Understanding Machine Shop Business Insurance
Running a machine shop has its challenges. For many owners and executives, finding quality insurance can be one of them. There are many reasons for this, but a primary factor is a machine shop’s exposure to high-hazard product liability risk for the parts they are machining. Pair this with the limited number of insurance companies specializing in machine shops, and securing insurance becomes a problem.
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Top Insurance Challenges For Machine Shops
Each machine shop handles operations and products differently, which makes going into detail challenging to address in a blog post.
With that said, here are three challenges that we see most machine shops run into when looking for insurance coverage:
1. It can be hard to predict what types of products you will be machining.
Many machine shops operate based on the machines working with certain materials at specific tolerances. They then take on customers based on the specifications and capabilities they can provide to the client or the materials they work with.
Unfortunately, it is nearly impossible for an underwriter to price the product liability coverage when they cannot tell what parts are being made or in what quantities. The underwriter has to make guesses or assumptions.
This can lead to increased pricing or the underwriter declining to quote at all.
2. The types of products you are machining might be considered “high risk.”
Many machine shops specialize in making products (or parts for products) that are considered a high liability if those parts fail. For example, if a machine shop makes parts for a car and the failure of one of those parts could lead to a crash, the liability for machining that product will be very high for the insurance company insuring the shop.
3. It may be difficult to find the right property coverages for your CNC machines.
CNC machines and other types of equipment aren’t properly covered with just contents coverage. Traditional property coverage does not cover issues like electrical surges, sudden breakdowns, or even newer risks like cyber-attacks.
Essential Insurance Policies For Machine Shops
Commercial General Liability Insurance (Including Products Liability Coverage)
The most common insurance policy that machine shops purchase is a commercial general liability insurance policy. Many of your customers will require you to carry this insurance, which limits the consequences of being sued, such as having to hire a legal defense and paying potential judgments.
One of the most important components of commercial general liability insurance is the products liability policy. This policy comes into play when a product or part you machined causes bodily injury or property damage to someone due to a failure of the product or even inadequate instructions or warnings.
If you run a machine shop, this can be the single largest threat to your business. That’s why commercial liability insurance with products liability coverage is the most common policy that machine shop businesses purchase.
Commercial Property Insurance
Machine shops contain expensive machines, raw materials, and finished products, which are susceptible to weather damage, fire damage, or even theft. If you own the building that you operate in, the structure itself is susceptible to similar hazards.
A commercial property insurance policy can cover the building that you own (or are responsible for insuring) and its contents from various perils that cause direct physical damage.
As a machine shop, you generate most of your income through the equipment you use. If that equipment fails, it could mean catastrophic issues for your business—the breakdown of a machine, or all your machines, can significantly impact revenue generation, while expenses may not decrease proportionally.
Additionally, if you want to expedite shipping for emergency parts and/or replacement machines to get you back up and running, you’ll have large bills to face.
Equipment breakdown coverage is like commercial property insurance for your machinery and equipment. It does, however, add additional covered situations that make it a must-buy for machine shops.
A few examples of these extra coverages are:
Artificial Currents (Power Surges): One of the issues with insuring equipment like CNC machines is the risk of a power surge causing damage. We have seen this quite a few times in machine shops, and the claims are usually very large. Adding equipment breakdown coverage will make sure that this is a covered claim for your machines.
Mechanical Breakdown: Covers the machinery from costs associated with sudden breakdowns and failure, if those failures aren’t a result of general wear and tear or improper maintenance.
Business Income: If your machinery experiences a breakdown that is covered by this policy, it will pay the lost net income that the machine would have generated for you during its absence. This can help cover various expenses that you still have while your production is slowed or halted.
Extra Expense: Extra expense coverage will cover the extra costs associated with getting you back up and running again. For example, if your CNC machine has a catastrophic breakdown and needs to be replaced, you need to get one ASAP. Skipping the queue, finding a machine, and getting it running in your shop as soon as possible means paying a premium. This coverage will help you with that kind of additional cost.
The great thing about equipment breakdown coverage is that it is usually very cheap to purchase and provides necessary assistance for machine shops.
If you have employees, most states require you to carry a workers compensation policy that provides benefits to those who suffer work-related injuries or illnesses. While the actual benefits vary due to state laws and statutes, these policies usually cover general types of benefits:
- Medical expenses
- Rehabilitation expenses
- Lost wages
- Permanent disability benefits
- Temporary disability benefits
- Death benefits
- Vocational rehabilitation
Workers compensation policies don’t differ substantially from one another because the benefits are written into the law. With that said, most machine shops choose theirs based on pricing, claims services, and value-added services to help lower the experience modifier and provide additional claims management.
CNC machines and other types of equipment are becoming more advanced by the day. These machines are now run by computers and various computer models, which makes them susceptible to many of the same risks a standard computer would be.
Here are a couple of items a cyber policy could help your business with:
- Breach of information: You might have sensitive information involving proprietary product designs that would cause significant liability for you if there were ever a breach. Additionally, you might have customer payment information or employee records on your computer systems. Data breaches are expensive and time-consuming; a cyber policy will help you manage the regulatory requirements, notify your customers according to law, and pay for liability associated with the breach.
- Business interruption: Some cyber-attacks have the potential to destroy some of your equipment or lock you out of your operations for a sustained amount of time. A cyber policy with quality business interruption coverage can pay for your lost income during the cyber-attack and the restoration period as you get back up and running.
High-Risk Products And Challenges In Finding Insurance
As we discussed above, machining and manufacturing certain products or parts can lead to higher liability. For example, machining a pen has significantly different ramifications than machining a medical device like a pacemaker. The failure of a pen means a slight irritation to the user; the failure of a pacemaker machine could lead to the death of the consumer. For this reason, there are several categories of products that are more difficult to insure (though not impossible).
Critical Auto Parts
We define “critical auto part” as any part where failure could lead to a catastrophic outcome. For example, the upholstery in a vehicle would not be considered critical, whereas the brake pads are critical.
Any part that is associated with aviation or aerospace is a tough placement for insurance. Additionally, most liability insurance policies have an aviation exclusion.
You can still find this coverage in specialty insurance carriers such as AIG, AXA, or Great American, which specialize in providing aviation product liability coverage. Just expect a higher premium for coverage on these parts.
Oil & Gas Components Or Parts
Machining parts for the oil and gas industry can be tough on a shop. That being said, some areas of oil and gas are more hazardous than others. For example, machining a part used in actual drilling or fracking operations would be more hazardous than a machine shop that made a part for where the crude oil is stored.
Medical Devices Or Medical Device Component Parts
Any part that is used in the medical industry can be tough because a slight mistake could be a full-limit liability claim if it severely injures or kills someone. I used the example of a pacemaker above, but the concept applies to most of the medical industry—even if it is just a part in an MRI machine. The liability is just a lot higher when the products are used as life-saving devices.
Products Involving Life Safety
If you are making products that are providing critical life safety to people—the failure of which would nullify that life safety device—then your products are obviously much more difficult to insure than those without that type of liability.
Expert Tips For Machine Shop Insurance
1. Let your agent know if you are machining to customer specifications—it lowers the risk on your part.
Let’s say your shop takes in files from customers, operates the CNC machines, and makes sure everything is to specification. Your product liability risk isn’t zero, but it is much less than if you design and machine the product. Let your agent know if this is the case.
2. It is easier to quote a machine shop with a defined niche than one that makes products across a wide spectrum of industries.
It is difficult to insure machine shops that will make almost any product if given the work order, especially if any of those products involve the high-risk category. There is just no way for an underwriter to price for the risk when there is no consistent industry or product; they will always guess the highest rate (or decline to quote).
Additionally, insurance companies might worry about the quality of the products or the expertise if a machine shop is manufacturing products with a high degree of liability with no defined or consistent niche.
3. Have good contracts in place that limit your liability in the event of a lawsuit with your customer.
Contracts are your first line of defense against a lawsuit. Make sure you don’t sign any contracts that put all the liability onto you; try to transfer as much risk as you can to other parties. Paying a lawyer to review your contract is much smarter—and will cost much less—than having a large lawsuit because you signed a contract that put you in a bad position.
4. Have quality assurance and traceability procedures in place in the event you need to recall parts/products.
Insurance companies like to see strict quality assurance in place for your business. These processes not only validate that the product is up to the promised standard for your customers, but also allow you to trace materials and finished products if you have to issue a recall or alert your customers of a defect.
5. If available for a reasonable price, always purchase equipment breakdown coverage for your CNC machines.
In general, equipment breakdown coverage is very low cost for machine shops. We have seen coverage go for as little as a couple hundred dollars per year for smaller shops. When you consider the risks associated with a mechanical breakdown, this coverage makes a lot of sense and is one of the best values in the insurance market.
6. If you machine very high-hazard products, you might have to purchase a GL policy without products liability and a standalone products liability policy from a specialty insurance company.
Insurance companies will commonly write a general liability policy that excludes products liability for machine shops that work on products in higher-risk industries. While it is nice to have all your coverage included on a single policy, sometimes you will need to split your general liability policy into two parts:
- General liability with products liability excluded
- Standalone products liability
These two parts make a complete general liability insurance program. At the same time, they allow a specialty insurance company to take on the high-risk products while a standard insurance carrier insures everything else.
Top Insurance Companies For Machine Shops
Chubb is a leading global insurance provider with a strong reputation for serving the manufacturing and machine shop industries. Their small business division is particularly well-suited for low-hazard machining businesses, offering comprehensive coverage with minimal exclusions. Chubb seeks to partner with experienced businesses that demonstrate strong operational procedures and a history of low claims.
For larger businesses, Chubb's expertise extends to insuring some of the most complex machining and manufacturing facilities worldwide. They provide product liability coverage for high-hazard operations that may not be available for smaller businesses.
Founded in 1882, Chubb is the eighth-largest insurance company in the United States. It’s a trusted and reliable insurance partner for businesses in the manufacturing and machine shop sectors.
Berkley Aspire and Admiral
Berkley Aspire and Admiral are both part of the W.R. Berkley family of insurance companies. Berkley Aspire is an excellent choice for medium-risk product coverage, offering general liability (including product liability), property, and equipment breakdown insurance in a single package policy.
For machine shops specializing in high-risk products, Admiral provides specialized underwriting and coverage that may not be available from other insurance companies. Their expertise in addressing the unique risks of these industries makes them a popular choice for businesses seeking comprehensive protection.
Mid-Continent Group, a subsidiary of Great American Group, is a popular insurance provider for machine shops. They offer general liability policies with product coverage for low- and medium-risk products, while providing the flexibility to exclude product liability for businesses that require specialized product liability coverage (e.g., aviation machine shops).
With their extensive experience in the manufacturing and machine shop industries, Mid-Continent Group is a reliable and adaptable insurance provider that can cater to the unique needs of these businesses.
Securing the right insurance for machine shops can be a complex process, but partnering with a knowledgeable insurance agent can greatly simplify the task. Relying on a one-size-fits-all approach can result in expensive premiums or insufficient coverage for your specific business risks. Understanding the available coverages and working with an experienced team will help you tailor a policy that meets your unique needs and ensures your business is protected and your insurance investment is well-spent.
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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