(August 2019)
This coverage part is complete only when attached to CO 1000–Commercial Output Program–Property Coverage Part because the following sections of the Property Coverage Part are referenced in the Equipment Breakdown Coverage:
A schedule of coverages must be used with this coverage form. There are two options. CO 1073–Equipment Breakdown Schedule can be attached when the CO 1050–Schedule of Coverages is used. If CO 1051–Schedule of Coverages is used with the COP, then the Equipment Breakdown scheduled information is entered on it.
Related Article: Commercial Output Program Declarations and Schedules of Coverages
Three definitions are added that apply to only this coverage part.
Boilers and Vessels
There are two types of items covered in this definition.
Pressure vessels that are subject to only the static pressure of its own content are not part of this definition.
Production machinery
Any machinery that is used to either process a product or to produce a product with the intent that it the product will be sold. Equipment and apparatus that is used exclusively with such machines is also considered production machinery.
Suit
A proceeding with judicial oversight that is used to determine liability and damages concerning a loss to property of others while that property is in the care, custody, or control of the named insured. A proceeding is a trial but can also include arbitration and other types of judicial actions. Arbitration is part of this definition only when the named insured is required to be a part of it.
Direct loss or damage to covered property is covered only is the loss or damage is due to an accident to covered equipment. The accident must take place at a covered location. Covered property is not specifically defined in this coverage part. Instead, reference is made to the covered property described in the Commercial Output Program–Property Coverage Part in Covered Property, Supplemental and Supplemental Marine Coverages Sections.
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Example: Friona’s boiler explodes. In addition to the boiler
being destroyed, one wall in the boiler room is destroyed, including the
equipment stored outside that wall. All damaged property is covered. |
Note: This is very specific coverage. The only peril is an accident to covered equipment. The terms accident and covered equipment are both defined in the Property Coverage Part. The definitions, taken from the CO 1000–Commercial Output Program Property Coverage Part Analysis, are provided below for reference.
3. Accident
Note: This term is used only with equipment breakdown coverage.
Direct physical loss from one or more of the following:
8. Covered equipment
Note: This term is used only with equipment breakdown coverage.
There are two types of covered equipment. One type is machinery or items involved with generating, transmitting, or using energy. Another is the type that operates under vacuum or pressure environments during normal usage. The equipment must also be considered covered property as described in the Covered Property section of this coverage form.
It does not include any of the following:
Related Article: CO 1000–Commercial Output Program Property Coverage Part Analysis
This section is an add-on to the Property Not Covered Section in the Commercial Output Program–Property Coverage Part.
1. Animals are not covered.
The difference between this item of property not covered and the same item in the Commercial Output Program–Property Coverage part is that this is a total exclusion with no exceptions.
2. Perishable Stock is not covered when the loss is due to any or all of the following:
These extensions are not automatic. They apply only if a limit is shown on the Equipment Breakdown Schedule for them. Therefore, entering limits on the Equipment Breakdown Schedule is critical.
If two or more of the listed coverages apply to the same portion of a loss, only the smaller limit is paid. Unless otherwise provided for, the limits for the additional coverages are part of the Property Damage Limit and not in addition to it. These coverages apply to a loss resulting from an accident to covered equipment.
a. Coverage
Coverage applies only if a limit is shown on the Equipment Breakdown Schedule.
Note: The entered limit is part of not in addition to the equipment breakdown limit. This means that the equipment breakdown limit should be sufficient to cover both the income limit and the direct physical loss caused by the accident.
If the named insured’s operation is interrupted because of an accident to covered equipment, an income loss occurs. The accident must occur at a covered location or within 1,000 feet of a covered location, either in the open or in or on a vehicle. If the named insured does not own the building or structure, its location includes passageways providing access to the its portion of the building and also its business personal property situated within 1,000 feet, either in the open or in or on a vehicle.
The income loss is covered during the period of restoration beginning when the business is interrupted and ending when the business can resume operations. This time period is more fully explained in the Definitions section of the Commercial Output Program – Property Coverage part.
Related Article: CO 1000–AAIS Commercial Output Program (COP)–Property Coverage Part Analysis
b. Coverage Options
The insured has three coverages available in four coverage options. They are:
Earnings include rents when the option for earnings, rents and extra expense is selected. However, earnings means only rents when the option for rents and extra expense is selected.
c. Earnings
The sum of the net income lost plus the cost of continuing expenses during the period of restoration is covered. Net income is either a loss or profit prior to income taxes. It must be noted that some businesses operate at a loss for part of the year but are profitable for the entire year because of seasonal peaks in sales. Even during the periods operated at a loss, certain expenses continue, including payroll expense, utility payments, and other contractual obligations. If the insured is a manufacturer, the net income includes the sales value of any goods that would have been produced.
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Example: Precious Manufacturing, Inc.’s net income/loss, that would have occurred during the restoration period had there been no direct damage, is a loss of $30,000. The sales value of goods that would have been produced in the time period is $15,000 and the continuing expenses are $20,000. The total income loss is computed as $15,000 + $20,000 - $30,000 = $5,000. |
d. Extra Expense
Extra expenses incurred during the restoration period that are considered
necessary but that would not have been incurred if a loss had not occurred are
covered. The loss must be due to an accident to covered equipment. Extra expenses
incurred to avoid or reduce the interruption of business by continuing
operations at a covered or substitute location are covered including those expenses
to relocate and to operate at the substitute location. If the insured must stop
operations entirely, coverage applies to extra expense incurred to reduce the length
of time the business cannot operate.
All extra expenses to expedite repairing, replacement, or restoration of property are covered but only up to the amount that having that property earlier reduces the income loss. All extra expenses to restore valuable papers or records including research and replacement are also covered but only up to the amount the income loss is reduced by having those papers and records.
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Example: Precious Manufacturing spends $20,000 in expedited
charges to get the property repaired so that they can return to operations.
It also spends $10,000 to research and replace its records. None of these
extra expenses reduces the insurance carrier’s income loss so none are paid. |
e. Period of Loss Extensions After Business Resumes
A business may be able to resume operations but still not be at full earnings capacity. This coverage extends the period of restoration to 30 days beyond the start of operations, or longer if an entry is shown on the Schedule. It will end earlier than the selected days once the earnings match the prior earnings. The 30 or more days extended coverage is further limited because it is part of the overall loss of income coverage.
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Example: The loss of income limit is $60,000. The business was closed for 145 days resulting in a loss of income claim of $55,000. The extra expense claim is $2,500. The extended period for business to be restored lasts 25 days and the claim is for $15,000. Because $57,500 has been paid out of the $60,000 limit, only $2,500 of the $15,000 extended period loss is paid. |
Note: Coverage applies only if a limit is shown on the Equipment Breakdown Schedule.
These expenses are the extra costs incurred to complete repairs or replacements ahead of schedule. These costs can include overtime pay, additional labor costs, and transportation costs.
Note: Coverage applies only if a limit is shown on the Equipment Breakdown Schedule.
This coverage pays for the additional cost of repairing or replacing covered property because of contamination by a pollutant. It includes the additional expense to clean up or dispose of the polluted property. Additional expenses are those above and beyond what would have been required if pollutants had not been involved. Coverage also applies to any additional loss described under Income Coverages caused by contamination by pollutants but only if Income Coverage is shown on the Equipment Breakdown Schedule.
Note: Coverage applies only for the items for which have limits are shown on the Equipment Breakdown Schedule.
a. Undamaged Parts of a Building
If a covered equipment breakdown loss occurs damaging a building to the point that an ordinance or law requires that the entire building be demolished, this extension covers the loss of value of the undamaged portion of the building that must be demolished. The ordinance or law must require the demolition, regulate construction or land use and be in force at the time of the loss. This insurance does not provide coverage for any cost involving pollution.
Note: It is difficult to enter a limit for this item because it is unclear how much would be undamaged and need to be demolished. Knowing how the ordinance or law is wording would be helpful. As an example, if it stated that when 50% or more of the building is damaged, then the entire building must be brought up to code, a limit of 50% of the value should be entered. If the ordinance doesn’t apply unless 70% of the building is damaged, then a limit of only 30% of the value would be needed.
b. Increased Cost to Repair and Cost to
Demolish and Clear Site
This part of the
extension applies to the actual cost to demolish the undamaged portion of the building
and to rebuild it so that it complies with the applicable ordinances. The limit
for the sum of these two items must be shown on the Equipment Breakdown
Schedule of Coverages under Ordinance or Law (Increased Cost to Repair/Cost to
Demolish and Clear Site).
Note: Coverage applies only for the items for which have limits are shown on the Equipment Breakdown Schedule.
If covered equipment at an off premises utility service that is damaged by an accident causes an interruption of power, gas, telecommunication or water to the covered location, the Income Coverage Extension is expanded to include the loss of earnings due to the interruption. The utility service could be provided by the actual utility or by a landlord or by another type of utility supplier.
Note: A limit is not required for this coverage. It applies and any amount paid is in addition to the coverage limit. In a practical sense, mounting defense costs often motivate insurance companies to offer settlements.
When an accident to covered equipment damages property that belongs to others while it is in the named insured’s care, custody, or control, lawsuits may arise. When that happens, the insurance company has both the right and the duty to defend the named insured. The insurance company controls the defense and has the option to investigate and settle any claim or suit. The insurance company needs the named insured's full cooperation during litigation. As a result, the named insured is not permitted to admit liability, pay, or incur any expenses without the written approval of the insurance company. If the named insured does not cooperate with the company, or interferes with negotiations for a settlement, the insurance company could consider that the contract has been breached; it would then exercise its rights to refuse to defend, forcing the named insured to assume responsibility for all such costs.
The insurance company pays the following expenses related to any suit it chooses to defend:
Coverage applies to the direct damage that occurs because of an accident to covered equipment. This peril is limited or excluded below.
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Example: Kelly’s boiler explodes. This forces the basement
ceiling and first floor upwards and results in destruction of all the
property situated on the first floor directly above the boiler. The
destruction of the basement ceiling, the flooring, and the destroyed property
on the first floor is covered because it is the direct result of a covered
accident to the boiler. |
Subject to specific exceptions, each of the broad exclusions is a total exclusion
and applies, regardless of any other cause or event that contributes to a loss,
whether concurrently or in any other sequence. The insurance company does not
pay for any direct or indirect loss or damage caused by or resulting from any
of these events.
Related Article: Concurrent Causation and Anti-concurrent
Causation Clauses–A Discussion
a. Ordinance or Law
Loss or increased cost due to enforcement of codes or laws regulating
construction, use, or repair of buildings, demolition of buildings or debris
removal is not covered. The one exception is that provided under Coverage
Extensions–Ordinance or Law.
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Example: Plaintowne Printers lost their primary printing press in
an accident. Plaintowne is ready to replace the press when the city reminds
it that new equipment being installed must comply with special pollution
control ordinances. Plaintowne estimates that this requirement will increase
its costs by 30%. The insurance company informs Plaintowne that the
additional cost is not covered. |
b. Earth Movement or Volcanic Eruption
Loss or damage caused by any earth movement or caused by eruption, explosion or effusion of a volcano is not covered. Earthquake, landslide, mudflow, mudslide, mine subsidence, sinking, rising or shifting of the earth and sinkhole collapse are all examples of earth movement.
Note: In the CO 1000–Commercial Output
Program Property Coverage Part sinkhole collapse is an exception to the earth
movement or volcanic eruption exclusion but under this coverage part it is not.
c. Civil Authority
Seizure,
confiscation, destruction, quarantine or other type loss or damage to property
by any civil authority is not covered.
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Example: The boiler at Maxine’s apartment building explodes. The
fire department responds and calls for an air quality report because of its
concerns about asbestos and lead. After the investigation, Maxine is ordered
to destroy the building and decontaminate the site. There is no coverage for
the costs resulting from the various orders by the civil authority, but the
costs of the explosion and the damage caused by that explosion would be
covered. |
d. Nuclear Hazard
Loss caused by nuclear reaction, nuclear radiation, or radioactive contamination is not covered. This exclusion applies whether the nuclear event is controlled or not and regardless of the means that causes the event.
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Example: The wall in the hospital’s nuclear medicine lab crumbles
as a result of a boiler accident. All costs required to clean up the site of
radioactive contamination are excluded. |
e. War and Military Action
There is no coverage for loss or damage caused by any of the following:
If any action involves nuclear reaction, nuclear radiation or radioactive contamination, this exclusion applies in place of the Nuclear Hazard exclusion.
f. Water
Loss or damage caused by water is not covered.
Flood, water that backs up through a sewer or drain or water below the surface
of the ground are all types of water damage that are not covered. Ineligible
sub-surface water exposures are those that exert pressure on or flow through
structures or surfaces. An exception provides coverage for covered electrical
equipment that must be dried out as a result of the occurrence of any of these
perils.
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Example: Floodwaters
rush into Romar’s plant. The water affects the electrical system and causes
all equipment to abruptly fail. As a result, many of the production presses
cannot cycle normally and break down. Even though the loss to the presses is
caused by mechanical breakdown, there is no coverage because flood caused the
breakdown. The cost to dry out the electrical equipment is covered thanks to
the exception. |
The second group of exclusions applies to loss or damage caused by or resulting from any of the following loss events. Some of these exclusions have exceptions, conditions, or limitations that should be noted and reviewed carefully. The insurance company does not pay for any loss or damage caused by or resulting from any of these events.
a. Wear, Tear, Deterioration and Corrosion
The insurance company does not pay for loss
or damage caused by or resulting from any of these events. It also does not pay
for marring, scratching, and erosion. However, if an accident to covered
equipment occurs because of one of these events, there is coverage for the
damage caused by that resulting accident.
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Example: A boiler explodes and pieces of it are thrown around the
basement. The walls are marred and scratched. Those scratches and marring are
covered because they are the result of the covered accident. |
b. Animals
There is no coverage for any loss or damage caused by any animal. This includes loss or damage caused by vermin, birds, and insects. However, coverage applies for any resulting loss caused by an accident.
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Example: The boarding kennel has an automated cage opening system
that allows groups of dogs out into the community play area at specified
times during the day. One night, a covered accident occurs breaking the
opening system. Every dog gains access to the outside area. When the
caretaker arrives, he discovers that the dogs have destroyed most of the
equipment in the play area and parts of the walls. Coverage applies because
the covered accident was the cause of the animal damage. |
c. Windstorm and Hail
Loss or damage due to wind or hail is not covered.
d. Fire and Combustion Explosion
Loss or damage caused by or resulting from
fire or combustion explosion is excluded even if caused by an accident.
Note: This exclusion eliminates overlapping coverage with the Property Coverage Part.
e. Discharge of Water
The insurance company does not pay for loss
or damage due to any extinguishing material used to fight a fire.
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Example: Scenario 1: A fire occurs in a neighboring
building. The fire department sprays water over Metal Fab’s building to
prevent the fire spread. That cold water hits the hot boiler causing it to
crack. The damage to the boiler is not covered. Scenario 2: The sprinkler system is
activated in error and strikes a hot boiler causing it to crack. This damage
is covered because the sprinkler system did not activate in order to fight a
fire. |
f. Breakage of Glass, Freezing, Collapse,
and Molten Material
All loss and damage from the following is
excluded and there is no exception for resulting loss:
g. Specified Perils
Specified perils, as defined in the CO 1000, caused loss or damage is not covered. There is one exception. If the loss is caused by explosion of steam boilers, pipes, turbines, or engines, there is coverage.
There is no payment for loss of earnings or extra expenses incurred by the named insured when caused by or resulting from any of the following causes or events.
a. Leases, Licenses, Contracts or Orders
If suspension or cancellation of lease arrangements, licenses, contracts or orders cause the loss of earnings or extra expense to increase there is no payment for that increase. There is one exception. Payment will be made if the suspension, lapse or cancellation is a direct result of the interruption of the named insured's business. Even this exception ends at the end of the restoration period.
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Example: Danny’s Dogs has a contract to supply hot dogs to the
baseball stadium. His pressure boiler explodes, and he cannot operate until
repairs are made. Because he cannot supply the hot dogs as required by the
contract, the contract is cancelled, and the stadium owners find another
supplier. The stadium continues with the new supplier even after Danny’s Dogs
resumes normal operations. The insurance company pays for the loss of the
contract during the period of restoration of Danny's business, but payments
end once Danny’s Dogs resumes normal operations. |
b. Due Diligence to Resume Your Business
The named insured is expected to return to business as quickly as possible. If it does not exercise due diligence to do so, the insurance company pays only the amount of earnings that would have been lost had the named insured acted responsibly. Extra expense is paid for that same time period.
Covered property is valued based on replacement cost provisions and items 3 through 9 in the Commercial Output Program–Property Coverage Part. This is further subject to the provisions described under Environmental, Safety and Efficiency Improvements and Equipment Utilizing CFC Refrigerants in the rest of this section.
When covered equipment must be replaced following an accident, the additional costs to replace the old equipment with more environmentally friendly, safer or energy efficient equipment are covered subject to the following conditions and limitations:
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Example: George
decides to upgrade to a more environmentally friendly boiler after a covered accident,
but the new boiler takes two additional weeks to deliver than similar models
that are not as environmentally friendly. George has no coverage for the
extra two weeks of lost earnings even though he has coverage for equipment
breakdown loss of earnings. |
When a covered loss occurs involving air conditioning systems or refrigeration equipment that uses CFC materials, the loss is valued at the least expensive of the following:
The insurance company must consider the direct and indirect damage losses when determining the least expensive option. If the first option above is the least expensive but the insured wants to use one of the other options, doing so may be considered part of the Environmental Safety and Efficiency Improvements but be subject to the 125% limitation.
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Example: Paoli Working’s CFC refrigeration units are damaged. There are many options available to replace them.
Option 3 is the best for Paoli because the CFC equipment is being phased out so that CFC is becoming more difficult to obtain. The company will pay up to $12,500 x 1.25 = $15,625 toward the upgraded equipment because of the Environmental Safety and Efficiency Improvements. The difference in the time may make option 3 the best option. |
No more than the named insured's interest in the lost or damaged property will be covered.
Note: When property is in the care, custody and control of the named insured how does this condition apply? What is the amount of named insured’s insurable interest in it?
When different types of equipment are damaged in a single accident and the pieces of equipment have different deductible amounts only the highest deductible that applies to a particular damaged item of equipment applies but when that deductible is satisfied, no other deductibles are applied.
Note: The Equipment Breakdown Schedule shows only a single Property Coverage deductible. If deductible by type of equipment is needed, an entry must be made on the schedule to refer to an endorsement where the types of equipment and their applicable deductibles can be shown. If two or more coverages are involved in the same accident, multiple deductibles may apply because they are applicable for the specific coverage. There are spaces on the Schedule for a property damage deductible, an income coverage’s deductible and an Other deductible.
a.
Property and Income Coverages
The property deductible shown on the declarations applies to all property damaged in a single Equipment Breakdown accident. The income deductible applies to earnings, rents, extra expense and service interruption covered losses from a single accident.
b.
Application of Deductibles
· When the deductible is expressed in terms of dollars, the deductible amount must be paid by the named insured before the insurance company pays any part of the loss.
·
When the deductibles are expressed in terms of
Multiple of Average Daily Value they are calculated as follows:
Operating expenses are defined as the sum of net income, payroll expense, interest, and continuing operating expenses. Operating expenses are not reduced for operating expenses not being earned, in the number of working days because of the accident or for any other scheduled or unscheduled shutdowns during the restoration period.
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Example: OK Plumbing Supplies has a covered accident and business operations end for 90 days. The operating expenses during that time would have been $150,000. The Income Deductible is five days and uses the average daily value method. The deductible is calculated as follows:
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· Time deductibles can be expressed in terms of days or hours. A day deductible equals 24 hours. Time deductibles are commonly referred to as waiting periods and the insurance company does not pay for any lost earnings during the waiting period.
Subject to other provisions in this section, the insurance company pays the smallest of the following amounts:
Note: This is very important to remember. No matter how many extras are added onto a coverage, it remains subject to the coverage limit.
a. Property Damage
If a coinsurance percentage applies to Equipment Breakdown Property Damage, the penalty for not meeting the coinsurance requirement is calculated as follows:
Step 1. Determine the value of property subject to coinsurance at the time of loss
Step 2. Multiply step 1 by the Equipment Breakdown coinsurance percentage
Step 3. If step 2 is equal to or greater than the limit of insurance for the coverage involved, no coinsurance penalty applies and the entire loss is covered, subject to limits and valuation. If step 2 is less than the limit of insurance for the coverage involved, proceed to step 4.
Step 4. Divide the limit of insurance by step 2.
Step 5. Multiply the amount of loss by step 4 to determine the amount of loss to be paid.
b. Income Coverage
The income coverage formula is identical to the formula for property damage except for Step 1. The sum of the net income, payroll expense, interest and other continuing expenses anticipated starting from the inception date of the policy and continuing for 12 months must be developed in Step 1.
Note: Coinsurance does not apply to extra expense.
The insurance company pays only the actual amount of a claim, loss, or damage, regardless of the number of coverages that apply to the loss.
If another policy having the same terms and conditions as this policy covers the same property, this policy pays its proportional share. The proportional share is determined by comparing the limit of the policy to the limits of each policy.
If the other policy or policies are written subject to different terms and conditions, this policy is excess and pays only the amount of the covered loss that exceeds the amount due from the other policy or policies. It remains excess even if the named insured cannot collect from the other coverage.
This policy never pays more than the coverage limit that applies.
Two unique additional conditions apply to this coverage part.
Any representative of the insurance company may immediately suspend coverage on any piece of covered equipment. The suspension must be because the equipment is found to be in or exposed to a dangerous situation or condition. This suspension applies only to an accident from that specific equipment. Any suspension must be in writing and delivered to the address in the policy where the equipment is located but it is immediate.
The suspension remains in effect until the insurance company provides written notice to the named insured that coverage is reinstated. The insurance company provides a premium refund for the period of suspension.
Note: The suspension applies even if the named insured has not received the premium refund.
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Example: It is the week before Easter and Special Events Candy has orders that must be completed. An insurance company inspector arrives to inspect the equipment. He notices a serious situation and stops to talk with the owner. The owner is uncooperative, so the inspector notifies the owner that coverage for that particular item is suspended immediately and leaves the premises. The owner removes the notice and continues to use the equipment. Scenario 1: The suspended equipment explodes. That equipment is not covered, and neither is any other property that is damaged by that explosion. The fire caused by that explosion is covered through, because that is part of the commercial property coverage part. Scenario 2: The equipment next to the suspended equipment
explodes and damages the suspended equipment. The suspended equipment is
covered because the accident at the other equipment caused its damage. |
The insurance company agrees to provide any required state or municipal boiler and pressure vessel inspections on behalf of the named insured.