may have been benefiting from underwriters not being able to access the full picture.

Either way, drones will increasingly help insurers differentiate good risks from bad. In time, they may also help insurance buyers differentiate between carriers, too. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]