Equipment Breakdown Insurance [The Ultimate Guide]
From computers, HVAC systems, and 3D printers to factory robots, many businesses today rely on sophisticated equipment to operate efficiently and profitably. However, if these essential tools break down unexpectedly, it can lead to significant financial losses, not only because the equipment itself is expensive, but because the business will be unable to operate. If this happens to your business, you’ll be covered if you have equipment breakdown insurance.
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What is equipment breakdown insurance?
Equipment breakdown insurance serves as a protective shield for businesses that rely on expensive tools and other items. It covers the repair or replacement of equipment, as well as other financial losses that result from malfunctions.
Under your equipment breakdown insurance coverage, you can be reimbursed for:
- Physical Damage: The cost of repairing or replacing broken equipment, including parts and labor.
- Business Income and Expenses: Lost income and any extra expenses incurred due to a disruption in your business operations. For example, if you need to rent temporary equipment or move operations to another location.
- Spoilage: Losses resulting from perishable goods that spoil due to equipment breakdown. For example, a refrigeration system failure in a grocery store could lead to spoilage of fresh produce.
- Compliance Costs: If the equipment breakdown results in enforcement of any ordinances or laws that increase the cost of repair or replacement, these will be covered.
Equipment Breakdown Coverage Vs. Commercial Insurance
Commercial property insurance applies to your building, including the tools and equipment within the building, but it only covers damage from external factors. Equipment breakdown insurance covers damage from internal factors. For example, if your equipment is damaged by a fire or storm, or is stolen, that falls under commercial insurance. But if it’s damaged by a power surge, or operator error, that falls under your equipment breakdown coverage.
Boiler and machinery breakdown insurance is another name for this policy. The difference is simply that equipment breakdown insurance is a more modern term for this coverage. If you only want to insure your boilers and machinery, this is still the policy you are looking for. But with the increased popularity of computer systems, electrical systems, or other expensive equipment, the name has simply changed over time..
Benefits Of Equipment Breakdown Insurance
Many businesses are heavily dependent on equipment for their daily operations. From manufacturing machinery to computer systems, any breakdown can halt production, disrupt services, and lead to unexpected revenue losses.
Take a bakery, for example: If an oven breaks down, not only will the bakery face the cost of repairing or replacing the oven, they’ll also lose out on sales because they can’t make their product. Equipment breakdown insurance can protect your business from consequences like these, helping you:
- Manage Unexpected Costs: Advanced equipment can be expensive to repair or replace. Equipment breakdown insurance helps ensure this won’t significantly impact your business’s financial health.
- Resume Business Quickly: Equipment breakdown can disrupt direct operations as well as impact other areas of business, leading to secondary losses. You want to replace it as quickly as possible, but you’ll need the funds to do so.
- Fill In Your Insurance Gaps: Property insurance policies typically do not cover losses from equipment breakdown. Equipment breakdown insurance fills this gap, ensuring that you’re protected against unique risks.
What does equipment breakdown coverage cover?
To better understand equipment breakdown insurance and how it differs from other types of insurance, let's go over the types of claims that are covered and also which equipment is covered.
Businesses may encounter a number of scenarios that can damage equipment. Here's what is covered by a typical equipment breakdown insurance policy.
- Electrical Issues: Electrical disturbances, such as power surges, short circuits, or arcing, are a common cause of equipment breakdown.
- Mechanical Breakdown: This includes any failure of the equipment’s moving parts, which can result from things like misalignment or imbalance.
- Boiler and Pressure Vessel Accidents: Equipment that operates under pressure, like boilers and pressure vessels, may explode or rupture due to overpressure, vacuum, or other internal pressure-related causes.
- Operator Error: When equipment operators make mistakes, malfunctions or damage can happen. This might include improper setup, maintenance oversights, or incorrect usage.
- Centrifugal Force: Equipment that contains rotating parts can break down due to centrifugal force when there's a sudden shift or imbalance.
- Utilities: Equipment breakdown at a utility provider can interrupt services like power or water that result in monetary losses for your business.
This type of insurance not only covers scenarios that may not be covered by other policies, as well as more types of equipment, from daily-use appliances to specialized machinery. Equipment breakdown coverage includes:
- Business and Office Equipment: Everyday equipment a business needs in its daily operations, like photocopiers, cash registers, and even security systems. For example, if a barista forgets to turn off the espresso machine overnight, causing it to overheat and malfunction, this would be covered.
- Boilers and Pressure Vessels: Steam boilers, steam pipes, steam engines, steam turbines, and the like, which are covered against risks such as explosions or ruptures.
- Electrical Systems: Vital electrical equipment like transformers, electrical panels, and circuit breakers, which are covered against electrical disturbances and other related risks. For example, a power surge that damages the electronic components of a manufacturing assembly line would be covered.
- Air Conditioning and Refrigeration Systems: Air conditioning units, commercial freezers, and refrigeration systems, which are crucial for businesses dealing with perishables or operating in controlled environments.
- Mechanical and Production Machinery: A broad category that includes pumps, gears, compressors, manufacturing machinery, and other mechanical systems.
- Computers and Communication Equipment: Computers, servers, telecommunication equipment, and other related devices are essential to most businesses in our digital age. These are covered against malfunctions, electrical disturbances, and other risks.
- Energy Equipment: Renewable energy equipment like solar panels, solar batteries, and wind turbines, as well as traditional energy systems like generators.
- Diagnostic and Treatment Equipment: Equipment like MRI machines, X-ray machines, and other diagnostic tools in the healthcare industry.
What’s Not Covered
Equipment failure insurance covers a wide variety of scenarios and equipment, but there are two important things to keep in mind. First, this type of insurance doesn’t cover normal wear and tear. For example, if you have an old computer that simply stops working, it may not be covered. It also doesn’t cover software, so even if your computer itself is covered, you’ll still need cyber liability insurance to cover any software malfunctions or system vulnerabilities.
Common Equipment Breakdown Claims
Understanding potential claims can give you a clearer picture of the risks you face and the importance of equipment breakdown insurance. Here are a few scenarios that illustrate the variety of situations where this type of insurance can come to the rescue.
Scenario: A craft brewery's fermentation tank malfunctions due to a faulty thermostat, spoiling an entire batch of beer.
Impact: The brewery not only faces the loss of the spoiled batch but also the cost of repairing the tank and potential downtime.
Coverage: Equipment breakdown insurance would cover the cost of repairing the fermentation tank and compensate for the lost batch of beer. Additionally, if the brewery had to halt operations temporarily, any resulting business income loss would also be covered.
Data Center Computers
Scenario: A power surge at a data center damages several servers, resulting in data loss and disruption of service.
Impact: The data center would need to repair or replace the servers and potentially compensate clients for lost income during the downtime.
Coverage: The insurance would cover the cost of repairing or replacing the servers. Additionally, the loss of business income and potential extra expenses to restore the business operations.
Commercial Building HVAC
Scenario: The HVAC system of a commercial building fails during the peak of summer, causing uncomfortable conditions for tenants.
Impact: Tenants might demand rent reductions or even decide to temporarily move. The building owner would also face the immediate costs of repairing or replacing the HVAC system.
Coverage: Equipment breakdown insurance would cover the HVAC repair or replacement costs. Additionally, if the building owner faced loss of rental income due to tenant disruptions, this would also be covered.
Common Claims Based On Equipment
The following table provides a breakdown of the most common failures by type of equipment.
Types of Equipment
- Boilers and Pressure Vessels: Includes fired vessels like boilers and unfired vessels like air tanks and hot water tanks.
- Mechanical Equipment: Encompasses production machinery such as presses and extruders, as well as rotating equipment like electric motors and generators.
- Electrical Equipment: Covers transformers, switchboards, cables, and other related electrical apparatus.
- Refrigeration and Air Conditioning: Pertains to refrigerating systems, air conditioning units, and related piping.
- Computers and Electronic Devices: Involves electronic equipment like personal computers, telephone systems, x-ray machines, and photocopiers.
- Explosions and Cracking: Can occur in boilers, pressure vessels, and piping due to overpressure or structural flaws.
- Burnouts and Breakages: Electrical burnouts in motors and transformers, and mechanical breakages in gears and compressors are common.
- Operational Failures: Such as control failures in boilers or compressor failures in refrigeration systems.
Some of the Causes
- Overpressure and Structural Weakness: Often due to inadequate safety devices or poor maintenance.
- Electrical Issues: Such as arcing, surges, or lightning strikes that lead to burnouts.
- Mechanical Stress: Including metal fatigue, misalignment, or inadequate lubrication resulting in breakdowns.
- Environmental Factors: Like extreme temperatures or moisture that can cause electronic breakdowns.
Do you need equipment breakdown insurance?
Because most modern businesses depend on at least some equipment, like computers and electrical systems, for day-to-day functioning, it's a good idea for nearly any business to have this coverage. It will protect you beyond your commercial property insurance and equipment warranties. Plus, policies are available for businesses of all sizes and in any industry, so you can find a policy tailored to your needs.
Equipment Insurance Vs. Warranties
You might think that your equipment warranty will cover similar situations as equipment failure insurance. Here’s a quick breakdown comparing what each one covers.
|Type of Occurrence or Service
|Typical Manufacturer’s Warranty
|“Full” Maintenance Contract
|Equipment Breakdown Insurance
|Pay for breakdown caused by faulty materials or workmanship
|Pay for Business Income Losses
|Pay for extra expense of rental equipment, rental facilities and temporary repairs
|Pay for spoilage of perishables
|Pay for direct damage to surrounding property
|Provide required jurisdictional inspection service
|Oil, clean, adjust, change filters, etc.
|Repair and replace worn parts
|Pay for lost refrigerant from breakdown
|Pay for labour cost to repair/replace parts
|Pay for accidental breakdown
|Pay for Ammonia Contamination
|Pay for operator error or misuse of equipment
|Pay for full replacement cost of parts and property
|Pay for refrigerant lost through leakage
|Pay for expediting expenses
Munich Re "A Guide To Equipment Breakdown Insurance"
How much does equipment breakdown insurance cost?
Just like other forms of insurance, the premium, or amount you pay for equipment breakdown coverage, depends on a variety of factors, including the type and value of equipment, your location, and your claims history. Other things that affect the cost include:
- Deductible: This is the amount that you must pay out-of-pocket before the insurance company starts covering the costs. A higher deductible generally means a lower premium, but it also means higher initial costs in the event of a claim.
- Risk Assessment: Insurers typically conduct a risk assessment that involves evaluating the age, type, and condition of the equipment, as well as factors like your maintenance practices and the operational safety measures you have in place.
- Discounts: Some insurance providers might offer discounts on premiums if you implement certain safety and maintenance protocols or bundle equipment breakdown insurance with other types of insurance in a business owners policy.
The Bottom Line
Equipment breakdown insurance coverage fills the gaps left by your commercial insurance and product warranties. It helps ensure your business is fully protected in the event of unexpected circumstances, including internal factors like employee error, making it a valuable piece of comprehensive coverage.
Because equipment varies so widely by industry, business size, and more, it's important to work with an experienced insurance broker who can guide you toward the right policy. LandesBlosch has decades of experience helping business owners like you get all the coverage they need. Contact us today to learn more about equipment breakdown insurance and how it helps protect your business.
About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.
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